Employer-sponsored public charities
In general, public charities provide the greatest flexibility in the type of assistance that can be provided to employees. An employer can establish a public charity to help with a disaster or emergency hardship as long as the employer does not exercise excessive control over the organization (for example, when rank-and-file employees constitute a significant portion of the board of directors and the selection committee). Public charities generally receive broad public support. In the context of an employer-sponsored public charity, the organization will receive funding through donations from employees and perhaps even from company vendors and others. While the sponsoring employer itself also may contribute to the public charity, it is the ability of the charity to attract significant support from nonemployer sources that allows it to receive favorable tax treatment as a public charity.
If these requirements are met, a public charity’s payments to employees and their family members in response to a disaster or emergency hardship are presumed to be made for charitable purposes (and thus eligible for a charitable contribution deduction provided documentation and other requirements under the IRC are satisfied) and do not result in taxable compensation to the employees.
Employer-sponsored private foundations
An employer may establish a private foundation (or use an existing private foundation) as a conduit to provide disaster relief payments to employees. However, an employer-sponsored private foundation can provide employee assistance only to employees or family members affected by a qualified disaster under Section 139, such as COVID-19. Additionally, to avoid prohibited self-dealing, payments cannot be made to, or for the benefit of, individuals who are directors, officers, or trustees of the private foundation or to members of the private foundation’s selection committee. If these requirements are met, the private foundation’s payments to employees are treated as made for charitable purposes (and thus eligible for a charitable contribution deduction provided documentation and other requirements under the IRC are satisfied) and do not result in taxable compensation to the employee.
Employer-sponsored donor-advised funds
An employer also could use a community foundation or public charity that offers a donor-advised fund to operate a disaster relief program to make payments to employees. In a donor-advised fund, the donor employer has advisory privileges over investment or distribution of the donated funds. Like private foundations, donor-advised funds can be used only for qualified disasters under Section 139. Additionally, payments cannot be made to any director, officer, or trustee of the charity sponsoring the fund or to any member of the fund’s selection committee. Any benefit to the donor employer may be only incidental and tenuous. If these requirements are met, the donor-advised fund’s payments to employees are treated as made for charitable purposes (and thus eligible for a charitable contribution deduction provided documentation and other requirements under the IRC are satisfied) and do not result in taxable compensation to the employee.
Moving forward
Employer-sponsored disaster relief programs are an option to permit employers to assist employees and for employees to assist co-workers in these financially difficult times. However, the rules around employer-sponsored public charities, private foundations, and donor-advised funds are complex. Each option should be considered in light of the employer’s resources. Things to consider include the cost of forming a new entity, applying for recognition of federal tax exemption, filing annual information returns, and expending internal administrative time to operate and oversee the program. Employers should consult a tax adviser to properly structure a disaster relief program that considers their available resources and achieves optimal tax benefits for the employer, donors, and employees.
