Employers May Provide Non-Taxable Qualified Disaster Relief Payments to Wildfire Victims

The severe wildfires and straight-line winds have devastated entire communities in the County of Los Angeles and other parts of southern California. Employers that would like to provide financial relief to employees impacted by the wildfires have the option to provide such benefit on a non-taxable basis under Internal Revenue Code section 139. Section 139 allows employers to provide “qualified disaster relief payments” to employees and other individuals on a tax-free basis. Qualified disaster relief payments include any amount paid to or for the benefit of an individual to reimburse or pay for reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster. It also includes reimbursements or payments for reasonable and necessary expenses incurred for the repayment or rehabilitation of a personal residence or its contents that need to be replaced due to a qualified disaster. Federal, State, and local government agencies may also provide qualified disaster relief payments in order to promote general welfare for individuals in connection with a qualified disaster.

A “qualified disaster” includes a federally declared disaster. On January 8, 2025, President Biden declared that a major disaster exists in the State of California and ordered Federal aid. He amended the disaster declaration on January 13, 2025 to provide further federal assistance. Based on these declarations, the fires meet the criteria to be a “qualified disaster” since the President determined it to be a federally declared disaster that warrants assistance by the federal government.

Any public agency employers that provide qualified disaster relief payments to any of its employees or other individuals in need of this assistance due to the California fires can exclude such payments from the gross income of the employee or individual. As a reminder, any qualified disaster relief payments are subject to meet and confer for any represented employee groups.

Major Disaster Leave Sharing Plans Can Help Employees Impacted by Wildfires.

During a Presidentially-declared major disaster, such as the California wildfires, it is expected that employees adversely impacted by the disaster will need to take time off. While many employers are more familiar with employee leave sharing banks for medical emergencies, employers also have the option to establish employee leave sharing banks for major disasters. Such banks allow employees to donate their accrued and unused leave hours to other employees who have been impacted by a major disaster and need time off from work related to the disaster. If properly structured, the leave that one employee (the donor) donates to an employer-sponsored leave sharing bank for major disasters will be non-taxable to the donor employee, which is a positive incentive for employees who want to help others but not be taxed on their donations. The amounts paid to recipient employees are considered wages.

The key requirements for setting up a valid major disaster leave sharing plan are:

• The employer must have a written plan for its major disaster leave sharing program.
• Recipient employees must be adversely affected by a Presidentially-declared major disaster. The California fires have been declared a major disaster by President Biden. If an employee or their family member suffers a severe hardship caused by the disaster that requires the employee to be absent from work, the IRS will consider that employee as being adversely affected by a major disaster.
• Donor employees cannot designate or earmark their donated hours to a specific employee.
• Donor employees cannot donate more accrued leave hours than they would normally accrue for the year.
• The employer must make a reasonable determination, based on need, as to how much leave each recipient may receive.
• Recipient employees should be compensated when using the donated paid leave at their normal rate of pay and must use the leave for purposes related to the disaster.
• The plan adopts a reasonable limit, based on the severity of the disaster, on the period of time after the major disaster occurs during which a donor may donate leave in the leave bank (“donation period”).
• Any donated leave that is not used by the end of the donation period must be returned within a reasonable period to donors. The amount of leave returned to each donor must be proportional to the amount of leave donated by the donor compared to the total amount of leave donated for the major disaster.
• Recipient employees cannot convert the donated leave to cash.
• Please note that such plans are subject to meet and confer for represented employees.

See the IRS Publication 15-A, Employer’s Supplemental Tax Guide and Notice 2006-59, 2006-28 I.R.B. 60 for more information.