Many of our members have asked for a written digest of the information covered by AICP Legal Counsel, Ellenoff Grossman & Schole's Jacki Ruocco on the AICP Town Hall last Thursday, January 9th, 2025. The information below and at this link regarding employer options for assisting employees impacted by the California wildfires, is a more detailed version of her presentation. This memo is provided for informational purposes only. It is not intended as legal advice and readers should consult legal counsel to discuss how these matters relate to their individual circumstances.

This memorandum provides information regarding the ways in which a production or post production company, as the employer, can assist employees who are affected by the ongoing fires in Los Angeles. On January 8, 2025, the Federal Emergency Management Agency (FEMA) declared the State of California as a major disaster area, opening the state up to federal disaster assistance as well as opening up options for employers to provide employees with workplace-related disaster relief. 

Disaster Relief Payments Directly to Affected Employees: Section 139 of the Internal Revenue Code (IRC) permits employers to make disaster relief payments directly to employees affected by a qualified disaster. FEMA’s declaration regarding the LA fires satisfies the “qualified disaster” requirement and any such payments made to affected employees are not subject to wage-related taxes. Pursuant to the IRC, a “qualified disaster relief payment” means any amount paid to or for the benefit of the affected employee:

• to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred as a result of a qualified disaster, or
• to reimburse or pay 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. 

Qualified disaster relief payments must be intended to cover out-of-pocket expenses attributable to the qualified disaster and cannot be intended as wage replacements or wage supplements. Further, qualified disaster relief payments may only be excluded from income to the extent that any expense compensated by such payments is not otherwise compensated for by insurance or otherwise.

401(k) Plan Hardship Distributions: FEMA’s disaster declaration means that affected employees may be eligible to take hardship distributions from their 401(k) plan accounts without such distribution being subject to the 10% penalty tax on early 401(k) withdrawals. An employer’s 401(k) must allow hardship distributions for employees to receive this benefit. If an employer’s 401(k) plan does not currently permit hardship distributions or allows hardship distributions but does not include disaster relief provisions, employers can permit disaster distributions as long as their 401(k) plans are amended to include these provisions by the end of the plan year in which the amendment is first effective. 

If the affected employee’s principal residence or principal place of employment was located in the area designated by FEMA at the time of the disaster, the employee may be able to take a disaster relief hardship distribution of up to $22,000. Such distribution would not be subject to the 10% tax on early withdrawals, but would have to be recognized as income to the employee over three years. Amounts distributed could be repaid to a tax-preferred retirement account. Disaster relief hardship distributions may be used to cover expenses and losses (including loss of income) incurred by the disaster. 

Note that hardship distributions may exceed $22,000, with such excess amounts generally being subject to the 10% tax on early withdrawals for employees not otherwise eligible to receive a distribution. Hardship distributions generally may not exceed the amount of the employee’s financial need, but they may include what is necessary to pay any taxes or penalties that may result from the distribution. Employers should seek written documentation from employees certifying their financial need. 

Leave-Sharing Programs: Companies may implement employer-sponsored paid time off (PTO) leave banks for use by employees affected by a major disaster. Any such program must comply with IRS regulations, and if done properly, donated hours are not included in the taxable income of the employee who donates their unused PTO but are included as wages for tax purposes to the employee who receives donated PTO. An employer-sponsored leave-sharing program for major disasters must comport with the following IRS requirements:

• The plan allows a leave donor to deposit accrued leave in an employer-sponsored leave bank for use by other employees who have been adversely affected by a major disaster.  For purposes of the plan, an employee is considered to be adversely affected by a major disaster if 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 does not allow a leave donor to deposit leave for transfer to a specific leave recipient.
• The amount of leave that may be donated by a leave donor in any year generally does not exceed the maximum amount of leave that an employee normally accrues during the year. 
• A leave recipient may receive paid leave (at his or her normal rate of compensation) from leave deposited in the leave bank.  Each leave recipient must use this leave for purposes related to the major disaster.
• The plan adopts a reasonable limit, based on the severity of the disaster, on the period of time after the major disaster occurs during which a leave donor may deposit the leave in the leave bank, and a leave recipient must use the leave received from the leave bank.
• A leave recipient may not convert leave received under the plan into cash in lieu of using the leave.  However, a leave recipient may use leave received under the plan to eliminate a negative leave balance that arose from leave that was advanced to the leave recipient because of the effects of the major disaster. A leave recipient also may substitute leave received under the plan for leave without pay used because of the major disaster.
• The employer must make a reasonable determination, based on need, as to how much leave each approved leave recipient may receive under the leave-sharing plan. 
• Leave deposited on account of one major disaster may be used only for employees affected by that major disaster. Except for an amount so small as to make accounting for it unreasonable or administratively impracticable, any leave deposited under a major disaster leave-sharing plan that is not used by leave recipients by the end of the period must be returned within a reasonable period of time to the leave donors (or, at the employer’s option, to those leave donors who are still employed by the employer) so that the donor will be able to use the leave.  
• A leave donor may not claim an expense, charitable contribution, or loss deduction on account of the deposit of the leave or its use by a leave recipient.   

Charitable Foundations: Employers may choose to create a long-term assistance program for employees impacted by natural disasters by establishing a 501(c)(3) foundation. There are many rules and regulations surrounding this approach and companies should consult with legal counsel in doing so. 

Do not hesitate to contact Jaclyn Ruocco at jruocco@egsllp.com or Harrison Taylor at htaylor@egsllp.com should you require additional assistance.

This memo is pvoided for informational purposes only.
It is not intended as legal advice and readers should consult legal counsel to discuss how these matters relate to their individual circumstances.