April 6, 2020
By Joe Price
If you want to provide financial assistance to an employee who has suffered hardship as a result of COVID-19, what is the most beneficial way to do that?
If you only care about the recipient’s income tax situation, how would you proceed?
This is the simplest situation. Grants can be made directly to an employee by the employer on an income tax-free basis, so long as such amounts are used to pay for or to reimburse amounts that are reasonably expected to be incurred for personal, family, living or funeral expenses as a result of the COVID-19 crisis. The employer is not required to make a specific assessment of the employee’s actual financial need.
If you are also concerned about providing an income tax incentive to an individual donor or an employer, how would you proceed?
The employer would establish an Employee Relief Fund for the benefit of its own employees. That may be done in the form of a stand-alone private foundation or within an existing publicly supported 501(c)(3) organization. Contributions would then be made to the Employee Relief Fund by the employer (and employees, although not necessary), and the distribution program would be administered as described below.
What steps must be taken by the Employee Relief Fund in order to ensure that the income tax deduction claimed by the employer and individual donors would be accepted by the IRS?
First, the Employee Relief Fund must be designed to benefit a significantly large class of employees. That requirement may be satisfied by providing that the funds may be used to benefit employees who are victims of all disasters, whether COVID-19 or future disasters.
Second, the selection of recipients must be made on an objective, needs-based basis. That requirement may be satisfied by providing written criteria for the selection of recipients prior to distributing any assistance payments.
Third, the recipients must be selected by a committee in which the Directors are unable to exercise substantial influence over the decisions. A workable solution is to include rank-and-file employees on the committee.
Fourth, the Employee Relief Fund must maintain documentation to show that the recipients that it benefited were actually needy and that the committee adhered to its written criteria in determining who benefited and in what amounts.
What expenses may the Employee Relief Fund pay or reimburse for during the COVID-19 crisis?
- Unreimbursed medical expenses and other health-related expenses
- Home expenses due to telecommuting
- Housing costs for additional family members
- Increased childcare and tutoring costs due to school closings
- Additional commuting expenses
- Increased costs of home office supplies
- Assistance with rent, mortgage payments or car loans if necessary to prevent loss of shelter or transportation
- Assistance with elementary and secondary school tuition and higher education costs
- Assistance to provide food or shelter
If the employer decides that its committee will operate the Employee Relief Fund within a stand-alone private foundation, what steps must be taken that would be avoided if an existing publicly supported 501(c)(3) organization were used?
- Creating of governance documents (trust agreement, LLC operating agreement and articles of organization or corporation articles of incorporation and bylaws)
- Filing of Form 1023 (Application for Recognition of Exemption) with IRS
- Filing of Form 990-PF (Return of Private Foundation) with IRS on annual basis
- The additional record-keeping that needs to be done in order to file Form 990-PF
- Monitoring of Employee Relief Fund to make sure that no Prohibited Transaction is committed
What sort of publicly supported 501(c)(3) organization would be appropriate to sponsor the Employee Relief Fund?
- Community foundations such as the Greater Kansas City Community Foundation or the Truman Heartland Community Foundation
- [NOTE: A donor-advised fund sponsored by a community foundation will provide lesser tax benefits than using the community foundation itself].
If an individual makes a cash contribution to a publicly supported Employee Relief Fund, what tax deductions are available in 2020?
- If deductions are itemized (over and above the standard deduction), up to 100% of adjusted gross income may be deducted
- If deductions are not itemized, a $300 “above the line” amount may still be deducted
If the employer makes a contribution to a publicly supported Employee Relief Fund, what tax deduction is available in 2020?
- 25% of taxable income (up from 10% in prior years)
A version of this article appeared in HR Legal & Compliance Excellence.