The following is intended to help employers support their employees impacted by the Los Angeles fires. Please consult with your tax advisor for further guidance.
The wildfires ravaging various parts of Los Angeles County are truly tragic and expected to cost more than $50 billion in damages, making it the most expensive natural disaster ever in the United States. For employers with employees in the impacted areas, there are several ways to help.
First, an employer may provide disaster assistance payments under IRC section 139 on a tax-free basis:
- 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 that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster.
Thus, employers can pay for hotel stays, money for food and clothing, or even to help repair homes damaged or destroyed by the fires. There is no limit on such payments, meaning employers can determine how much assistance to provide those affected.
Second, employers can create a leave-sharing program for employees impacted by disasters. Under a leave-sharing program, employees donate accrued but unused leave to employees who have exhausted their leave. For the donation to be tax exempt to the donor, an employer-sponsored leave-sharing program must comport with the following requirements:
- The plan must allow a leave donor to deposit unused, accrued leave in an employer-sponsored leave bank for the benefit of other employees who have been adversely affected by a major disaster. An employee is considered adversely affected if the disaster has caused severe hardship to the employee or family member that requires the employee to be absent from work.
- The plan does not allow a donor to specify a particular recipient of their donated leave.
- The amount of leave donated in a year may not exceed the maximum amount of leave that an employee normally accrues during that year.
- A leave recipient may receive paid leave from the leave bank at the recipient’s normal compensation rate.
- The plan must provide a reasonable limit on the period of time after the disaster has occurred, during which leave may be donated and received from the leave bank, based on the severity of the disaster.
- A recipient may not receive cash in lieu of using the paid leave received.
- The employer must make a reasonable determination of the amount of leave a recipient may receive.
- Leave deposited on account of a particular disaster may be used only by those employees affected by that particular disaster. In addition, any donated leave that has not been used by recipients by the end of the specified time must be returned to the donor within a reasonable time so that the donor may use the leave, except in the event the amount is so small as to make accounting for it unreasonable or impractical. The amount of leave returned must be in the same proportion to the leave donated.
The IRS does not allow special tax treatment for major disaster leave-sharing plans that do not comply with the above requirements. For example, the IRS rejected special tax treatment for an employer-sponsored leave-sharing program that allowed employees to draw from its leave bank in the event of a “catastrophic casualty loss.” Under the program rejected by the IRS, employees were allowed to donate hours of paid leave for the benefit of an employee who experienced severe damage to or destruction of their primary residence that required immediate action by the employee to secure the residence or to those who were affected by a terrorist attack, natural disaster, or public health crisis. The IRS determined that a “catastrophic casualty loss” was too broad to be permitted as an eligible medical emergency plan since the plan may or may not involve a personal or family medical emergency. The IRS also found that the plan was outside the scope of an eligible major disaster leave-sharing plan because the plan was not “designed to be limited specifically to aid the victims of a ‘major disaster’ as declared by the President of the United States.”
Other resources may also be available. For example, employers might consider reminding employees about EAP programs or other benefits that are available to them should they be struggling with mental health issues relating to the stress of the wildfires. And of course, simply checking up on employees to ensure they are safe is always a good idea.
