Commonly Asked Section 139 Plan Questions

Is there a cap on how much an employer can provide to an employee as a qualified disaster payment?

No, the statute states that as long as it meets the requirements, there is no cap on the exclusion amount. While it can feel like this is too good to be true, be careful not to push the boundaries. You don’t want to be the court case that defines what the boundaries are.

The statute does specifically use the term “reasonable” and it does state that the payments must be attributable to the disaster itself. So that’s ultimately going to be your cap or your limit. Some people can only reasonably pay out ten thousand dollars, while for others the benefits could be over a hundred thousand dollars.

Must employers have a written plan to make qualified disaster payments to employees?

No, the Congressional Reports clearly state that there isn’t a written plan requirement. It appears their point of view was essentially that during a disaster there’s no time to have an attorney draft documents for you. So they aren’t specifically asking for a written plan, nor are they asking for a substantiation of the payment expenses.

But keep in mind, it’s always good practice to have some sort of proof for your argument. I recommend having a basic written plan or having a corporate resolution that contains very boilerplate information.

One other point: please be careful about the language that you use. If you’re saying that this payment is specifically for supplies, you’d want to use the word “stipend” versus “reimbursement”. When you use the word reimbursement, you’re implying that that person actually did have out-of-pocket costs. In that case, you’d want to have the receipt or some sort of record of the reimbursement.

Can you reduce wages and replace it with a 139 payment?

While you might be tempted to reduce wages and replace them with a 139 payment, you explicitly aren’t allowed to use the payment as a replacement for existing compensation. The goal of Code 139 is to give employees something additional during a difficult time. So a 139 payment can’t be a replacement for compensation.

An auditor will catch on pretty quickly if the W-2 decreases and coincidentally the 139 payments match the decrease identically. And just because the requirements are loose in terms of documentation doesn’t mean that this is not going to be an area for an audit. After people file for 2020, the IRS may make a decision regarding how to audit this area based on how many people took advantage of it.

Want to learn more about Section 139 to help your clients? Become a Certified Tax Planner through the American Institute of Certified Tax Planners.

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