Employers Can Aid Wildfire Victims with Out-of-Pocket Expenses, Paid Leave, and Through Tax-Exempt Organizations

Many individuals are in desperate need of funds due to injuries, damage, and other unexpected expenses caused by the ongoing wildfires in Los Angeles. Employers can aid wildfire victims with tax-free payments, paid leave, and relief organizations. This LawFlash outlines Internal Revenue Service (IRS) Section 139 guidance, leave donation programs, and tax-exempt options to assist employees with housing, medical costs, and other necessities during natural disasters.

IRS rules allow employers to cover certain employee out-of-pocket expenses incurred as a result of a qualified disaster, as well as to establish “leave banks” into which employees can deposit annual leave to be paid to other employees if they or their family members have experienced severe hardship on account of the disaster that requires the employee to be absent from work. Additionally, employers may be able to utilize tax-exempt organizations to provide disaster relief to their employees.

Qualified Disaster Assistance Payments

Internal Revenue Code Section 139 allows employers to make payments “for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster [that are] not otherwise compensated for by insurance or otherwise.”

Limited IRS guidance instructs that such payments can include, but are not limited to, unexpected expenses for food, housing, course materials, technology, health care, or childcare. These payments are not subject to federal employment tax, and are deductible to the employer (per the legislative history) if the following requirements are satisfied:

• There has been a “qualified disaster”
• Assistance is intended to cover out-of-pocket expenses attributable to the qualified disaster
• Assistance is reasonably expected to cover reasonable and necessary (as opposed to lavish or extravagant) personal, family, and living expenses
• Assistance is not intended as a wage replacement or wage supplement

Provided that assistance is distributed to cover reasonable and necessary out-of-pocket expenses attributable to the wildfires and is not intended to substitute or to increase wages, then with President Joseph Biden’s approval of a Major Disaster (Disaster) declaration for California on January 8, 2025, it appears that all four Code Section 139 requirements have been satisfied. Employers who set up a program to provide qualified disaster assistance payments should maintain records of program eligibility and request that employees retain receipts in the event of an audit of the program.

Leave Donation Programs

During a presidentially declared national disaster, IRS rules permit employers to set up “leave banks” into which employees can deposit annual leave to be paid to other employees (and their family members) who have experienced severe hardship on account of a disaster that requires the employee to be absent from work. [1] The leave donated to a “bona fide employer-sponsored leave bank” is treated as income to the donee but not to the donor, who is treated as having assigned his or her income. An employee’s donation cannot be assigned to a specifically identified employee. Further, while a donation generally cannot be converted into a cash contribution to charity, the IRS historically has permitted such contributions in the context of certain other disasters. It remains to be seen if the IRS permits such contributions in the wake of the ongoing Los Angeles wildfires.

Tax-Exempt Organizations

Employers may be able to assist employees during a disaster by funding relief programs housed at tax-exempt charitable organizations, as described in IRS Publication 3833. After a disaster, charitable organizations are permitted to provide relief to individuals to ensure they have access to basic necessities (e.g., food, clothing, housing, medical expenses, and transportation).

Employers can help provide this relief through

• an employer-sponsored public charity (which generally solicits contributions from employees and on whose board rank and file employees typically sit);
• a donor-advised fund (which may make grants to individuals in need in the context of qualified disasters); or
• an employer-sponsored private foundation (which is more closely controlled by the employer and therefore subject to more stringent requirements).

While the specific requirements for each of these avenues differ and must be addressed in greater detail, in all cases, the class of beneficiaries must be large or indefinite enough to constitute a “charitable class,” and recipients must be selected based on an objective determination of need and using procedures (such as an independent selection committee) to ensure that any benefit to the employer is incidental and tenuous.