The IRS scrutinizes whether employee disaster and hardship relief funds impermissibly serve the private interests of sponsoring employers. The prohibition on serving the sponsoring employer’s needs practically means that eligibility for the relief fund cannot be an employee benefit. Those benefits aid employers by making their workplaces more appealing to both current and potential employees. Employee benefits, often seen in company health or other insurance plans, are often part of a larger contractual agreement between employees and employer. A natural, but mistaken, impulse is to include relief fund eligibility along with traditional employee benefits.
It is clear from the IRS position, which courts have affirmed, that relief fund eligibility cannot be an employee benefit. This is true even when there is an independent nonprofit administrator for the relief fund. The IRS has explicitly forbidden this approach, saying exclusion from such benefit programs is a condition to assess both the fund’s charitable purpose and tax-free status for grants. Indeed, the Service specifically states:
This is an obvious and unacceptable way which employers might use the relief fund to serve a nonexempt purpose. Indeed, the IRS has successfully challenged programs that were serving as a benefit more than once. A company-sponsored program to provide scholarships to employees was held to be a fringe benefit of employment. In another case, the fund was guaranteed in a collective bargaining agreement, which the Sixth Circuit and IRS agreed was a form of compensation. For this reason, an employee relief fund which aims to provide tax-exempt grants to employees must avoid even the appearance of being an employee benefit.
Click here to view the original article on the Emergency Assistance Foundation’s website.
The Emergency Assistance Foundation, Inc. is a 501c(3) charity created to design and operate multiple employer-sponsored disaster relief and employee hardship funds. These funds allow domestic and international employers and employees to help their coworkers in times of crises.
EAF is a 501c(3) tax-exempt, public, non-profit organization with IRS approval specifically for Employee Hardship and Disaster Relief Funds which can be administered in the United States, Canada and internationally.