Written by Jeffrey D. Davine
Termination of COVID-19 Emergency.
The White House recently announced that the Presidentially declared disaster concerning the COVID-19 pandemic will be withdrawn as of May 11, 2023. The effect of this withdrawal will make it more difficult for employers to reimburse employees for their work-from-home expenses.
Declaration of National Emergency.
On March 13, 2020, President Trump declared a nationwide emergency as a result of the COVID-19 pandemic. It resulted in all 50 states, the District of Columbia, and four territories being approved for major disaster declarations. As a result of the Presidentially declared disaster, employers could make “qualified disaster relief payments” to their employees who were impacted by COVID-19 and these payments would not be taxable to the employees.
Qualified Disaster Relief Payments.
The tax treatment of a qualified disaster relief payment is governed by Internal Revenue Code Section 139, which provides that a qualified disaster relief payment may be excluded from the recipient’s gross income. A qualified disaster relief payment includes amounts paid by an employer to reimburse employees for necessary personal, family, living or funeral expenses that are not covered by insurance as a result of the qualified disaster. These payments may also be used to cover expenses such as masks and personal protective equipment, dependent care, unreimbursed medical expenses, and work-from-home expenses (such as internet and office supplies). The recordkeeping burdens imposed on employees and employers for these payments are minimal: employers are not required to obtain receipts or expense reports from employees to substantiate these expenses. The only requirement is that the employer determine that the amount being paid is reasonably commensurate with the additional expenses incurred by its employees as a result of the COVID-19 pandemic.
Withdrawal of Presidentially Declared Disaster.
As a result of the withdrawal of the Presidentially declared disaster as of May 11th, an employer can no longer make qualified disaster relief payments to its employees. This means that expense reimbursements paid to an employee for expenses that were previously considered to be qualified disaster relief payments will be required to satisfy the “accountable plan” requirements in order for the employee to not have to include the reimbursement in income.
Accountable Plan Requirements.
In order for an expense reimbursement arrangement to be treated as an accountable plan, it must satisfy three requirements:
(i) the expense must be one that is related to an employee’s work for his/her employer;
(ii) the reimbursement arrangement must require that the employee provide substantiation for the expense with receipts or similar documentation within a reasonable period of time; and
(iii) the reimbursement arrangement must require the employee to return any excess advances/reimbursements within a reasonable period of time.
As can be seen, satisfying the accountable plan requirements can be somewhat burdensome, because employees must “prove-up” expenses for which reimbursement is sought with receipts or similar documentation and the employer must review the documents provided to ensure that they adequately substantiate the requested reimbursement. If all of the requirements are not satisfied, the employer must treat the reimbursement as additional wages/salary paid to the employee and include it on the employee’s Form W-2 that reports his/her income.
An employer that has been providing employees with reimbursements for their work-from-home expenses during the COVID-19 pandemic on a tax-free basis will need to update its accounting procedures as of May 11th to ensure that they comply with the accountable plan requirements. If the accountable plan requirements cannot be satisfied, the employer will need to treat the reimbursements as taxable wages/salary. Failure to do so could subject the employer to liability for the taxes that should have been withheld as well as interest and penalties.