The Covid-19 Disaster Declarations And Options For Employers
As of April 17, 2020, all 50 states have been approved by President Trump for major disaster declarations in connection with the COVID-19 pandemic. These major disaster designations offer a number of special tools for employers to assist employees who have been impacted.
PTO Donation Policy
As a result of the President’s declaration of a “major disaster” in all states, including Nebraska and Iowa, employers may assist employees affected by the pandemic by implementing a qualified employer-sponsored paid time off (“PTO”) donation policy or leave-sharing plan.
These policies offer certain tax benefits to employees who donate their unused PTO to employees affected by a major disaster or who are suffering from a medical emergency (as defined by the Internal Revenue Service (IRS)). Absent a qualified written PTO donation policy, both the donor employee and the recipient employee would be subject to income tax on the value of the donated leave, but by adopting a qualified policy, these adverse tax consequences may be avoided. Generally, a qualified policy has the following characteristics:
- Employees adversely affected by the COVID-19 pandemic must use the donated PTO for purposes related to the disaster and may not convert the donated PTO into cash.
- An employee is “adversely affected” by a major disaster if the disaster has caused a severe hardship to the employee or a family member of the employee that requires the employee to be absent from work.
- Amounts paid to a recipient of donated PTO are included in the recipient’s compensation and are subject to applicable employment and income tax withholding.
- The employee who surrenders leave to the employer pursuant to a qualified PTO donation policy does not realize any income and incurs no deductible expense or loss upon such donation.
To qualify for the tax benefits of a qualified leave-sharing plan, certain requirements, including a written policy, must be met. If you have any questions about qualified leave-sharing plans, please contact a Baird Holm LLP attorney.
Employees impacted by the COVID-19 pandemic may take a hardship withdrawal from an employer-sponsored retirement plan if the employer’s retirement plan expressly permits hardship withdrawals. Specifically, if the retirement plan permits hardship withdrawals, employees may take an in-service withdrawal from any elective deferrals they’ve contributed to their 401(k), 403(b), or 457(b) plans if the distribution is on account of an “immediate and heavy financial need.” A distribution is deemed to be made on account of an “immediate and heavy financial need” if made, among other reasons, for expenses and losses (including loss of income) incurred by the employee on account of a Federally Declared Disaster.
Disaster Relief Payments
Finally, employers may make direct “qualified disaster relief payments” to affected employees. Such payments are excludable from employees’ gross incomes and are not subject to withholding or employment taxes. A “qualified disaster” means a federally declared disaster, and a “qualified disaster relief payment” includes any amount paid to or for the benefit of an individual to pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster.
Due to the circumstances surrounding a qualified disaster, employees are not required to account for actual expenses in order to qualify for the exclusion, provided that the amount of the payments can be reasonably expected to be in line with the expenses actually incurred. Employers should nonetheless consider obtaining certifications from employees setting forth the expenses covered by the payment.