Section 139 Plans ASilverLiningintheCOVID-19Cloud

Background:FollowingtheattacksonSeptember11,2001,CongressaddedSection139totheUSTaxCodewhichallowsemployerstomaketax-free“qualifieddisasterreliefpayments”toassistemployees.OnMarch13,2020PresidentTrumpdeclaredthecoronavirusanationaldisasterundertheRobertT.StaffordDisasterReliefandEmergenceAssistanceAct.InadditiontodelayingthetaxfilingdeadlinetoJuly15,2020,thisdeclarationalsoactivatedSection139thatnowallowsemployerstoissuequalifieddisasterreliefpaymentstotheiremployees.Thetaxtreatmentofthese“qualifieddisasterreliefpayments”isuniquesince:

• Theemployerreceivesataxdeductionforthepaymentatthefederaland(inmostcases)atthestatelevel.

• Theemployerdoesnotpayanypayrolltaxesonthesepayments(notsubjecttoFICA,FUTA,andinmoststates,SUTA).1

• TheemployeedoesnotrecognizethesepaymentsasincomeandthepaymentsarenotreportedonFormW-2,aForm1099,noraretheytreatedasself-employmentincome.

• ThesepaymentsarenotsubjecttoanyannualnondiscriminationtestingandnoannualIRSreportingisrequired(suchasForm5500).

• Theeligibilityforthisprogramisdeterminedbytheemployerandcanbeasbroadorasselectiveastheemployerwishes.

• TheSection139fundingamountdoesnotneedtobeauniformamountacrossthecompany’semployees.

1Statesgenerallyeitherusethefederaldefinitionofwagesforstateincometaxpurposesorhavetheirowndefinitionthatexcludesqualifieddisasterreliefpayments.

• Theemployer(oracontractedadministratorsuchas24HourFlex)doesnotneedtosubstantiatetheexpenseorcollectreceipts.

• Thereisnolimitontheamountorthefrequencyofthequalifieddisasterreliefpayments.

WhattypeofexpensequalifiesunderSection139?First,theexpensemustnotbecoveredbyinsuranceandtheemployeereceivingthereimbursementmustnotalsolistthisexpenseasataxdeductionorbereimbursedfortheexpensethroughsomeothermeanssuchasaflexiblespendingaccount.(Nodouble-dipping.)Second,theexpensemustbeincurredaresultofaqualifieddisaster.Third,theexpensemustbeincurredbytheemployeeoranymemberofhisimmediatefamily(spouseandeligibledependents).Afterthesehurdlesarecleared,thelistofeligibleexpensesisquiteextensiveandcaninclude:

• Over-the-countermedications• Medicalexpenses• Funeralexpenses• Handsanitizer• Homedisinfectantsupplies• Additionaltechnologyandsuppliesthatenabletheemployeetoworkfrom

homeincluding,computers,officeequipment,printer,supplies,internet,utility,cellphones

• Childcareincurredbecausethechildisnotallowedtoattendschool• Costsassociatedwithhomeschoolingincludingcomputer,internet,school

supplies,tutoring,andeducationalmaterialsPleasenotethatunlessSection139isactivated,payingtheaboveemployeeexpenseswillresultintaxableincometotheemployeeandadditionalpayrolltaxestotheemployer.Let’slookatanexample:

UnderSection139 WithoutSection139

Amountof“grant” $1,000.00 $1,000.00Lessfederalincometaxwithholding

(estimatedat20%) $0 <$200.00>LessemployeeFICAat7.65%(Notethatthe

employeralsosaves7.65%inFICA) $0 <$76.50>Lessstateincometaxwithholding

(estimatedat5%) $0 <$50.00>Netdisbursement $1,000.00 $673.50

TheemployeralsobenefitsbygrantingthisvaluablebenefittotheemployeesincetheemployerdoesnothavetodeclaretheSection139grantasincometotheemployeethussavingthematchingFICA.Intheexample,theemployerFICAsavingswouldbe$76.50.2TheMechanics–HowthePlanWorksThroughtheadvancedtechnologyavailablethrough24HourFlex,aSection139accountcanbeestablishedwithadebitcardattachedtoitthatcanonlybeusedatcertaintypesofmerchants.EachmerchantthatenrollsintheVisaorMasterCardsystemisassignedaMerchantCategoryCodeandthe24HourFlexdebitcardcanbestructuredsothatitcanonlybeusedatthesetypesofmerchants.Further,eachSection139employeeaccountwillbegivenafundinglimit,establishedbytheemployer,andthisamountdoesnotneedtobeuniformforallemployees.TheSection139accountinformationwillbeavailabletotheemployeeviathe24HourFlexmobileappandthroughasecureonlineaccount.Theemployerwillalsohavecompleteaccesstoallplaninformationviathesecure24HourFlexportal.

2AnypotentialsavingsofFUTAandSUTAareusuallynotrelevantsincemostemployeesarewellabovetheFUTAandColoradoSUTAtaxablewagebasesof$7,000and$9,000respectively.NotethattheFICAwagebasein2020is$137,700andiftheemployeehasalreadyexceededthiswagebase,therewillonlybesavingsontheMedicaretaxof2.9%whichhasnowagebase.

Theemployeecaneitherusethedebitcardtopayfortheexpense,orpersonallypaytheexpenseandreceiveareimbursementfrom24HourFlexbyenteringthedataintothe24HourFlexmobileapporbycompletinganonlineclaimform.Noreceiptsarerequired.Areimbursementfrom24HourFlextotheemployeecantaketheformofaphysicalcheckoradirectdeposit.AllexpensesmusthavebeenincurredafterMarch13,2020;thedatePresidentTrumpdeclaredthenationalemergency.24HourFlex(alongwithWEX,oursoftwaresupplier)hasalreadyestablishedtwoMerchantNetworks.Customnetworkscanalsobecreated.COVID Emergency Funds Special Merchant Network MCCs 4812 - Telecommunication Equipment 4814 - Telecommunication Services 4816 - Computer Network/Information Services 4899 - Cable, Satellite, and Other Pay Television and Radio Services 4900 - Utilities – Electric, Gas, Heating Oil, Sanitary, Water 5013 - Motor Vehicle Supplies and New Parts 5072 - Hardware Equipment and Supplies 5074 - Plumbing and Heating Equipment 5122 - Drugs, Drug Proprietors and Druggists Sundries 5300 - Wholesale Clubs 5310 - Discount Stores 5411 - Grocery Stores, Supermarkets 5541 – Fuel Service Stations 5451 - Dairy Products Stores 5542 - Fuel Service Stations 5912 - Drug Stores and Pharmacies 5969 – Online Merchants (Not Elsewhere Classified) 6513 - Real Estate Agents and Managers–Rentals 7210 - Cleaning, Garment and Laundry Services 7211 - Laundry Services

WEX Name = COVID Work At Home Special Merchant Network MCCs 4812 - Telecommunication Equipment 4814 - Telecommunication Services 4816 - Computer Network/Information Services 4899 - Cable, Satellite, and Other Pay Television and Radio Services 5021 - Office and Commercial Furniture 5045 - Computers, Computer Peripheral Equipment, Software 5111 - Stationery, Office Supplies, Printing and Writing Paper 5200 - Home Supply Warehouse Stores 5300 - Wholesale Clubs 5310 - Discount Stores 5712 - Equipment, Furniture and Home Furnishings Stores (except Appliances) 5732 - Electronics Sales 5743 - Computer Software Stores 5943 - Office, School Supply and Stationery Stores 5969 - Online Merchants (Not Elsewhere Classified) 7379 - Computer Maintenance, Repair and Services–Not Elsewhere Classified 7394 - Equipment Rental and Leasing Services, Furniture Rental, Tool Rental 7399 - Business Services Not Elsewhere Classified Whatisthecostofthisprogram?Acustomfeequotewillbeprovidedbaseduponthenumberofplanparticipantsandtheamountoftheparticipantgrants.Usually,thecostoftheprogramwillnotexceedthepayrolltaxsavingsoftheemployer.Howquicklycanthisprogrambesetupanddebitcardsdistributed?Oncetheclientengages24HourFlex,wecanhavedebitcardsdeliveredtoemployeeswithin7-10businessdays.

WhatistheprocesstoestablishaSection139Plan?

• Theclientengages24HourFlex.• TheclientchoosesfromtheabovetwoSpecialMerchantNetworks(onecard

cannotcoverbothnetworks).• TheclientdeterminesemployeeeligibilityfortheSection139planandthe

amountoffundingforeachparticipantandprovidesthiscensusdatato24HourFlexviaoursecureportal.

• Section139fundingarrangementsareestablishedbetweentheclientandthe24HourFlexTrustAccount.

• 24HourFlexprocessesthefileandordersthedebitcards.• RPSpreparesabriefdescriptionoftheSection139planwhichtheclient

distributestotheeligibleemployees.Whymustaseparatedebitcardbeissued?Whycan’tthisbenefitbestackedontoourexistingFlexFSAdebitcard?TheSection139merchantnetworkisamuchdifferentnetworkthatthemedicalFSAnetworkwhichisdesignedtobeusedonlyatmedicalestablishmentssuchaspharmacies,hospitals,doctor’soffices,etc.PleasenotethattheSection139cardthatisissuedtotheemployeeswilllookdistinctivelydifferentthatthenormal24HourFlexdebitcardandwillincludeadescriptivenameonthecard,chosenbytheclient.

ForfurtherinformationortoscheduleaZoompresentation,pleasecontactmarketing@24hourflex.com.