“Qualified Disaster Recovery Payments” allows your company to distribute tax free income to your employees in need.
Here is some sound business advice to those companies with employees who are attempting to recover from Hurricane Sandy. Under the tax laws, employers can help employees with cash payments to offset their Hurricane Sandy losses -tax free through a little-known provision called Qualified Disaster Relief Payments (“QDRP”). QDRP are fully deductible to businesses and is not considered taxable income to the employee.
“During the aftermath of Hurricane Sandy, many employees have suffered significant personal losses including damaged or lost homes, cars, clothing and household effects,” says Mark Goodman of New York-based Accounting firm Janover LLC. “Their main focus is trying to restore their personal lives. With QDRP, businesses can help their employees bring normalcy to their lives sooner through tax free income.”
Simply said, an employer can make cash payments to its employees to reimburse them for their uninsured losses. It’s that easy. QDRP can pay for physical damage losses and payments for additional personal, family living or funeral expenses incurred as a result of Hurricane Sandy. Also, QDRP can reimburse or pay for expenses to repair or replace their home or apartment. So employers can pay for clothing, food , lodging and commuting costs. Furthermore, there is no monetary limit on how much assistance that an employer can provide to any employee other than the amount has to be reasonable and necessary. Additionally, employer payments to employees can be made on a discriminatory basis; therefore employers can direct payments to needed and valued employees.
“Generally, the tax laws make it very difficult to pay employees cash payments without considering it as income to employees, Goodman continues. “The loss definition in this program includes many personal expenses that, without a disaster, would be taxable income to the employee.”
The benefits are plentiful: not only does it help the employees get back to being a productive part of your business, that much sooner, by taking some of the stress away from the day-to-day recovery situation, but to an employee that lost their home and all their personal belongings this tax free benefit is a powerful tool to promote goodwill throughout your business as well as helping to retain your valued employees. Corporately, it is also a great way to participate in the overall recovery effort… focusing on the people you know and care about the most.
In order for the payments to qualify as QDRP, the employee needs to live in the disaster zone which is declared by the President and for Hurricane Sandy includes most counties in NY, NJ and southern CT. For employers with a large number of employees, the company can set up a formal process or plan to distribute the money to their employees by asking them about their losses. For employers with a smaller number of employees, there doesn’t have to be a formal plan, but the employer just needs to make sure that the employee has a loss that is uninsured. Usually, employees need to fully document expense reimbursements to avoid taxable income, but for QDRP, no documentation is required other than the amount needs to be reasonable. And of course, the company’s expense is fully tax deductible. For income tax reporting, QDRP are not subject to income taxes so there is no reporting requirements in the employee’s W-2, payroll taxes nor withholding taxes.
“After an unprecedented disaster like Hurricane Sandy, it’s imperative that companies find creative solutions to help their employees,” Goodman concludes. “People are the most important asset of any successful business.”