The end of the federal emergency declaration for Covid-19 came on May 11. As a result, there are various public health policy changes. For example, vaccines and treatments will remain available, but at-home tests may no longer be covered by insurance and national CDC data reporting is subject to change.
Administratively, there are also changes to regulatory measures temporarily put in place by the emergency status that will have tax consequences. As employers struggled during the pandemic, some even to meet payroll, issues around expense reimbursements, stipends and how these are considered fringe benefits or compensation came into light.
History of Section 139
Section 139 came into being over 20 years ago after the Sept. 11 terrorist attacks. Then President George W. Bush signed the Victims of Terrorism Tax Relief Act, which created Section 139, defining qualified disasters and providing a non-taxable status to relief payments. The emergency Covid declaration enabled Section 139 to apply under its time in existence.
Consequently, employers were able to aid employees under the federally declared Covid-19 disaster by providing non-taxable benefits to employees while deducting 100 percent at the company level.
One of the typical principles of tax law is that in order for compensation, whether cash or in-kind, to not be taxable to the recipient, it cannot be deducted by the compensating party. This makes sense logically, as the IRS simply wants one side to pay taxes in the end. The disaster declaration allowed a sort of have your cake and eat it too period when it came to certain employee benefits.
Impact on Benefits
So, Section 139 is the reason why some Covid-related payments never found their way onto a Form W-2. It meant that certain medical expense reimbursements such as testing and OTC treatments, dependent care expenses, and work-from-home expenses including home office stipends were treated as deductible for the employer providing them, but still not taxable to the employee receiving them.
There was never any specific IRS guidance stipulating exactly which Covid-19 expenses qualify under Section 139. Instead, most employers looked at what benefits they would not have otherwise provided, but for the COVID-19 pandemic, and classified these as qualifying items.
The Big Problem
Using this logic of classifying benefits that would otherwise not exist, but for Covid-19, as the justification for their taxability under Section 139 put companies in a bind. If they want to continue these benefits, they have to be treated as taxable income to the employee or the employer can no longer deduct them.
While some benefits such as Covid-19 test reimbursements are less of an issue, many employees have come to see others such as home office stipends as a normal benefit – especially in the context of the work-from-home (or at least partial) new normal. No longer receiving these benefits or having to pay tax on them is going to cause a lot of consternation.
One thing is certain. The end of the emergency declaration is going to bring changes in the realm of employee benefits. While the easy solution could be to simply make these benefits taxable to employees, companies need to think about what and how they provide in the context of both tax compliance and employee engagement and retention.