With hurricane season on the horizon, it is important for employers to be prepared in the event that disaster strikes. When a hurricane or other disaster occurs, employees are often in desperate need of assistance. Employers can step in to help employees monetarily using several different approaches. Support can be achieved through offering a qualified disaster relief program, employer-sponsored charitable organizations and crowdfunding.
Qualified Disaster Relief Program
Internal Revenue Code (IRC) Section 139 allows an employer to provide tax-free financial assistance directly to employees to help them recover from a natural disaster.
In order to qualify for this type of assistance:
- The disaster must be a qualified disaster. A qualified disaster is federally declared by the president as a disaster, is the result of terrorist or military action, or is considered catastrophic by the Secretary of the Treasury.
- The employee must be within the declared disaster area.
- The payment must be a qualified disaster relief payment. This includes amounts to reimburse or pay reasonable and necessary personal, family, funeral, property repair, replacement or rehabilitation expenses that are incurred as a result of a qualified disaster.
Tips for Employers
If considering this type of program, employers should:
- Specify the disaster related to the program and the employees who will be eligible to receive grants under it.
- Describe the type of expenses that may be covered.
- Specify that reimbursement does not apply to the cost of nonessential, luxury, or decorative items and services.
- Consider a written policy limiting the use of funds to actual losses.
- Provide authorization for administration of the program through a committee of three or more employees, and give the committee the authority to make discretionary decisions.
- Provide an end date for submission of grant applications.
Employer-Sponsored Charitable Organizations
There are a few different types of employer-sponsored charitable organizations that an employer can set up if the employer does not want to provide direct relief to employees: employer-sponsored public charities and employer-sponsored donor-advised funds. A third type, not discussed here, is the creation of a private foundation by large employers.
Employer-Sponsored Public Charity
The employer can establish a nonprofit corporation under IRC Section 501(c)(3) to receive and disburse donated funds to employees affected by the disaster. Other employees can contribute by making donations to the nonprofit corporation to assist coworkers. This approach has tax advantages for everyone: tax deductibility for donors and no tax liability for the recipients or the employer. Something to keep in mind about this approach—The employer cannot control which employees will receive aid. Rather, an independent selection committee decides who receives the aid.
In order to create this type of charity, the employer must:
- Create a corporate entity and adhere to corporate formalities.
- Apply to the Internal Revenue Service for recognition as tax-exempt under Section 501(c)(3).
Tips for Employers:
- Ensure that the charity selects recipients based on need.
- Make sure the charity serves a broad group of employees, including victims of current and future disasters, for current and future employees.
- Create an independent selection committee, with a majority of the committee consisting of individuals who are not able to exercise substantial influence over the employer’s affairs. For example, the selection committee should not include senior management or its entire board of directors, but it could include retired employees, human resources personnel, or one to two board members not making up the majority of the committee.
Employer-Sponsored Donor-Advised Funds
An employer can set up a donor-advised fund under the umbrella of an existing charitable foundation while achieving the same tax advantages under the employer-sponsored public charity approach described above. In this approach, employees and others donate to the newly created fund, and the existing charitable organization distributes the funds with significant input from the employer.
Tips for Employers:
- Funds must meet the same requirements described in the employer-sponsored public charity approach.
- Recipients cannot include the employer’s officers, directors or members of the selection committee.
- The fund must keep and maintain records that show the recipients’ need for the disaster assistance provided.
Many employers now use crowdfunding as a way to provide support to employees quickly. Merriam-Webster defines crowdfunding as “the practice of obtaining needed funding . . . by soliciting contributions from a large number of people especially from the online community.” When using this approach, an employer may have to set up a new bank account or work with a third-party online funding aggregator. Employers or individual employees may then contribute to the “fund.” Employers often use crowdfunding when they are unwilling or unable to meet the restrictions of other approaches.
Tips for Employers:
- Keep in mind this approach does not provide the same tax benefits to donating employees as the earlier approaches.
- Tax-related complexities might exist for the employer.
- Watch out for third-party aggregators’ administrative fees—They can be substantial, and the aggregator does not assume responsibility for actually disbursing the funds.
[Related Reading: Employee Benefits Details to Consider When Disaster Planning]
- Tax Treatment of Employee Hardship and Disaster Relief – Pepper Hamilton LLP, December 1, 2017
- Hurricane Harvey Client Alert: How Employers and Employees Can Help Those in Need – Morgan Lewis, August 31, 2017
- Disaster and Hardship Relief for Employees: Common Pitfalls and How to Avoid Them – Robinson Bradshaw, January 5, 2017
Amanda Wilke, CEBS
Information/Research Specialist at the International Foundation