Reed Smith Client Alerts

On March 13, 2020, President Trump declared the ongoing COVID-19 pandemic a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (the Stafford Act) effective March 1, 2020. Under section 139 of the Internal Revenue Code (the Code), the president’s declaration of a national emergency permits employers to provide employees with financial assistance in the form of qualified disaster relief payments that are not subject to federal taxation.
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Code section 139 provides that gross income does not include any amount received as a qualified disaster relief payment. Qualified disaster relief payments include any amount paid to, or for the benefit of, an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred because of a “qualified disaster” to the extent such payment is not otherwise paid by insurance. The definition of a qualified disaster includes a federally declared disaster (that is, any disaster determined by the president to warrant assistance under the Stafford Act). Therefore, the emergency declaration by President Trump triggered the opportunity for employers to provide employees with tax-free qualified disaster relief payments to assist their employees during this pandemic.

Tax treatment of qualified disaster relief payments

Qualified disaster relief payments are excluded from gross income and from wages and compensation for purposes of employment taxes. This means that employers may provide financial assistance to employees in connection with COVID-19, and the payments will not be subject to federal income tax or employment taxes (that is, social security, Medicare, and federal unemployment taxes), provided the requirements of Code section 139 are met (for example, expenses are not compensated for by insurance). The employer can deduct those payments as ordinary and necessary business expenses as if they were reported normally. There is no dollar limit on qualified disaster relief payments other than that they must be reasonable and necessary. Note that wage replacement, such as paid sick or other leave, is not covered by section 139 and cannot be provided tax-free. In addition, Code section 139 only addresses federal taxes, so state laws should be consulted to determine whether the qualified disaster relief payments are subject to any state taxes and withholdings.

If an employer chooses to make qualified disaster relief payments to its employees, we recommend adopting a written section 139 policy for administering these payments that includes details such as eligible employees, types of expenses that may be paid or reimbursed, any dollar limit imposed by the employer, the method of payment, identification of an administrator, and the administrator’s authority and responsibilities under the policy. If adopted, eligible employees should be informed of the availability and material terms of the policy.

Our Reed Smith Coronavirus team includes multidisciplinary lawyers from Asia, EME and the United States who stand ready to advise you on the issues above or others you many face related to COVID-19.

For more information on the legal and business implications of COVID-19, visit the Reed Smith Coronavirus (COVID-19) Resource Center or contact us at


Client Alert 2020-150