Especially during the holidays, but also throughout the year, both employers and employees often seek a means of financially assisting distressed coworkers and their families. The various methods of targeting relief to employees are summarized in IRS Publication 3833, DISASTER RELIEF, PROVIDING ASSISTANCE THROUGH CHARITABLE ORGANIZATIONS at http://www.irs.gov/pub/irs-pdf/p3833.pdf. Some employers establish a “donor-advised fund” or other similar account at a local “community foundation” in order to target assistance to members of the company “family” who are in need due to some financial or medical setback or circumstance. Many moderate to large-sized companies, however, have established their own charitable employee relief organizations to perform this function.
A Company Workforce as a “Charitable Class”
Since Hurricane Katrina, the IRS has recognized significantly smaller employee populations than previously as a qualifying “charitable class” that can be benefited by a 501(c)(3) company-sponsored organization. The benefited class must be the indefinite open-ended group of current and future employees, rather than a specific group of existing employees.
The Benefits of Public Charity Status
A 501(c)(3) employee relief charity will be classified as a “private foundation” unless it meets the requirements to qualify as the generally more tax-favored and flexible “public charity.” Deductible contributions to a public charity are capped at a higher limit than those for private foundations. Private foundations must also comply with more burdensome regulations and restrictions on their investments and grants than do public charities.
Company private foundations can provide employee financial relief only in the case of “qualified disasters” designated under federal law, but if an organization qualifies as a public charity it can provide such relief in virtually any kind of disaster or personal emergency hardship situation. Recipients must be selected based on objective determinations of need or distress by an independent selection committee or some other procedure that ensures any benefit to the employer is incidental. In short, the relief granted cannot be a disguised “employee benefit” or entitlement even though it may, and should, cause the company to be deemed a more desirable place to work.
Establishing “Public Support”
To establish public charity status, the organization must normally not receive more than one-third of its support from gross investment income and must normally receive more than one-third of its support from contributions by employees (through payroll deduction or otherwise), other public charities, governmental units and/or the general public. Generous employer contributions may need to qualify as isolated or “unusual” grants in order to meet this one-third test. Fundraising activities for an employee relief charity can include golf tournaments or other similar events. Employees may make payroll deduction contributions or donate unused PTO dollars. The employee may deduct these just like contributions to the United Way.
A company employee relief charity can build workforce morale in a way that complements other employee benefits offerings. The unbenefit can be a real continuing benefit for both employees and employers. Happy Holidays!