Supporting Employees During Southern California Wildfires

The wildfires in Southern California have devastated communities, leaving many without homes and safety. Employers are seeking ways to support their employees during this challenging time.

Disaster Assistance to Employees

Employers can extend various forms of disaster assistance to their employees:

• Qualified Disaster Relief Payments: Under Section 139 of the Internal Revenue Code, employers in FEMA-aided states like California can offer tax-free payments to affected employees for necessary personal, family, or living expenses due to the disaster. This includes funeral costs as well, but does not cover income replacement or expenses reimbursed through insurance or FEMA grants.
• Charitable Emergency Funds: Through 501(c)(3) charities, employers can provide tax-free emergency funds. The rules differ depending on the structure of the charity, like employer-sponsored public or private entities.

Retirement Plan Distributions

Depending on the terms of your retirement plan, options may be available to employees facing financial hardship due to the wildfires:

• Hardship Distributions: Employees may withdraw from their 401(k) or 403(b) plans for immediate financial needs caused by the disaster but will incur taxes and potentially a 10% penalty if under age 59 ½.
• Qualified Disaster Recovery Distributions: Made possible by the SECURE 2.0 Act, these distributions of up to $22,000 are exempt from the 10% penalty and must be requested within 180 days of the disaster declaration.
• Emergency Personal Expense Withdrawals: Employees can withdraw up to $1,000 for urgent personal expenses, exempt from the 10% penalty but taxable in the withdrawal year.
• Plan Loans: Employees might take loans from their retirement plans; post-disaster provisions allow increased borrowable amounts and delayed repayment under certain conditions.

Deadline Extensions and Tax Relief

The IRS has extended various deadlines, such as contributions to IRAs and health savings accounts, until October 15, 2025. Employers should stay informed about additional deadline extensions and work with their legal counsel to ensure compliance and extend voluntary deadlines where feasible.

Next Steps for Employers

It's crucial for employers to collaborate with legal experts when offering disaster relief payments to ensure tax requirements are met. Reviewing and amending retirement plans as needed, and coordinating with plan recordkeepers is also essential to effectively offer available relief options to employees.