Many business owners have asked how they can help their employees struggling from the COVID-19 outbreak and its economic effects. The difficult part is that many businesses are also suffering financially, so providing aid from free cash flow may not be a viable option. Fortunately, employers interested in providing aid to employees at this time have several attractive options that are wholly or partially subsidized by tax incentives. Brown Brothers Harriman (BBH) has previously shared the details of two important new tax credits for employee salaries paid during the COVID-19 crisis. The Families First Coronavirus Response Act (FFCRA) provides a potentially immediate tax credit for salary and healthcare benefits paid to employees during sick leave or leave to care for others taken as a result of the COVID-19 crisis. The Employee Retention Credit under the CARES Act offers an employer who has been seriously adversely affected by the COVID-19 crisis a refundable payroll tax credit for 50% of wages paid to employees during the COVID-19 crisis, up to $10,000.
For employers who are willing and able to provide additional relief to employees, two long-standing provisions of tax law could be of interest:
- Reimbursing Employees Directly for Disaster Expenses. The Internal Revenue Code (the tax code) has long allowed employers to deduct reimbursements made to employees for reasonable and necessary expenses incurred as a result of a qualified disaster. These payments are also not taxable income to the employee – so employees receive these funds as a tax-free benefit with no self-employment, payroll, income or any other taxes. On March 13, 2020, President Trump declared the COVID-19 outbreak to be such a qualified disaster. Employers cannot deduct the salary they pay their employees who may be unable to report to work under this provision, as salary is not a disaster relief expense. While there has been no specific guidance on what disaster relief payments during the COVID-19 pandemic include, an employer could safely reimburse an employee for medical expenses, childcare expenses, educational expenses incurred in home schooling or similar expenses that an employee would not incur if the outbreak had not occurred. While it is not necessary under the tax laws to have a formal reimbursement plan in place, employers who want to adopt a disaster relief reimbursement plan to all employees should have some written guidelines in place so employees understand the plan, whether it is available to them, how and when they can provide receipts to the employee and when they will receive the reimbursement. The tax code does not require employers to make the reimbursement available to all employees – employers can provide selective reimbursements to key employees or only those who they believe have exceptional need.
- Charitable Employee Assistance Funds. An employer could create a charity or a fund within an existing charity to address substantial employee financial hardship brought on by the COVID-19 outbreak. Unlike the disaster payments described above, this type of charity, often called an employee assistance fund (EAF), can provide financial support for hardship expenses and disaster relief expenses and could provide an employee needed funds to cover rent, food and basic living expenses. BBH has particular expertise in setting up an EAF, as we put one in place during Hurricane Sandy; initially funded by BBH Partners, it was soon after funded by many other BBH employees. BBH’s EAF has given many grants over the years to help our employees with disaster and hardship. If an EAF is set up in compliance with the charitable rules under 501(c)(3) of the tax code, then anyone (the employer, other employees or the public) can make a tax-deductible charitable donation to the EAF. The challenge with charitable EAFs is that the employer must maintain objective criteria to determine who will receive support, and the selection of support recipients must be made by an independent selection committee. The class of recipients who receive support must also be large and indefinite – the current employee group of a small or mid-size company is probably not a large enough class to qualify under the charitable rules. Defining the possible recipients of aid as the current and former employees of a large employer would likely qualify. Qualifying as a charity under these rules is complex and can take time to put in place; thus, many employers prefer to outsource the compliance with these rules to an existing charity. An existing charity, such as the Emergency Assistance Foundation or America’s Charities, can, for a fee, create a separate fund just for the employees of a single employer and will take on the obligation of complying with the relevant charitable rules and properly administering the EAF. EAFs administered by a public charity can take as little as one to two days to set up and thus can be very responsive to urgent needs. However, one possible challenge is that the employer must be comfortable relinquishing all control of the aid selection process to the public charity.
Please reach out to your BBH relationship team for further information or assistance in establishing an employee reimbursement or assistance program.