With the current economic situation and many businesses forced to scale
back or cease operations, individuals, businesses and charitable
organizations are looking for ways to help those facing financial
hardships. Certain charitable organizations and businesses can offer
financial assistance directly to individuals who are affected, directly or
indirectly, by the virus, as outlined in Internal Revenue Service guidance.
Employers have several options to consider for providing financial
assistance to their employees facing economic and other hardship as a
result of the COVID-19 pandemic and its societal impacts.
Benefits Through Charitable Organizations
An employer (as well as its employees or others) may contribute funds to
charitable organizations to provide assistance to employees affected by the
Charitable organizations can offer employer-sponsored assistance programs,
which can provide assistance based on individual determinations of
financial need for each affected employee. But the payments cannot be a
wage replacement. An employer can establish its own charitable organization
or partner with existing public charities that have disaster relief and
financial hardship programs to create an employer-sponsored assistance
program for its employees.
Once a charitable organization is selected or established, anyone,
including employees and employers, can contribute funds to such programs to
allow grants to be awarded to employees needing assistance. However, the
type of assistance that can be provided through these employer-sponsored
programs at charitable organizations depends on whether the organization is
a private foundation or a public charity.
If an employer desires to provide broader relief to its employees for any
type of disaster or other emergency hardship situation, the charitable
organization sponsoring the employer-sponsored assistance program or
employee assistance fund must be a public charity. In most cases, this
means the organization will be a publicly supported charity with more than
one-third of the organization's total support coming from the general
public, and with limitations on how much support from any one individual or
entity can be counted in calculating this support fraction. Grants from
public charities can be used to meet the employee’s financial hardship and
may include paying for reasonable and necessary personal, family and living
expenses not otherwise paid for by insurance or other reimbursements.
The IRS will not question the charitable nature of any disaster relief or
emergency hardship payments made to employees by an employer-sponsored
public charity if: (1) the class of beneficiaries is large and indefinite,
(2) the recipients are selected based on an objective determination of
need, and (3) the selection is made using either an independent selection
committee or adequate substitute procedures to ensure that any benefit to
the employer is incidental and tenuous. The selection committee will be
considered independent if a majority of its members are not in a position
to exercise substantial influence over the affairs of the employer.
A corporate foundation that is classified as a private foundation can make
"qualified disaster relief" payments within the meaning of section 139 of
the Internal Revenue Code to the affected employees of the foundation’s
employer-sponsor. But the corporate foundation cannot make payments for
other emergency hardship situations employees are facing.
Historically, “qualified disasters,” for purposes of providing disaster
relief, have been declared as a result of hurricanes or other natural
catastrophes. However, a “qualified disaster” includes any “federally declared
disaster” as “determined by the President of the United States to warrant
assistance by the Federal Government under the Robert T. Stafford Disaster
Relief and Emergency Assistance Act.” On March 13, President Trump
declared that the “ongoing Coronavirus Disease 2019 (COVID-19) pandemic is
of sufficient severity and magnitude to warrant an emergency determination under
section 501(b) of the Robert T. Stafford Disaster Relief and Emergency
Assistance Act.” Declarations of emergencies and disasters are under different
provisions of the Stafford Act (sections 501 and 401, respectively). Because
section 401 of the Stafford Act has not yet been invoked on a nationwide basis,
there is some uncertainty whether corporate private foundations can provide
grants to employees facing hardship due to COVID-19 in a state where a major
disaster declaration has not yet been made. However, prior informal
issued by the IRS defines a "federally declared disaster" to include either a
major disaster declaration or an emergency declaration under the Stafford Act.
The Federal Emergency Management Agency has an updated list available
online of the
states for which a major disaster declaration under section 401 of the Stafford
Act has been declared.
Any qualified disaster relief payments made to employees by the private
foundation will not be taxable compensation to the employees and, if
properly made and documented, will not constitute prohibited acts of
self-dealing under section 4941 of the Internal Revenue Code or taxable
expenditures under section 4945 of the Internal Revenue Code. Unlike
scholarship and certain other individual grant programs, there is no
requirement to seek pre-approval of grant procedures from the IRS before
initiating this type of program.
Again, as with an employer-sponsored private foundation, the IRS will not
question the charitable nature of any qualified disaster relief payments
made to employees by an employer-sponsored private foundation if: (1) the
class of beneficiaries is large and indefinite, (2) the recipients are
selected based on an objective determination of need, and (3) the selection
is made using either an independent selection committee or adequate
substitute procedures to ensure that any benefit to the employer is
incidental and tenuous. The selection committee will be considered
independent if a majority of its members are not in a position to exercise
substantial influence over the affairs of the employer.
Employer Direct Payments
Section 139 of the Internal Revenue Code allows an employer to issue to an
employee qualified disaster relief payments that are not includable in the
employee’s gross income and therefore not subject to income or employment
taxes. Under section 139, a “qualified disaster relief payment” includes
any amount paid to or for the benefit of an individual to reimburse or pay
personal, family, funeral or living expenses.
The employer may deduct any qualified disaster relief payments even though
the payments are not included in the employee’s gross income. An employer
need not obtain detailed receipts and documentation from the employee
related to the use of the qualified disaster relief payments so long as the
payments reflect a reasonable estimate of the employee’s losses and
expenses attributable to the disaster. Further, employers who make
qualified disaster relief payments to employees need not include the
payments on any employee’s Form W-2, issue the employee a Form 1099, or
withhold or pay employment taxes on any of the payments.
To decide what option might be best for an employer and its employees, the
employer should examine a number of factors, including the anticipated
sources of support and whether the employer expects that the program would
continue beyond the current COVID-19 pandemic and be available as a
resource for its employees experiencing hardship in the absence of a
qualified disaster. Before deciding whether to use an existing private
foundation, the employer may want to explore employee assistance programs
maintained by some charities throughout the United States allowing
employers to set up designated funds for their employees. And, many
employers have existing employee assistance or relief organizations that
are public charities. These existing assistance organizations provide
employers an immediate mechanism to receive contributions and provide
assistance to those in need.
For questions or additional guidance on these recommendations and other COVID-19 considerations, please contact any of the McGuireWoods COVID-19 Response Team members.