The wildfires in Los Angeles County have wreaked devastation in the area, with thousands of homes and other structures, vehicles, and more destroyed by the worst wildfire in L.A. history. In response, on January 8, 2025, President Biden approved a Major Disaster declaration for California, allowing impacted communities and survivors to immediately access funds and resources to jumpstart their recovery.

As it stands, impacted individuals are in need of funds, housing, food, clothing, medical care, and other assistance as they navigate their current circumstances and begin to rebuild.  For employers who want to help, there are various tax-free ways to provide housing, cash, food, and other assistance to those affected by the wildfires that will give employees the resources and flexibility they need to get through these incredibly difficult times.

The various forms of assistance with tax-preferred treatment include “qualified disaster relief payments” under section 139, leave sharing programs, and assistance through employer-sponsored private foundations, donor-advised funds, and public charities. While each of these is beneficial, section 139 is the simplest method of assistance to establish, followed by leave-sharing programs, whereas private foundations, public charities and donor-advised funds will take some time to set up for employers that have not done so previously, and have restrictions as to how much assistance can be provided and to whom. 

Section 139

Under section 139 of the Internal Revenue Code, employers can provide employees with assistance, or “qualified disaster relief payments.” Section 139 provides an exclusion for “qualified disaster relief payments” from any source, including from employers, for reimbursement or payment of individuals’ eligible expenses in connection with a “qualified disaster.”  Qualified disaster relief payments are excluded from gross income, net earnings from self-employment, wages, and compensation subject to tax.

Qualified disasters are defined in section 139 to include a Presidentially declared disaster.  

Qualified disaster relief payments include payments to or for the benefit of an individual for:

• reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster; and
• reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents to the extent that the need for such repair, rehabilitation, or replacement is attributable to a qualified disaster, to the extent any expense compensated by such payment is not otherwise compensated for by insurance or otherwise. 

Qualified disaster relief payments do not include lost wages or other income replacement or unemployment, and cannot be for expenses that have been otherwise reimbursed, such as by insurance.

It’s important to note that section 139 does not require that any type of policy or plan be in place or that one be established. Moreover, section 139 does not require any tracking or substantiation of the amounts reimbursed to or paid for the benefit of an employee, and does impose any limits on the amount that can be reimbursed to or paid on behalf of an employee as long as the assistance provided is reasonably expected to be commensurate with the amount of unreimbursed reasonable and necessary expenses.  Employees are not required to return amounts or items reimbursed or paid for by their employer for the benefit of the employee.   

Under section 139, the provision of both cash and in-kind benefits is permitted. Accordingly, employers who want to assist employees affected by the LA Wildfires are able to provide cash, as well as temporary housing or hotel stays, medical care, food, clothing and other items employees may need as they face evacuations, smoke and other damage to their homes and possessions.

Employers may provide qualified disaster relief payments to employees directly, or via employer-sponsored private foundations or donor-advised funds, as discussed below. 

Practically, while section 139 does not require that a written plan be in place nor that employers obtain any type of substantiation, it’s suggested that employers communicate that any assistance being provided is intended to be qualified disaster relief under section 139. It’s further suggested that employers obtain some sort of confirmation that employees receiving the assistance are affected individuals and that the expenses have not otherwise been reimbursed or paid for by insurance or otherwise.

Section 139 payments are deductible to the same extent as if they were includable in income.

Leave Sharing

While cash and in-kind assistance such as temporary housing, hotel stays, clothing and food are critical, the flexibility that additional leave, or paid time off, provides is often just as necessary as it permits employees to not have to choose between working to get paid, or taking unpaid time off during a period when they are dealing with mounting expenses, required evacuations, and rebuilding, sometimes from scratch. As such, leave-sharing programs are another excellent resource for employers to provide employees affected by the wildfires.

Pursuant to Notice 2006-59, employers can establish leave sharing plans that permit employees to donate a portion of their accrued leave to a pool, which can then be used by employees who have been affected by a declared disaster and need additional leave (beyond what they have individually accrued). If the leave-sharing plan meets certain requirements, the leave donor employee is not taxed on the donated leave, and the leave recipient employee is able to use the extra paid time off (which is taxed as wages to them), as needed.

Notice 2006-59 provides the following requirements in order for the donated leave to not be taxable to the leave donor employee:

• The plan must be in writing;
• The plan must permit leave donors to deposit accrued leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster (defined to include employees for whom the disaster has caused severe hardship to the employee or a family member of the employee that requires the employee to be absent from work).
• The plan may not permit a leave donor to deposit leave for a specific employee.
• The plan must limit the amount of leave that may be donated by a leave donor in any year so that it does not exceed the maximum amount of leave that an employee normally accrues during the year.
• The plan must allow a leave recipient to receive paid leave at their normal rate of compensation from the leave bank, which leave must be used for purposes related to the disaster.
• The plan must specify a period with a reasonable limit, based on the severity of the disaster, after the major disaster occurs during which leave may be deposited and received.
• The plan may not permit leave recipients to convert leave received into cash in lieu of using the leave, though a leave recipient may use leave received to eliminate a negative leave balance resulting from taking advanced leaved as a result of the disaster, or use leave received in lieu of leave without pay.
• The employer must make a reasonable need-based determination as to how much leave each employee may receive.
• Leave deposited on account of one major disaster may be used only for employees affected by that major disaster, and other than de minimis amounts, any leave deposited that is not used by leave recipients by the end of the period specified above must be returned to leave donors in proportion to the leave donated within a reasonable period of time so that the donor will be able to use the leave. (If leave donor employees have terminated, the employer may choose to return leave only to currently employed employees.)

Setting up a leave-sharing program that complies with the requirements of Notice 2006-59 is relatively simple. Employers who either have a plan or want to set one up should communicate the plan to employees so that employees who wish to donate, or who are in need of leave, are familiar with the program and can take advantage of it. In practice, senior and other employees with significant amounts of accrued leave that is unlikely to be used, particularly if there are any “use or lose” restrictions on accruing leave, are generally happy to donate to employees affected by disasters.

Leave-based Charitable Donation Programs

Another potential option that is dependent on IRS guidance is to set up a leave-based charitable donation program. Under leave-based charitable donation programs, employees can elect to forgo vacation, sick or personal leave in exchange for cash payments that the employer makes to IRC Section 170(c) charitable organizations, as instructed by IRS guidance.

While the IRS has not yet issued guidance with respect to the current LA Wildfires, it would be normal course for such guidance to be issued.  If so, it would generally permit employers to set up leave-based donation programs, but rather than donating leave to other employees, the employer would make contributions to charities benefitting victims of the LA Wildfires.  The IRS issued similar guidance in Notice 2017-70 with respect to the 2017 California wildfires.  Once guidance is released, employers may want to consider this as an option, particularly if the company’s employees have not been directly affected.  

In general, under these programs, cash payments made pursuant to these programs will not be treated as wages or otherwise be included in the donating employees’ gross income if the payments are made to the IRC Section 170(c) charitable organizations for victims, as specified in IRS guidance, and paid to the IRC section 170(c) organization by the deadline set in IRS guidance.

Cash payments made pursuant to IRS guidance under these programs are not be included in Box 1, 3 (if applicable), or 5 of Form W-2 for the donating employee. In addition, employees may not claim a charitable contribution deduction under IRC Section 170 for the value of forgone leave.

Employers may deduct these cash payments in accordance with IRC Section 170 or IRC Section 162 if they otherwise meet the respective requirements.

As noted, these programs are dependent on IRS guidance so we will need to wait and see.

Private Foundations

Like public charities, employer-sponsored private foundations can make need-based distributions to victims of disasters or to members of a charitable class, though they tend to have more restrictions than public charities because of the control the employer has.  However, employer-sponsored private foundations can make qualified disaster relief payments to employees or their family members under section 139, as long as certain safeguards are in place to ensure that such assistance is serving charitable purposes, rather than the business purposes of the employer.

In general, the IRS will presume that section 139 qualified disaster relief payments made by a private foundation to employees (or their family members) of an employer that is a disqualified person (such as a company that is a substantial contributor or manager of the foundation) are consistent with the foundation’s charitable purposes if:

• the class of beneficiaries is large or indefinite (a charitable class),
• the recipients are selected based on objective determinations of need, and
• the selection is made using either an independent selection committee (where the majority of the members are persons who are not in a position to exercise substantial influence over the affairs or the employer) or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous.

If these requirements are met, then the foundation’s payments in response to a qualified disaster are treated as made for charitable purposes, do not result in taxable compensation to the employees pursuant to section 139, and do not result in prohibited self-dealing merely because the recipient is an employee (or a family member of an employee) of the employer-sponsor. However, the presumption described above does not apply to payments that would otherwise constitute self-dealing, such as payments made to (or for the benefit of) individuals who are directors, officers, or trustees of the private foundation or members of the private foundation’s selection committee. Such payments would be fully taxable to such individuals and may cause the individuals and managers of the foundation who approved the payments to be subject to the highly punitive self-dealing excise taxes.

To the extent employers would like to utilize a private foundation to assist employees affected by wildfires, it’s suggested that advice be sought to confirm that the payments are excludable and do not subject the foundation’s management and disqualified employees (employees who are substantial contributors to the foundation or serve in a management role at the foundation) to any excise tax.

Donor-advised Funds

While donor-advised funds cannot generally make grants to individual persons, as with private foundations, there is an exception for certain employer-related funds or accounts established to benefit employees and their family members who are victims of a section 139 qualified disaster.

Specifically, a donor advised fund or account can make grants to employees and their family members in the following circumstances:

• the fund serves the single identified purpose of providing relief from one or more section 139 qualified disasters,
• the fund serves a charitable class,
• recipients of grants are selected based upon an objective determination of need,
• the selection of recipients of grants is made using either an independent selection committee (where a majority of its members consists of persons who are not in a position to exercise substantial influence over the employer’s affairs) or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous,
• no payment is made from the fund to or for the benefit of any director, officer, or trustee of the sponsoring community foundation or public charity, or members of the fund’s selection committee, and,
• the fund maintains adequate records to demonstrate the recipients’ need for the disaster assistance provided.

To the extent employers wish to provide assistance through a donor-advised fund, it is essential to note that while section 139 does not have substantiation requirements, in order for amounts to remain tax-free to the recipient employees, the fund itself must maintain adequate records to demonstrate the recipients’ need for the disaster assistance provided. It’s suggested that advice be sought to confirm that the payments are excludable and meet the relevant requirements.

Charities

An employer can establish an employer-sponsored public charity to provide assistance programs to respond to disaster or employee emergency hardship situations, subject to restrictions on employer control over the organization. To ensure the program is not impermissibly serving the related employer, the following requirements must be met:

• the class of beneficiaries must be large or indefinite (a “charitable class”),
• the recipients must be selected based on an objective determination of need, and,
• the recipients must be selected by an independent selection committee (where the majority of the members of the committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer) or adequate substitute procedures must be in place to ensure that any benefit to the employer is incidental and tenuous.

If these requirements are met, the public charity’s payments to the employer-sponsor’s employees and their family members in response to a disaster or emergency hardship are presumed to be made for charitable purposes, and are not taxable to the employees.

Given the restrictions, employers are not able to direct a charity to provide aid to specific employees, and employees would need to seek assistance under normal course. 

Takeaways

• Now that President Biden has declared the LA Wildfires a disaster, it is possible to provide employees, contractors, and others impacted by the wildfires with non-taxable disaster relief under section 139. 
• Section 139 relief can be implemented through various vehicles.
•  Direct section 139 qualified disaster relief payments programs are simplest to set up, as they require no written plan and no substantiation, and permit employers to provide assistance such as cash, housing, food, medical care, and clothing immediately as long as it is reasonable to do so.
•  Other vehicles, such as assistance through private foundations, require more planning and set up to ensure that payments made through them remain excludable and meet the relevant requirements.

Regardless of the vehicle(s) used, given the destruction wrought by these wildfires and the long road affected employees will face in rebuilding and recovering what they’ve lost, both materially and emotionally, assistance and support from employers in helping employees move forward will have a positive impactContinue Reading How Employers Can Help Employees Affected by the Wildfires Tax-Free