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COVID-19 Disaster Relief through Employer-Sponsored Section 139 Program and Charitable Organizations

03/24/2020 Bryan Pautsch

The novel Coronavirus (COVID-19) outbreak was designated as a disaster under the Stafford Act on March 13, 2020.  President Trump declaring a national emergency, unlocked billions of dollars of federal aid for states and localities. This action of classifying the pandemic as federal disaster also allows for relief (separate from the relief of the federal and state governments) to disaster victims through the following ways:

  1. Employer-Sponsored Section 139 Programs
  2. Charitable Organizations
  3. Employer-Sponsored
    • Public Charities
    • Donor Advised Funds
    • Private Foundations

These vehicles have been in existence for years.  In prior years, federally declared disasters were mainly natural disasters such as hurricanes, tornadoes, fires, floods, earthquakes etc.  The COVID-19 outbreak is a federally declared disaster but it’s different in terms of its nature, scope and severity.  Providing aid to relieve human suffering caused by a federally declared disaster is charity in its most basic form.  The remainder of the article will explain the basic framework that will allow relief in ways that are consistent with the federal tax rules that are in place.

This article has been created for information and planning purposes.  It is not intended to be, nor should it be substituted for, tax and legal advice, which is dependent on specific fact(s).

Employer-Sponsored Section 139 Program

Internal Revenue Code Section 139 provides that gross income does not include any amount received by an individual as a “qualified disaster payment” from any source.  Section 139(d) specifies that a qualified disaster relief payment shall not be treated as net earnings from self-employment, wages, or compensation subject to tax. In addition, businesses receive a tax deduction for amounts paid pursuant to a Section 139 plan.

“Qualified disaster relief payment” includes any amount paid by an employer to or to benefit its employees

  • To reimburse or pay reasonable and necessary expenses 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 that the need is a result of the qualified disaster

A “Qualified disaster relief payment does NOT:

  • Include payments for any expenses that reimbursed or compensation by insurance or otherwise
  • Include nonessentials, luxury or decorative items or services
  • Include a payment that is considered replacement/lost wages or paid sick leave.

These nonqualified disaster payments are not covered by Section 139 and would remain taxable income to the employee.

No regulations have been issued to provide guidance of the application of Section 139.  Legislative history provides that the qualified disaster relief payments are deductible by the employer even though the payment is excluded from the employee’s income.

Example 3 in Revenue Ruling 2003-12 discusses an employer making grants to employees who were affected by a presidentially declared disaster area.  Employer grants to employees were to cover medical, temporary housing and transportation expenses incurred as a result of the declared disaster (which were not reimbursed by insurance or otherwise).

The employer will not require individuals to provide proof of actual expenses to receive the grant payment.  However the employer’s program contains requirements (which are described in the program documents) to ensure the grant amounts are reasonably expected to be commensurate with the amount of the unreimbursed reasonable and necessary medical, temporary housing and transportation expenses as a result of the federally disaster area.

Establishing/Administrating a Section 139 Program

Rev Ruling 2003-12 provides that grants made pursuant to Section 139 were made under a written program adopted by the employer.  Even though not required by statute, an employer intending to have payments qualify under Section 139 should establish a written program, adopted by its governing body.

Listed below are some of the items for an Employer Sponsored Section 139 Program:

  • Specify the disaster is with respect to the COVID-19 declaration
  • Describe the types of expenses that will be reimbursed or paid under the Plan (Remember lost/replacement wages; paid sick leave are not covered under Section 139)
  • Eligible employees
  • State payments cannot be used to reimburse the cost of nonessential, luxury or decorative items or services
  • Describe the method or process for reimbursement/payment
  • Provide a start and end date
  • Once the program is adopted the employer should consider establishing a basic administrative structure including using an application form for employees wishing to receive a grant and have a committee of 3 or more to make decisions under the program

Please contact your VonLehman representative or Bryan Pautsch if you have any questions about Section 139 payments or establishing an Employer-Sponsored Section 139 Program.


The remainder of this article focuses on how charitable organizations and employer-sponsored charitable organizations can provide disaster relief assistance.  However many charities are also suffering from the COVID-19 virus and may not be in a position to assist individuals.

Charitable Organizations

There are many existing charities that are established to provide relief to victims of federally declared disaster areas such the Red Cross, United Way, Salvation Army, etc.  These types of relief organizations have provided targeted disaster relief and emergency assistance in response to the disasters.  Community-based organization often know what type of assistance is needed and understand the social impact on the community.

If a charity is not specifically organized to provide disaster relief and these activities were not listed in its Form 1023 Application for Exempt Status, an existing charity may engage in disaster relief without the IRS approval.  However it must report their new activities on its form 990.  When no existing charity appears to have the capabilities to carry out an effective program or when organizers have long term goals beyond the current crisis, it may be appropriate to establish a new charity.

Whether an existing or new charitable organization, it must be organized and operated exclusively for charitable purposes, serve public rather than private interests and refrains from participating or intervening in any political campaign or engaging in substantial amounts of lobbying expenditures.  Generally a charitable disaster relief organization needs to consider four additional factors.


All qualified charities generally must be given “full control and authority” over the use of the funds and contributors may not earmark the contribution to benefit a specific individual.  The group of individuals that may receive assistance is sometime called a “charitable class”

Charitable Class

The charitable class must large enough or sufficiently indefinite rather than a pre-selected group of people benefiting from the charity’s assistance.  A charitable class could consist of all individuals in a particular area but the class must large enough that the potential beneficiaries are not individually identified and by providing benefits to this group, the community as a whole benefits.

If the charitable class is limited a smaller group, such as employees of a particular employer, the group of people benefiting must be indefinite.  Indefinite means that the program must be open-ended to include employees affected by the current disaster and those affected by a future disaster.  Defining your charitable class will take thoughtful analysis.   If the facts indicate that a newly established disaster relief program is intended to benefit employees of an employer under the current disaster, it may not qualify as a charitable organization.  In this situation an Employer sponsored section 139 program (discussed earlier) may be beneficial.

Needy or Distressed Test

Generally a charity involved with disaster relief must make a specific assessment that a recipient is financially or otherwise in need.  Recipients do not need to be financially destitute but they may merely lack the resources to obtain basic necessities.  The disaster relief charity’s decision about how the funds will be distributed must be based on an objective evaluation and analysis of recipient’s need at the time the grant is made.  The analysis supporting the need for assistance will vary depending on the circumstances.

Document, Document, Document 

Generally, all charities must maintain adequate records to demonstrate the payments/grants were made in furtherance of their exempt purposes and that the recipients are needy and distressed.  In addition charities also must maintain records that the recipients have met the appropriate needs assessment.  Short term aid such as blankets, meals etc. do not require as much documentation as to the longer term aid.

Generally, documentation should include:

  • a complete description of the assistance provided,
  • costs associated with providing the assistance,
  • the purpose for which the aid was given,
  • the charity’s objective criteria for disbursing assistance under each program,
  • how the recipients were selected,
  • the name, address, and amount distributed to each recipient,
  • any relationship between a recipient and officers, directors, or key employees of, or substantial contributors to, the charitable organization, and,
  • the composition of the selection committee approving the assistance.

Employer-Sponsored Assistance Programs utilizing Charitable Organizations

Many times employers will establish charitable organizations (for example, an employee emergency assistance fund) to provide aid/relief to employees coping with the consequences of a disaster or personal hardship.  There are three types of charitable organizations that employer could establish:

  • Public Charities
  • Donor Advised Funds
  • Private Foundations

As we mentioned earlier all charitable organizations must demonstrate that they serve a public rather than a private interest and serve a charitable class.  Also the aspects of control, charitable class, needy or distressed test, and documentation will also apply.

Employer-sponsored charitable organizations were not viewed favorably.  They were considered to enhance employee recruitment and retention providing a private benefit to the employer.  Also there was concerns that the employer would control the charity.  Specific procedures were put in place to alleviate these concerns, which are discussed below.

Employer-Sponsored Public Charities

Public charities typically receive broad financial support from the general public.  Their operations are generally considered more transparent and subject to greater scrutiny by the general public.  The employer cannot exercise excessive control over the organization.

The following requirements must be met:

  • Class of beneficiaries must be large or indefinite
  • The recipients must be selected based on an objective determination and
  • The recipients must be selected by an independent selection committee

Employer-Sponsored Donor Advised Funds

Employers may establish disaster relief funds at a community foundation or other public charity to provide disaster relief grants to employees or their families who are victims of a major disaster.  The sponsoring organization of the fund may receive charitable contributions from the employer and employees.

To avoid the excise tax under Section 4966, a donor-advised fund can make grants to employees and their family members in the following circumstances:

  • the fund serves the single identified purpose of providing relief from one or more qualified disasters,
  • the fund serves a charitable class,
  • recipients of grants are selected based upon an objective determination of need,
  • the selection of recipients of grants is made using either an independent selection committee,
  • no payment is made from the fund to or for the benefit of any director, officer, or trustee of the sponsoring community foundation, or members of the fund’s selection committee, and
  • the fund maintains adequate records to demonstrate the recipients’ need for the disaster assistance provided.

To determine if the recipient has taxable income is dependent on whether the payment qualifies under Section 139; or as a gift under Section 102.

Employer-Sponsored Private Foundations

Employer-sponsored private foundations can also make need-based distributions for disaster relief for the poor or distressed. However, several issues arise when an employer-sponsored private foundation provides aid that favors the employees of the sponsoring employer.

After the September 11 attacks, Congress took the position that employer-sponsored private foundations should be able to provide assistance to employees in certain situations.  Employer-sponsored private foundations may provide assistance to employees or family members affected by a qualified disaster, as defined in section 139 of the Code, as long as certain safeguards are in place to ensure that such assistance is serving charitable purposes, rather than the business purposes of the employer.

The qualified disaster payment made by a private foundation to employees (or family members of employees) of an employer that is a disqualified person (such as a company that is a substantial contributor) are consistent with the foundation’s charitable purposes if:

  • the class of beneficiaries is large or indefinite (a “charitable class”),
  • the recipients are selected based on an objective determination of need or, and,
  • the selection is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental.

The foundation’s selection committee is considered independent if a majority of the members of the committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer. If this is met, the private foundation’s qualified disaster relief payments are treated as made for charitable purposes; does not result in prohibited self-dealing or as a taxable expenditure.

To determine if the recipient has taxable income is dependent on whether the payment qualifies under Section 139; or as a gift under Section 102.


There are different alternatives that employers can do assist their employees; whether it’s through a Section 139 Program or through the use of a charitable organization.  This article is intended to provide to information not to provide tax or legal advice.

Please contact your VonLehman representative or Bryan Pautsch with questions or comments.

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