As employers look for ways to help employees negatively affected by COVID-19, one option is to establish an employer-sponsored disaster relief fund through a charitable organization. Such programs allow employers to assist employees, and employees to assist other employees, in a tax favorable manner.
Charitable organizations can be public charities or private foundations. Public charities typically solicit funds from a broad range of sources and, as such, generally are subject to public scrutiny and oversight. Private foundations, on the other hand, might have only a single source of funding (such as the company creating the foundation). Therefore, public charities are less restricted than private foundations in the types of disaster assistance and emergency hardship relief they can provide. In addition, unlike public charities, private foundations are subject to certain excise taxes, and deductibility of contributions to a private foundation is more limited than deductibility of contributions to a public charity.
Regardless of the type of charitable organization, three principal requirements exist for setting up an employer-sponsored disaster relief fund through a charitable organization:
- The class of potential aid recipients (charitable class) must be large enough, or sufficiently indefinite, that the community as a whole, rather than a preselected group of people, benefits when the charity provides assistance.
- The recipients must be selected based on an objective determination of need.
- The recipients must be selected by an independent selection committee, or adequate substitute procedures must be in place to ensure that any benefit to the employer is incidental and tenuous.
These requirements were put in place to ensure that the sponsor (the employer in the case of employee disaster relief funds) does not receive an impermissible benefit.