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 COVID-19 pandemic.
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.
Public Charities. 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.
Private Foundations. 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 guidance 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.