Supporting Employees Impacted by Wildfires

There are several ways employers can support employees impacted by the wildfires, including by making qualified disaster relief payments to employees and creating paid leave sharing programs. Employers can also set up employee assistance funds through existing public charities that administer disaster relief programs, create an employer-sponsored charitable organization that provides disaster relief payments to employees, or set up a donor-advised fund with a sponsoring public charity. In addition, employers can allow employees greater access to distributions and loans from accounts under employer-sponsored retirement plans.

This alert provides a high-level overview of qualified disaster relief payments, leave sharing programs, disaster relief options using charitable organizations, and expanded opportunities to receive distributions and loans from employer-sponsored retirement plans. The following is intended to provide a brief introduction to the options available to employers and does not address the specific requirements for each option. Qualified disaster relief payments, leave bank programs, charitable organizations, and expansion of distributions and loans from employer-sponsored retirement plans must be carefully structured to ensure compliance under the federal tax laws. It is recommended to consult with legal or tax professionals to ensure full compliance and avoid potential liabilities.

Qualified Disaster Relief Payments

Section 139 of the Internal Revenue Code permits employers to make “qualified disaster relief payments” to employees in areas with an emergency disaster or major disaster declaration. Qualified disaster relief payments are not included in the employee’s gross income or subject to employment tax. Employers can also deduct qualified disaster relief payments to the same extent as payments treated as income to the employee.

A payment qualifies as a “qualified disaster relief payment” if the following requirements are satisfied:

• There has been a “qualified disaster” (e.g., a federally declared disaster issued by the President of the United States).
• The payment is intended to cover reasonable and necessary personal, family, living, or funeral expenses, or reasonable and necessary expenses incurred for repairing or replacing a personal residence or its contents, provided the expenses were incurred as a result of the qualified disaster and not covered by insurance or other resources.
• The payment is not income replacement (e.g., severance, furlough pay, or lost wages from missed work).

Since President Biden approved the Major Disaster Declaration, employers can therefore provide financial assistance to employees impacted by the wildfires, provided that the payments meet the additional requirements described above. Employers who provide qualified disaster assistance payments should maintain adequate records for the program and request that recipients retain receipts and other documentation.

Leave Sharing Programs

Under Internal Revenue Service (IRS) Notice 2006-59, the IRS allows employers, responding to a “major disaster” (as declared by the president), to establish “leave banks” that enable employees to contribute accrued leave (up to the maximum amount the employee normally accrues during the year) to a collective pool for use by employees who have been adversely affected by a “major disaster” necessitating absence from work. Because President Biden approved a Major Disaster Declaration in response to the wildfires in Los Angeles County, employers can use employer-sponsored leave banks to support employees adversely impacted by the wildfires with additional paid leave. The leave is treated as wages with respect to the leave recipient and subject to federal income tax withholding and employment tax (e.g., FICA and FUTA). Leave donors are not entitled to a charitable contribution deduction on their individual income tax returns for the donated leave, but the portion of leave donated is not treated as income or wages to the leave donor. For employer-sponsored leave banks to qualify for the US federal tax treatment addressed herein, leave bank programs must meet certain additional requirements set forth in IRS Notice 2006-59.

Charitable Organizations

Employers can also support employees and other individuals impacted by the wildfires through disaster relief options using charitable organizations. Employers can set up employee assistance funds through existing public charities that administer disaster relief programs, create an employer-sponsored charitable organization that provides disaster relief payments to employees, or set up a donor-advised fund with a sponsoring public charity.

Employee Assistance Fund Administered by Existing Public Charity

Employers can create and fund an employee assistance fund administered by an existing public charity. This allows an employer to provide critical financial assistance to employees affected by the disaster while leveraging the charity’s established infrastructure and expertise.

Employer-Sponsored Public Charity

Employers can establish an employee-sponsored public charity to provide disaster relief payments to employees and other individuals impacted by current and future disasters. Employee-sponsored public charities are typically funded not only by the employer but also by employees or other donors. An employer-sponsored public charity can generally provide disaster relief to employees affected by current and future disasters, including qualified and non-qualified disasters or emergency hardship situations.

Employee-Sponsored Private Foundation

Employers can also establish an employee-sponsored private foundation to provide disaster relief payments to employees and other individuals impacted by current and future disasters. Employee-sponsored private foundations are generally funded by the employer and subject to additional requirements and restrictions that do not apply to public charities. An employer-sponsored private foundation can provide disaster relief to employees affected by current and future qualified disasters (but not non-qualified disasters or emergency hardship situations).

Employer-Sponsored Donor-Advised Fund

Employers can set up a donor-advised fund with a sponsoring public charity to support employees and their family members who are victims of qualified disasters. The sponsoring organization manages the fund, and a selection committee has advisory privileges over the fund. An employer-sponsored donor-advised fund can provide disaster relief to employees affected by current and future qualified disasters (but not non-qualified disasters or emergency hardship situations).

Disaster relief options involving charitable organizations are subject to complex tax requirements and must be carefully structured to ensure compliance.

Distributions and Loans From Employer-Sponsored Retirement Plans

Employers can allow their retirement plans to offer relief to “qualified individuals” impacted by a qualified disaster through expanded distribution options, increased access to plan loans, and loan repayment relief. A “qualified individual” is an individual whose principal residence during the incident period of any qualified disaster is in the qualified disaster area and the individual has sustained an economic loss by reason of that qualified disaster.

To the extent the plans do not already have provisions related to expansions of distributions and loans in the context of federally declared disasters, employers will need to amend their plans and would have until the end of this year to adopt the amendments.

Qualified Disaster Recovery Distributions

Employers can permit qualified individuals to receive distributions from the employee’s plan account in an amount up to $22,000 per disaster, with no early withdrawal penalty, and the option to repay all or a portion of the distribution within three years.

Increase to Plan Loan Limit

Employers can increase the maximum loan amount available to qualified individuals for plan loans made during a specified period following a qualified disaster. The plan loan limit may be increased to the full amount of the individual’s vested account under the plan, but not more than $100,000 (minus outstanding plan loans of the individual).

Relief for Plan Loan Repayments

Employers can also provide qualified individuals additional time (up to one year) to repay plan loans outstanding on the date of the declaration of the qualified disaster.

If you have questions about restrictions on qualified disaster relief payments, leave sharing programs, employer-sponsored charitable organizations, or distributions and loans from employer-sponsored retirement plans, please contact your relationship attorney at ArentFox Schiff or one of the authors of this alert.