The closure orders issued by federal and state government authorities across the United States have resulted in the reduction and loss of income for a significant percentage of the U.S. workforce. On March 18, 2020, President Trump signed into law the Families First Coronavirus Report Act (the “Coronavirus Act”), effective April 2, 2020, providing relief for certain eligible families, employers and businesses. Further legislation is on the horizon. Meanwhile, under existing law, the Internal Revenue Code of 1986, as amended (the “Code”) permits employers to provide some immediate and direct employee assistance on a tax-favored basis.
The following summarizes some of the tax-favored benefit strategies employers may consider to assist their employees in these challenging times:
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Qualified Disaster Relief Payments. Employers in states receiving FEMA assistance could make direct “qualified disaster relief payments” to their employees under Section 139 of the Code. Qualified disaster relief payments may pay for reasonable and necessary personal, family, living or funeral expenses as a result of a qualified disaster. This could include childcare due to school closures; commuting expenses in excess of normal commuting costs due to the reduction of, or medical inadvisability of taking, mass transit; and food deliveries for quarantined individuals. Qualified disaster relief payments, however, do not include income replacement payments, such as provisions for lost wages or unemployment compensation. Expenses that are otherwise reimbursed through insurance or FEMA grants also do not qualify.
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Coronavirus Act Paid Sick and Family Leave. The Coronavirus Act grants private employers with fewer than 500 employees payroll tax credits to provide sick leave, emergency FMLA leave and group health plan coverage. For more information, please see Epstein Becker Green’s Act Now Advisory titled “Families First Coronavirus Response Act: Employers’ New Paid Family and Sick Leave Obligations Take Effect by April 2.”
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Childcare and Elder-Care Stipends. Employers could provide childcare and elder-care stipends. Without further guidance from the IRS, childcare and elder care stipends generally are treated as taxable income to employees, unless the expenses meet the exception for a dependent care assistance program under Code Section 129.
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Commuting Assistance Benefits. Different types of pre-tax commuting assistance benefits could be offered. Generally employer payments of employee ride-sharing and ride-hailing expenses, such as Uber gift cards, ride sharing or other special types of employer-organized transportation, may not constitute qualified transportation fringe benefits entitled to tax-favorable treatment under Code Section 132. However, where employees are engaged in essential businesses under a stay-at-home governmental mandate with limited or shut-down public transportation, such expenses arguably could be considered outside the normal day-to-day commuting expenses and perhaps could qualify as a de minimis fringe benefits for unsafe conditions and/or unusual circumstances. The IRS may recognize that employers are currently paying for taxi and carpool rides because mass transportation such as trains and buses pose higher risks of COVID-19 community spread, and because employees are working hours outside their normal hours, overtime, and/or late hours. If the unsafe conditions and unusual circumstances exclusion applies, such payments should also be deductible by employers. If special commuting arrangements otherwise qualify as a qualified transportation fringe benefit under Code Section 132, such amounts could be excluded up to the $270 monthly cap.
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On-Premise Meals. Given the current circumstances of the COVID-19 outbreak, employers of essential businesses can likely take a 50 percent deduction for providing on-premise meals to employees for the “convenience of the employer” under Code Section 119.
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401(k) Plan Hardship Distributions. Employees may be eligible for hardship distributions under their 401(k) plans. For more information, please see Epstein Becker Green’s Blog titled May Employees Take Hardship Distributions Under Their 401(k) Plan? Benefits Guidance in the Time of COVID-19.
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Home Office Expenses. As discussed further in an Epstein Becker Green blog post, office-related expenses, such as internet service, computer service and cleaning supplies, should qualify as working condition fringe benefits excludable from employee wages under Code Section 132(a)(3), but the IRS will need to issue clarifying guidance with respect to the tax treatment of such expenses.
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Leave Donation Programs. Employers may be able to sponsor leave sharing or leave donation programs for their employees. For more information, please see Epstein Becker Green’s Blog titled Employer-Sponsored Leave Sharing or Leave Donation Programs: Benefits Guidance in the Time of COVID-19.
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Charitable Emergency Funds. Employers may be able to provide tax-free emergency funds to their employees through their related 501(c)(3) charities and private foundations.
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Health Insurance. Finally, employers could pay health insurance premiums during a temporary layoff or furlough (subject to insurer/third party agreement on coverage). For more information, please see Epstein Becker Green’s Blog Benefits Guidance In the Time of COVID-19: Continuing Employer Group Health Coverage During Temporary Layoffs or Furloughs.
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