Many organizations want to help their own during tough times. Relief funds offer a vehicle to provide much-needed financial assistance to individuals during unforeseen disasters and personal hardships. And those that comply with regulatory requirements allow for tax-deductible donations and tax-free grants within the United States.
However, navigating the myriad regulations and best practices can be confusing. In fact, research shows that many self-administered relief funds are inadvertently in violation of regulatory requirements and/or are operating with inefficient practices. Numerous IRS administrative rulings have been issued to foundations that were established to provide disaster and hardship grants to employees in need, and some of these foundations have had their tax-exempt status revoked. Charitable Solutions, LLC reports that its audits of employee-focused relief funds show that many funds are missing important compliance elements, including elements which should not be included, and/or taking more compliance risk than is necessary.
As a starting point, the elements below provide a brief overview of some of the essential regulatory requirements for disaster and hardship relief funds:
A tax-exempt relief fund’s charitable class is the group of individuals who are eligible to apply for and receive a grant. According to IRS Publication 3833 (Disaster Relief: Providing Assistance Through Charitable Organization): “A charitable class must be large enough or sufficiently indefinite that the community as a whole, rather than a pre-selected group of people, benefits when a charity provides assistance. For example, a charitable class could consist of all the individuals in a city, county or state. This charitable class is large enough that the potential beneficiaries cannot be individually identified and providing benefits to this group would benefit the entire community.”
How does a charitable class function for employee-focused relief funds?
Many organizations choose to focus on providing financial assistance to their employees, whether full-time and/or part-time employees, retirees, contractors, U.S. and/or non-U.S. based employees, some combination of these, or some other employment-related criteria.
When considering charitable class for these types of relief funds, IRS Publication 3833 states that, “if the group of eligible beneficiaries is limited to a smaller group, such as the employees of a particular employer, the group of persons eligible for assistance must be indefinite. To be considered to benefit an indefinite class, the proposed relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster.
In addition to defining the fund’s charitable class, a regulatory compliant disaster and hardship relief fund must be established with specific written and objective grant criteria, which guide the nondiscriminatory grant review and award process. Grant criteria includes:
- What occurred to make the applicant eligible for a grant?
A relief fund’s grant criteria include the events and expenses that qualify for financial assistance from the fund. Events might be natural disasters, serious illnesses or injuries, an impact to the applicant’s primary residence (i.e., housefires), death of a family member, and others. Associated expenses related to the event might include evacuation costs, medical expenses, rent for temporary housing, repairs to damaged property, and many more. Best practice is to include many common types of events and expenses for both disaster and hardship relief.
- When can an application be submitted?
Considerations such as the number of days after an event occurs that an application may be submitted and the number of grants that can be awarded to an individual in a given timeframe help ensure regulatory compliance. These criteria limit applicants to events which are most current, as well as those events that could not be readily foreseen or reasonably avoided.
- How large of a grant can be requested?
When determining maximum grant amounts, the most significant consideration is to choose an amount large enough to provide substantial assistance to the applicant, while balancing their needs with expected donations. Minimum grant amounts help discourage applications for small grant amounts that might be obtained from family and/or friends to focus the fund on those who have been substantially impacted by a disaster or personal hardship.
The Needs-Based Test
The Needs-Based Test, as described in IRS Publication 3833, is “an objective evaluation of the victims’ needs at the time the grant is made” and is a regulatory requirement for providing financial assistance through a disaster and hardship relief fund.
In the immediate aftermath of a qualified disaster, the Needs-Based Test is not a requirement because “when flood waters drive people from their homes, everyone urgently needs shelter, warmth, food, clothing, medicine, transportation, and some cash for incidental expenses.” In these instances, the relief fund is, however, still responsible for keeping records of assistance provided.
The Needs-Based Test becomes a requirement “as time goes on” and “people are able to call upon their individual resources.” This is when a financial needs assessment becomes necessary. Appropriate supporting documentation – demonstrating the need for and purpose of a grant – must be provided and objectively evaluated. This is essential to ensuring that donations made to a relief fund are used for the intended charitable purpose.
Employee-Focused Relief Fund Requirements
For an employee-focused disaster and hardship relief fund to remain tax advantaged:
- It is a regulatory requirement that the nexus between the employer and the employee be broken. An applicant must begin and submit the application confidentially as an individual, not as an employee of the fund’s sponsoring organization. Per the IRS (1999 EO CPE): “Other than as an initial qualifier, employment is not a relevant factor in the application or selection process, or in the amount or type of assistance provided. For example, employee’s position in the corporation, length of service, continued employment, etc.”
- The relief fund must be administered by a public charity rather than by any employer-related private foundation, cannot be excessively controlled by the employer, and must not be funded by the employer in a manner that will cause it to be classified as a private foundation
- Although beneficial, the Relief Fund cannot be considered an employee benefit, does not fulfill a legal obligation of the employer, and must not be used by the employer to recruit or induce employee retention.
Other Requirements & Considerations
Regulatory and legal requirements for disaster and hardship relief funds are not limited to those outlined above. In fact, these items merely scrape the surface. For example, did you know that all state governments typically require annual registration in each state if you solicit donations from donors located there? In addition, there are many laws and regulations surrounding personally identifiable information and data privacy that must be followed.
Given the complexities, it is strongly recommended that those seeking to establish a disaster and hardship relief fund consult the appropriate legal and tax professionals and/or partner with an experienced third-party relief fund administrator that handles all the above and more to ensure that financial assistance reaches those in need as quickly and efficiently as possible.