November 03, 2020 | Posted in:

COVID-19 Tax-Free Employee Benefits

Tax-Free Qualified Disaster Relief Payments

Internal Revenue Code Section 139 specifies that any amount received by an individual as a qualified disaster relief payment is not included in gross income.  This means that if your employer gives you money to help with disaster related expenses, you aren’t taxed on those payments, and the employer gets to deduct them as business expenses.  Section 139 was created after the 9/11 disaster, but the terms of the law can apply to any qualified disaster.  And COVID-19 is a federally declared disaster!

The qualified relief payments have to be for “reasonable and necessary personal, family, living, or funeral expenses” incurred as a result of the disaster.  This could include medical expenses not covered by insurance if the expenses are related to COVID-19.  It could include the funeral costs of an employee or employee’s family member if they die from COVID-19.

The costs of working from home might qualify if the employee is forced to work from home during the pandemic.  This might include the costs of a computer, desk chair, office supplies, or increased utility costs.  An employer might also reimburse an employee for child care or tutoring costs which allow an employee to work while the children are not able to attend school or daycare due to shutdowns.

Educational Assistance Programs

While educational assistance programs are not new, the CARES Act revised the rules to expand what an employer can pay for in the plans.  The existing part of the rules allow an employer to pay up to $5,250 per employee, per year, toward educational expenses of an employee.  These payments, often called tuition assistance or tuition reimbursement programs, are not included in the taxable income of the employee.

Student Loan Payments

Temporarily, from March 27, 2020 through December 31, 2020, employers may also pay qualified student loan debt from the plans.  The payments can be for principal and interest.  The debt must be the employee’s and cannot be for a spouse or child.  The annual limit remains at $5,250 per employee, per year, however.  This means that an employer may pay for any combination of tuition and/or loan payments, but the total that is deductible by the employer and tax-free for the employee is capped at $5,250.

Plan Disclosures

An employer offering an educational assistance program must provide a written plan document that spells out the details and how to apply for the funds.  The plan must be offered on a nondiscriminatory basis to all employees.  The program may not offer employees a choice between wages or educational assistance.

Using these tax code provisions to assist employees in a tax-free way can help to ease some of the pandemic-related financial burdens many employees are facing.


Associate Partner
Julie has over 20 years of experience in public and private accounting, representing varied clientele including the medical, legal, and real estate industries and trusts.
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