Key takeaways
- Employers can provide tax-free cash assistance to employees affected by the California wildfires under U.S. tax law, with payments covering necessary personal expenses not reimbursed by insurance.
- Employees may access retirement funds through hardship distributions from 401(k) or 403(b) plans for disaster-related expenses, subject to income tax and potential penalties.
- Meanwhile, the SECURE 2.0 Act allows penalty-free distributions up to $22,000 with flexible repayment and tax options.
- Employers can establish leave donation programs that allow employees to donate PTO to colleagues affected by the disaster, ensuring tax-free treatment for donors and IRS compliance.
- Employers should consider implementing formal policies and documentation processes to effectively support affected employees and take advantage of available tax benefits.
As those affected seek to recover and rebuild from the devastating wildfires in California, employers are likewise seeking options to support their employees who have been affected. The California wildfires were declared a federal major disaster by President Biden as of January 8, 2025.
Section 139 programs
Section 139 of the Internal Revenue Code allows employers to provide cash assistance to employees affected by a qualified disaster (and take a deduction for those payments) and allows employees to exclude the amounts they receive as “qualified disaster relief” from federal income tax. Given the federal major disaster declaration for the California wildfires as of January 8, 2025, section 139 benefits may be utilized to assist with certain personal expenses attributable to the California wildfires.
In general, to qualify under section 139, in addition to the existence of a “qualified disaster,” payments must be for the purpose of paying or reimbursing the employee’s reasonable and necessary personal, family, living or funeral costs incurred as a result of the qualified disaster and/or expenses to repair or rehabilitate a personal residence to the extent that need is due to the qualified disaster, provided the amounts are not otherwise reimbursed or reimbursable through insurance. Section 139 programs can vary from employer to employer in design, and are available to for-profit and tax-exempt employers (although tax-exempt employers cannot take a deduction). An employer that wants to take advantage of the section 139 tax rules above should have a formal written policy or program in place and will need to implement a process to retain substantiation of payments and benefits provided.