The coronavirus (COVID-19) epidemic was recently declared a disaster under the Stafford Disaster Relief and Emergency Act. This triggers special tax treatment for qualified disaster relief payments (“QDR payments”). To the extent not covered by insurance or other means, QDR payments to an individual are not taxable for federal income and employment tax purposes. QDR payments include amounts paid to an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of the disaster. The amount of the QDR payments need only be commensurate with the recipient’s reasonably expected expenses. A recipient is not required to account for the actual expenses.
QDR payments may include amounts paid by an employer to an employee. These payments would be excludable by the employee and generally deductible by the employer. QDR payments might include additional childcare expenses, medical expenses, transportation expenses, temporary accommodations, and other “reasonable and necessary” expenses arising from the COVID-19 epidemic.
Although not required, an employer wishing to provide QDR payments to employees should adopt a formal plan. This helps to ensure the payments qualify as QDR payments and facilitates the implementation and administration of the program.
If you have questions about QDR payments, please contact any of the attorneys in our Tax group.
This update is prepared for the general information of our clients and friends. It should not be regarded as legal advice. If you have questions about QDR payments, please contact any of the attorneys in our Tax Practice Group.