Aiding Employees After A Disaster Via Sec. 139

In the wake of a natural disaster, individuals frequently incur all sorts of extra expenses, including those to repair damaged property and obtain temporary housing while their home cannot be used. Employers may want to provide extra financial assistance to their employees to help them recover from a disaster, and Sec. 139 allows employers to provide assistance on a tax-free basis. This article provides an overview of this little-known provision and practical advice to employers who may wish to establish this type of program.

SEC. 139

Sec. 139 was added to the Code in 2001. It provides that gross income does not include a “qualified disaster relief payment.” A qualified disaster relief payment includes, among other items, amounts to reimburse or pay “reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster” and “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.”

A “qualified disaster” includes “a disaster which results from a terroristic or military action … a federally declared disaster … [and] a disaster which results from an accident involving a common carrier, or from any other event, which is determined by the Secretary to be of a catastrophic nature.” Sec. 139 also provides that qualified disaster relief payments are not treated as net earnings from self-employment, wages, or compensation subject to tax. Although the payments are not includible as income for the employees, the Joint Committee on Taxation stated that they are deductible by the employer to the same extent they would be if the payments were includible in income (Joint Committee on Taxation, Technical Explanation of the Victims of Terrorism Tax Relief Act of 2001 (JCX-93-01) (Dec. 21, 2001)). Therefore, the employer gets a deduction for the payments, even though employees do not have to include the amounts in their gross income.

REV. RUL. 2003-12

No regulations have been issued under Sec. 139, but Rev. Rul. 2003-12 provides three examples of situations to which Sec. 139 may apply. In the third example, an employer makes grants to its employees who are affected by a flood in a presidentially declared disaster area. The grants will pay or reimburse employees for medical, temporary housing, and transportation expenses they incur as a result of the flood that are not compensated for by insurance or otherwise. The employer will not require individuals to provide proof of actual expenses to receive a grant payment. The program, however, contains requirements (which are described in the program documents) to ensure that the grant amounts are reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary medical, temporary housing, and transportation expenses that the employees incur as a result of the flood. The grants are not intended to indemnify all flood-related losses or to reimburse the cost of nonessential, luxury, or decorative items and services. The grants are available to all employees regardless of length or type of service with the employer.

The IRS ruled that the payments that the employees receive under the program to pay or reimburse their unreimbursed reasonable and necessary medical, temporary housing, or transportation expenses are excluded from gross income under Sec. 139. In addition, the payments are not subject to reporting on Form W-2, Wage and Tax Statement, under Sec. 6041.


Rev. Rul. 2003-12 states that the grants were made under a written program adopted by the employer. Therefore, an employer that wishes to make grants intended to qualify under Sec. 139 should establish a written program, the adoption of which is approved by the employer’s board of directors or other governing body. The ruling gives few specifics about the program’s terms and conditions, but, based on the details that were provided in the ruling, the program document should at least:

  • Specify the disaster to which the program relates and the employees who will be eligible to receive grants under it.
  • Describe the types of expenses that may be covered by payments from the program — i.e., the expenses listed in Sec. 139.
  • Specify that payments cannot be used to reimburse the cost of nonessential, luxury, or decorative items and services.
  • Provide authorization for the administration of the program and give the administrator the authority to make discretionary decisions.
  • Place a per-employee maximum on grants, if desired (Sec. 139 does not limit the amount that can be excluded).
  • Provide an end date by which applications for grants under the program must be submitted.

A Sec. 139 program is not subject to the Employee Retirement Income Security Act (ERISA), so provisions required in an ERISA plan, such as a two-level claims procedure, are not necessary. This also means that ERISA’s fiduciary duties do not apply to the program.


Once the program is adopted, the employer should then establish a basic administrative structure. Although a Sec. 139 program is not subject to ERISA, principles from good ERISA plan administration can be applied to it. Therefore, it is a good practice to install a committee of three or more employees to make decisions regarding grants, such as whether an employee qualifies and the amount of the grant to each employee. Grants need not be uniform in amount, so the committee should have the discretion to approve differing grant amounts.

Another good practice is to have employees who wish to receive grants complete a basic application form. The form can require the employee to state the amount he or she is requesting and to represent that he or she resides in the disaster area, that the request does not exceed the amount of the employee’s unreimbursed reasonable and necessary expenses, and that the grant will be used for qualifying purposes and not for nonessential, luxury, or decorative items and services. The form should also require the employee to agree to be bound by the terms of the program document.


Assuming that the Sec. 139 program meets the applicable requirements, the payments from the program are not taxable income to employees, so they will not appear on the Forms W-2 that employees receive for the year of the payments. The grants will also not be subject to Social Security and Medicare taxes. Although the IRS does not require an individual to provide itemized receipts to substantiate that an amount is excludable under Sec. 139, employees who wish to take a casualty loss under Sec. 165 need to remember that the documentation requirements under that section would still apply. (Note also that P.L. 115-97, known as the Tax Cuts and Jobs Act, restricts deductions for personal casualty losses in tax years 2018 through 2025 to “qualified disaster losses”; see Sec. 165(h)(5).) In addition, since the deduction under Sec. 165 applies to losses “not compensated for by insurance or otherwise,” the receipt of a grant under a Sec. 139 program could reduce the amount of the Sec. 165 deduction, since it can be viewed as a means of compensation for the loss.

Sec. 139 is not a well-known provision in the Code, especially in the context of an employment relationship, but it can be a relatively simple and tax-efficient way to help employees after a disaster.

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