The structure for employee assistance funds hinges on several factors including the type of assistance employers intend to provide. For example, some types of employer sponsored charities are limited to providing aid only in the event of a qualified disaster while others are able to provide aid for both qualified disasters and in cases of personal hardship.
Very generally, the most popular vehicles for employer sponsored employee assistance funds are:
- Employer-sponsored charities;
- Donor Advised Fund (DAF); and
- Direct giving outside an exempt organization.
The two most important considerations for employer sponsored charities are:
- The employer must not control the selection of aid recipients as this could be considered an impermissible private benefit to the employer; and
- Whether or not a payment from the employer or the charity is considered taxable compensation.
In order to show that payments are not for an employer’s private benefit the charity must be able to show that:
- It serves a sufficiently broad charitable class, such as all current and former employees of the employer;
- The recipients are selected based on an objective determination of need or distress; and
- The recipients are selected by an independent selection committee (i.e. a majority of the committee consists of persons not in a position to exercise substantial influence over the employer’s affairs) or some similar procedures designed to ensure that any benefit to the employer is incidental.
If a charity meets the criteria above, the payments will not be considered compensation and will not be treated as income to the employee recipients, but rather as tax-free gifts.
Private Foundations. If the employer sponsored foundation does not plan to solicit outside contributions to support the employee care fund, it will be considered a private foundation. An employer-sponsored private foundation can only provide support to employees in response to a qualified disaster or a disaster that:
- results from terrorist or military actions;
- results from an accident involving a common carrier;
- is a Presidentially declared disaster; or
- is deemed catastrophic by the Secretary of the Treasury.
What this means to an employer wishing to assist employees in times of need is that assistance can only be provided in one of the situations described above. Employer-sponsored private foundations are not able to provide assistance in personal hardship situations such as illness, a spouse losing his or her job, a house fire or a similar situation.
In addition, an employer-sponsored private foundation is subject to self-dealing rules which generally prohibit most financial transactions with insiders (in tax jargon, disqualified persons). Simply stated, the foundation cannot make grants to members of the selection committee, officers, directors or their family members without violating the self-dealing rules.
Public Charities. If the employer intends to solicit contributions to the fund from outside sources such as employees or the general public, it may qualify as an employer-sponsored public charity. Employer-sponsored public charities have broader latitude to provide relief than employer-sponsored private foundations. Specifically, in addition to providing assistance in qualified disaster situations, employer-sponsored public charities may provide assistance to employees in response to personal hardship situations such as illness, a spouse losing his or her job, a house fire or a similar situation.
Employer-Sponsored Donor Advised Funds.
DAFs are separate funds or accounts, often maintained by community foundations or other public charities, that receive contributions from individual donors in which donors retain the right to provide recommendations regarding distributions from the fund. Employer-sponsored DAFs can make grants to employees and their family members where:
- the DAF provides relief in qualified disasters;
- the DAF serves a charitable class;
- the DAF makes an objective determination of need;
- the DAF relies on an independent selection committee;
- the employer benefit is incidental; and
- the employee’s need is documented.
Like an employer-sponsored private foundation, these funds can only be used to provide relief in qualified disaster situations, but if recipients are selected in the appropriate manner, assistance will be considered a tax-free gift to the employee.
Anyone, including an employer, can make qualified disaster relief payments to cover reasonable and necessary personal, family, living or funeral expenses not covered by insurance if the expenses are incurred as a result of a qualified disaster. Additionally, payments can be made for reasonable and necessary expenses incurred for the repair of a personal residence and for the repair or replacement of the contents of a personal residence in a declared disaster. As with DAFs, employer-sponsored private foundations and employer-sponsored public charities, if assistance is given in accordance with the guidelines listed above, it will not be taxable to the employee as income.
Ellis Carter is a nonprofit lawyer licensed to practice in Washington and Arizona. Ellis advises tax-exempt clients on federal tax matters nationwide.