Relief is needed for thousands who suffered damage and loss due to Hurricane Harvey. The IRS has done a great deal over the last few days to provide the much-needed relief to affected businesses and families.
Employer Disaster Relief Payments to Employees
For employers, disaster relief payments made to employees who are storm victims can be excludable from gross income and taxable wages under IRC Section 139. Gross income does not include any money received by an individual as a “qualified disaster relief payment,” according to Section 139. For employment tax purposes, qualified disaster relief is also not treated as wages or as net earnings from self-employment, as defined in Section 139(d). Importantly, employers also do not need to require employees to document their actual expenses, as long the relief payments are reasonably expected to be commensurate to the expenses incurred.
The IRS defines a “qualified disaster relief payment,” as any amount paid to or for an individual’s benefit:
- to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster
- to reimburse or pay reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent such need is attributable to a qualified disaster, or
- by a federal, state, or local government, or agency or instrumentality thereof, in connection with a qualified disaster in order to promote the general welfare.
Qualified disaster relief payments do not include payments for any expenses compensated by insurance or otherwise. A “qualified disaster” is a presidentially declared disaster as defined in IRC Section 165(h)(3)(C)(i) – any disaster determined by the President to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act. A qualified disaster relief payment can be from any source, including an employer, as indicated by previous IRC Section 139 legislative history.
In Revenue Ruling 2003-12, the IRS ruled that even if employees do not provide proof of actual expenses to receive a grant from an employer to cover temporary housing, medical, or transportation expenses due to a presidentially declared disaster, those employer grants can still be excluded from income. “In light of the extraordinary circumstances surrounding a qualified disaster, it is anticipated that individuals will not be required to account for actual expenses in order to qualify for the exclusion, provided that the amount of payments can be reasonably expected to be commensurate with the expenses incurred,” the ruling says.
The IRS ruling did say, however, that the employer program at issue possessed requirements which ensured grant amounts to be equal to the amount of unreimbursed reasonable and necessary medical, temporary housing and transportation expenses caused by the disaster.
The following Texas counties have been declared disaster areas and are eligible for disaster unemployment benefits:
IRS Provision Relaxes Use of Retirement Plan Funds for Disaster Relief
The IRS is relaxing certain procedures to allow employees access to their retirement plan funds, as needed, due to financial needs created by Hurricane Harvey. The special provisions compliment a host of unique rules intended to make it easier for employers to assist employees affected by Hurricane Harvey.
The IRS is granting relief from certain verification procedures which govern loans and hardship distributions from qualified retirement plans for victims in covered Texas counties. The IRS said a distribution from certain qualified retirement plans will be deemed to constitute a “hardship distribution” when an employee resides in a designated federal disaster zones for Hurricane Harvey, the place of employment is in the disaster zone, or the employee has family members who reside or work in the disaster zone. If the employee maintains their financial need is a result of Hurricane Harvey, no further documentation is needed. For federal tax purposes, the distribution will be treated as a hardship distribution.
The IRS provision allows employers to expand the types of financial events that are eligible for a hardship distribution. While a plan might not cover the hardship of a parent, the financial losses of a parent working or residing in the Hurricane Harvey disaster zone can be deemed eligible, according to the IRS announcement. The IRS announcement also lets employers to waive provisions prohibiting employees from making contributions for at least six months after the hardship distribution.
The IRS announcement does not alter the standards which determine the amount available for hardship distribution. These limits are typically restricted to the maximum amount permitted to alleviate the financial need and which is not otherwise reimbursed by insurance. The announcement did state, however, that an employer can rely on the employee’s representation of the need, unless the employer has direct, contradictory knowledge.
Although the IRS announcement does not waive the requirements for plan loans, it does say that an employer may temporarily suspend certain documentation requirements for loans. This includes requiring a death certificate of a spouse when spousal consent otherwise would be required. Employers need to obtain the appropriate documentation by January 31, 2018.
Relief applies to hardship distributions or loans made on account of a hardship resulting from Hurricane Harvey from August 23, 2017 to January 31, 2018. Any plan document must be amended no later than the end of the first plan year beginning after December 31, 2017. A qualified employer plan means a plan or contract that:
- meets the requirements of Sections 401(a), 403(a) or 403(b)
- could make hardship distributions if it contained enabling language
Relief is also available to plans described in Section 457(b) maintained by an eligible employer described in Section 457(e)(1)(A). Any hardship arising from Hurricane Harvey is treated as an “unforeseeable emergency” for purposes of distributions from such plans. Although IRA participants are barred from taking out loans, they may still be eligible for hardship distributions.
Covered areas are those identified as federally declared disaster areas for Hurricane Harvey. A full list is available on FEMA’s website: https://www.fema.gov/disaster/4332
Check IRS.gov for updates. Here are links to other IRS news items related to Hurricane Harvey:
- IRS Gives Tax Relief to Victims of Hurricane Harvey; Parts of Texas Now Eligible; Extension Filers Have Until Jan. 31 to File
- Beware of Fake Charity Scams Relating to Hurricane Harvey
- Retirement Plans Can Make Loans, Hardship Distributions to Victims of Hurricane Harvey
- IRS Waives Diesel Fuel Penalty Due to Hurricane Harvey
- Disaster Relief Resource Center for Tax Professionals
If you or anyone you know has been affected by Hurricane Harvey, please contact a tax expert at Caroprese & Company. A Caroprese accountant will ensure that any storm victim and their employers know how taxes apply to their relief payments.