Many companies are rushing to help workers recover from hurricanes Harvey and Irma with financial support and other aid. What some may not realize is that there can be tax breaks for doing so.
“Companies are very attuned to helping employees affected by disasters, but often they don’t know the most tax-advantaged ways to provide relief,” says
an employee-benefits attorney with Morgan, Lewis & Bockius who has advised many firms on these issues.
A wide range of tax-favored options is available to companies who want to assist workers recovering after disasters. While some involve complex structures such as foundations, others are as simple as cutting a check to help with expenses. The aid helps fill gaps not covered by insurance payouts or casualty-loss tax deductions.
Here’s what businesses need to know:
•Direct assistance. Payments an employer makes to cover medical, living, personal, transportation and funeral costs are deductible by the business and not taxable to worker—as long as the payments aren’t reimbursed in some other way, such as by insurance.
But these payments can’t be excessive, and they must be in connection with a “qualified disaster”—that is, one defined as such by the tax code. Areas affected by Harvey and Irma are included.
For example, after Hurricane Irma roared through Florida, human-resources firm TriNet moved some of its 750 local workers to prearranged emergency housing and picked up the bill.
Businesses can also set up informal, non-tax-exempt funds to collect and disburse direct aid to victims in disaster areas. Employee donations to such funds aren’t deductible.
•Donations of time off. Leave-donation programs allow workers to contribute their paid time off, such as a vacation day, to aid disaster victims.
It works like this. Say an employee earning $300 a day wants to contribute to relief but is short of cash. Using a leave-donation program, the worker can donate a vacation day he has earned but not used.
The employer then contributes $300 to a qualified disaster-relief charity and takes a deduction for that amount. The worker doesn’t get a deduction, but people who don’t itemize don’t benefit from these write offs. No payroll tax is due on the amount donated.
TriNet, which is based in San Leandro, Calif., is also sponsoring a program allowing employees to give up vacation-day pay to assist hurricane victims.
The Internal Revenue Service must designate events eligible for leave donation, but they don’t have to be natural disasters: the first programs were approved after the attacks on Sept. 11, 2001. The IRS is allowing leave donation following Harvey and Irma.
•Retirement-plan withdrawals. If companies concur, participants in 401(k)s and similar retirement plans can more easily take loans and hardship withdrawals from their accounts—as long as they use the funds for disaster relief caused by Harvey or Irma. Such funds can be withdrawn by savers outside the disaster area to help family members within it.
The relaxed rules can provide access to needed cash, but they come with drawbacks. Loans must still be repaid, and taxes plus a 10% penalty are typically due on withdrawals.
•Company-sponsored charities. Employers can set up charities, donor-advised funds, and foundations that can provide relief to employees who are victims of a widespread disaster, such as a flood, or a particular one, such as a crime.
Insperity, a Houston-based human-resources provider, maintains such a nonprofit and added more than $1 million to it to assist more than 300 employees who suffered damage from Harvey.
“We wanted to increase support for employees during this challenging time,” says
chief executive of Insperity.
Many large corporations have affiliated nonprofits, but the rules governing them are complex to prevent too many benefits from going to too few people, which the tax code prohibits. They require expert oversight.
•Sharing time off. “Disaster-assistance leave banks” allow workers to donate unused vacation days and other paid leave to help co-workers that have used up their own leave address a personal crisis.
In these programs, the donor gives up one or more days of paid leave so that one or more co-workers can have extra time off. The recipient is paid for the extra days and owes income and payroll tax on them.
Mr. Fuller says that if the donor earns more than the recipient, the company can come out ahead on the trade.
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