If your Company leadership is looking for an innovative employee benefit – something outside the standard employee benefit package of retirement, health, and welfare benefits, a Company-sponsored charitable foundation might be your answer. A charitable foundation not only can further your Company culture while serving the community, but it also has tax benefits to boot.
A Company’s culture is the tie that binds. No matter how much pay or how lucrative the benefits package, if the employee feels like just a number or that the employee’s opinion does not matter, that employee will forever be on the lookout for a better fit. The world is changing, and social causes are all over the news. Imagine the impact it would have if you could put your employees in the driver’s seat of choosing from a litany of social causes that matter most to them. Imagine the positive public relations that would come from the Company’s foundation making sizable gifts of support in the community.
What does a Company-Sponsored Charitable Foundation Do?
Most are designed as grant-making organizations, as opposed to operational entities. The purpose of the charitable foundation could be:
- To make grants to other 501(c)(3) charities or governmental entities in the community who are furthering causes that are important to the Company. For example, a manufacturing company might choose to focus on environmental causes. A company in the healthcare field might choose to focus on healthcare education or support causes combatting the opioid crisis.
- To make grants to individuals in the community who have experienced a severe financial hardship. For example, if a family in the community loses their home to a fire or a flood, or the breadwinner in the family dies unexpectedly while in the line of duty leaving behind 4 little hungry mouths to feed, the Company’s foundation could be there to provide financial support.
- To provide educational scholarships to employees and their family members. Note that, unlike the two foregoing, there are additional, rigid tax law requirements in IRS Revenue Procedure 76-47 with which the charitable foundation must comply to get this type of entity to work. For example, the selection committee must be unrelated to the employer and foundation (e.g., no employees, former employees, officers, directors may serve on it).
How Could Employees Be Involved?
Absent a foundation, when the Company wants to support an identified cause, funds are raised and provided directly to that charity. Once given, control over the ultimate expenditure of the funds is ceded to the charitable organization.
With a Company-sponsored charitable foundation, your employees can be more involved in the promotion of the foundation and have more say in how and when the charitable funds are used.
For example, the Board of Directors of the non-profit corporation could consist of your employees. They could have oversight responsibility over the foundation and have the ultimate say in which charities or individuals are chosen for support. Employees could serve on a selection or nominating committee or simply promote the foundation in its giving efforts.
How Is the Foundation Funded?
Employees also can be involved by providing financial support to the foundation. For example, the Company could do one or more of the following:
- Allow employees to have a percentage of their after-tax pay payroll deducted and contributed to the foundation;
- Offer to match employee contributions according to a specified formula or up to a certain amount;
- Have all unused paid time off that normally would be forfeited at year-end converted to a charitable contribution to the foundation, giving employees the feel-good knowledge that if they work more, they also will do more for the community.
Amounts contributed to the foundation would be tax-deductible up to the legal limits allowed under Section 170 of the Internal Revenue Code. Company-sponsored charitable foundations often are classified as “private foundations,” rather than “public charities,” which simply means additional tax rules apply, and the deduction limit is reduced. Even so, this reduced deduction limit applies only with those giving substantial amounts to charity.
Unlike your normal charitable giving, a Company-sponsored foundation is different. Here, funds can be raised, but do not all need to be expended each year. Some distributions will have to comply with applicable tax law. However, the foundation could serve as a charitable endowment that grows over time so that when the right cause comes your way, the foundation will have the resources to make a substantial impact.
What is Involved in Setting One Up?
Charitable foundations are like most corporate entities. First, the separate legal entity would need to be formed under applicable state law. Typically, non-profit corporations are the best fit for the entity form. The charitable foundation would need to abide by all the requirements under state law to be a viable entity and for its corporate separateness to be respected. This means that the foundation should have bylaws, regular board meetings with minutes, and separate bank accounts, to name a few.
The foundation also would file an exemption application with the Internal Revenue Service using the Form 1023 series to seek a determination that the foundation is exempt from taxation under Section 501(c)(3).
And the foundation may be subject to state charitable registration requirements if it will be soliciting charitable donations. It also may need to register in other states if its activities will be crossing state lines. Foundations, like other corporate entities, are subject to annual filing and reporting requirements with the state and federal governments.
Thus, like all other employee benefits that require on-going maintenance and attention, a charitable foundation is no different. There are start-up costs, and on-going costs. But, for your employees, this atypical “benefit” really could make a difference both inside and outside your Company.