On March 13, 2020, President Trump declared a national emergency under the Robert T. Stafford Disaster Relief and Emergency Assistance Act of 1988 as the impact of the coronavirus pandemic has grown exponentially around the country. The national emergency declaration designates the coronavirus pandemic as a "qualified disaster" under Sections 139(c) and 165(i)(5)(A) of the Internal Revenue Code, thereby permitting an employer to provide financial assistance to employees through a variety of philanthropic means. In addition, under certain circumstances, the payments may be excluded from the employee's taxable income.
Qualified Disaster Relief Payment and Tax Benefits to the Recipients
Only financial assistance that qualifies as a "qualified disaster relief payment" may be eligible for the benefits under the tax rules. A "qualified disaster relief payment" under Section 139 of the Code includes any payment or reimbursement made to a company employee, in connection with a qualified disaster, for reasonable and necessary personal, family, living or funeral expenses and reasonable and necessary expenses incurred for the repair or rehabilitation of a personal residence or repair or replacement of its contents. Only those costs and expenses qualify that are not reimbursed by insurance or otherwise. Examples of expenses that may be qualified disaster relief payments include: unreimbursed medical expenses (co-pays and deductibles related to COVID-19 care) and health-related expenses; childcare and tutoring expenses in light of school closings; travel and other expenses to permit college-age children to return home; increased expenses related to telecommuting (e.g., technology needs); and other critical financial needs (such as lost wages or lost income from a spouse's small business, although such payments would be taxable).
The tax consequences and tax relief that may be available to individuals receiving assistance in the wake of the coronavirus pandemic is likely to evolve over time. The IRS has a website that provides information at https://www.irs.gov/coronavirus.
In general, qualified disaster relief payments are tax free to the recipient. However, if the payment is made by an employer, rather than by an employer-sponsored private foundation (or a donor-advised fund or another charity), such payments are tax free only to the extent that insurance does not otherwise compensate or reimburse the employee for the loss. Additionally, payments by an employer for an employee's lost income or compensation do not qualify as tax free to the recipient.
Direct Assistance by Employer
An employer may provide direct financial assistance to employees affected by a "qualified disaster." As long as the payments qualify as "qualified disaster relief payments," as described above, the assistance will be tax free to the recipient (including for payroll tax purposes). There is no specific cap on the amount an employer may provide to an employee, although the assistance should be commensurate with an employee's need.
Employer-Sponsored Private Foundations
An employer-sponsored private foundation (i.e., the company foundation) may provide financial assistance to company employees for a "qualified disaster" by complying with the following requirements:
- The class of beneficiaries eligible to receive assistance must be large or indefinite. (In general, the company foundation can comply with this requirement if its disaster relief program remains open to benefit employees who are victims of future disasters.)
- Recipients must be selected based on nondiscriminatory criteria and payments must be made on an objective determination of need—although immediate needs, such as food and shelter, do not require a determination of financial need (the foundation must also maintain adequate records to demonstrate that these requirements are met).
- Recipients must be selected by a committee or group, the majority of whom are not in a position to exercise substantial influence over the sponsoring company (e.g., company directors, officers and senior executives may not serve on the committee).
Employer-Sponsored Disaster Relief Funds—Donor-Advised Funds
Many employers provide financial assistance to employees through a donor-advised fund sponsored by a public charity, such as a community foundation. Although donor-advised funds are generally prohibited from making grants to individuals, certain employer-sponsored disaster relief funds are exempted from this restriction.1
In order to qualify for the exemption, a disaster relief fund in which the employer-sponsor retains advisory rights must meet the following requirements:
- Organized to provide relief from one or more "qualified disaster(s)."
- The class of beneficiaries eligible to receive assistance must be large or indefinite. (In general, this requirement can be satisfied if the fund remains open to benefit employees who are victims of future disasters.)
- Recipients must be selected based on an objective determination of financial need. (As describe above, immediate needs, such as food and shelter, do not require a determination of financial need, but longer-term needs are subject to this requirement.)
- Recipients must be selected by an independent selection committee. In the context of a donor-advised fund, the majority of the members of the selection committee will be composed of the employees or representatives of the sponsoring organization (e.g., the community foundation) and the remaining members may be company employees who are not in a position to exercise substantial influence over the sponsoring company (e.g., company directors, officers and senior executives may not serve on the committee).
- Make no payments for the benefit of any director, officer or trustee of the sponsoring organization that maintains the fund or any member of the selection committee.
Employer-Sponsored Disaster Relief Funds—Restricted Funds Without Advisory Rights
In some cases, an employer will establish a disaster relief fund at a public charity that is restricted to providing financial assistance to company employees in case of disaster or emergencies, but where the employer-sponsor does not retain advisory rights with respect to the fund. The public charity (e.g., community foundation) provides all administrative services to the fund, including receiving, processing and approving all requests for assistance from employees. These funds will usually follow the requirements described above for employer-sponsored disaster relief funds where the employer retains advisory rights, although assistance by these funds is not strictly limited to "qualified disasters." Any financial assistance, other than immediate needs, must still be based on the financial needs of employees/recipients.
Employer/Employee-Sponsored Public Charity
Sometimes an employer sponsors a charitable organization that qualifies as a public charity because the charity receives contributions from both the company and employees and thus is able to satisfy the public support test. These charitable organizations are typically used by the company for community-based grantmaking under the direction of employees, but they can also be used to provide financial assistance to employees. Financial assistance does not have to be limited to "qualified disasters." However, the other requirements described generally herein would apply, namely: the class of beneficiaries must be large or indefinite; there must be an objective determination of need; and recipients must be selected by an independent selection committee composed of a majority of individuals who are not in a position to exercise substantial influence over the sponsoring company (e.g., company directors, officers and senior executives may not serve on the committee).
Other Types of Assistance
Apart from qualified disaster relief payments, employers have other ways to provide immediate, as well as long-term assistance, to victims affected by a qualified disaster:
- Employee-leave based donations. In the wake of disasters and tragedies, employers may wish to establish leave-sharing programs to allow employees to donate their vacation, sick or personal leave time to other employees affected by the disaster or to permit the company to donate the value of their accrued leave time as charitable contributions to nonprofit organizations assisting in the recovery. In general, such employer-sponsored leave banks have various tax and reporting consequences to the employees and the employer.2 In certain prior disasters, the IRS provided relief from these tax and reporting requirements, but the IRS has not made a determination yet for the coronavirus pandemic.
- Matching gifts. Many employers have well-established matching gift programs. Employers often match employee gifts dollar for dollar. In responding to needs in a national emergency, a matching gift program could allow for a higher match of employee contributions.3
- Employee volunteerism. One of the most valuable resources an employer may offer to charitable organizations is the volunteer time and expertise of their employees. Many companies encourage and assist employees to volunteer their time. An employer-sponsored private foundation may play a role in promoting employee volunteerism by, for example, coordinating the activities of company volunteers. The foundation could also make grants to charities at which company employees volunteer. However, the foundation must be mindful of the limitations imposed by the private foundation self-dealing rules. For example, a foundation should not pay any of the expenses employees may incur while volunteering. Given social distancing and other restrictions on travel and gatherings, company foundations may be able to help identify virtual or other online volunteer opportunities for employees eager to give back to their community during this crisis.
- Scholarships. Providing scholarships to children, including the children of company employees, is often an effective way to provide long-term assistance to individuals and families affected by a disaster. An employer-sponsored private foundation that wishes to provide scholarships to company employees will have to comply with strict rules regarding how the scholarship program operates, as well as obtain advance approval of the program from the IRS. In addition, the foundation may only provide a limited number of scholarships to company employees and their families. Many scholarship programs are making additional funding available to students in financial need who have unexpected living or travel expenses because of school closings and campus lockdowns.
1. Notice 2006-109, 2006-2 CB 1121 (Dec. 4, 2006).
2. In general, the IRS has provided guidance for disaster leave-sharing programs in Notice 2006-59 and for catastrophic leave-sharing programs in Revenue Ruling 90-29.
3. A matching gift program should be subject to a written policy that specifies how the program works and what charities are eligible for the match. In addition, an employer-sponsored private foundation that provides matches to company employee contributions must be sure that the matches comply with the private foundation self-dealing rules (e.g., employees who are eligible to participate and types of employee pledges that may be matched).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.