Employer benevolent fund administration.

Since the Sept. 11, 2001 terrorist attacks and the passage of Sec. 139, the interest in employer benevolent funds, used to assist employees who are victims of natural disasters, national emergencies, financial hardship or family crisis, has proliferated. Because the funds are responsible for adhering to their organizational and operational intentions (which is the basis for their tax-exempt status), a major concern with administering them is determining whether employees requesting assistance qualify.

Sec. 139 Overview

The Victims of Terrorism Tax Relief Act of 2001, Section 111, enacted Sec. 139, disaster relief payments, which provides for reimbursements of reasonable and necessary personal, family, living or funeral expenses resulting from a qualifying disaster. It also provides for expenses to repair or rehabilitate a personal residence, or to repair or replace its contents, to the extent that the need for such is attributed to the qualifying disaster, or just to promote general welfare.

Under Sec. 139(c), a qualifying disaster is (1) a disaster that results from terrorism or military action, (2) a Presidentially declared disaster, (3) a disaster resulting from an accident involving a common carrier or from any other event determined by the IRS to be catastrophic or (4) a disaster determined by an applicable Federal, state or local government (or agency or instrumentality thereof).

Sec. 139's legislative history indicates that Congress did not intend for taxpayers to have to account for their losses to qualify for relief under Sec. 139.

What Do Payments Cover?

For qualifying victims of natural disasters or national emergencies, a benevolent fund can replace basic needs, such as food, clothing, housing (including household repairs), transportation and medical assistance (including psychological help). The fund's intent is not to make a person whole, as that would result in a prohibited private benefit.

Just because an individual applies for financial relief does not necessarily mean that he or she will or should receive it. A fund's board or disbursing trustees use several criteria in determining whether an applicant qualifies, such as whether the applicant could reasonably obtain and repay a commercial loan for relief (including any other loan assistance programs available through the employer). They also look at whether an applicant's financial resources are inadequate or unavailable to meet his or her current needs. Most importantly, the board or trustees must keep records adequate to substantiate the applicant's needs, and require individuals receiving assistance to have an adequate case supporting their need.

Charitable Intent

Individuals who are financially unable to care for themselves as a result of sudden and severe (or overwhelming) financial burdens arising from events beyond their control would qualify for charity, as would persons who are financially impoverished as a result of low income or no financial resources, and who lack a means of acquiring food and shelter. A victim of a civil disaster or disturbance would also qualify. Eligibility would also cover an individual undergoing a severe personal or family crisis if, for example, he or she were a victim of crime, violence or physical abuse, were language limited or culturally deficient, or underwent some sort of severe financial difficulty. This could include minors who are not self-sufficient, or applicants previously incarcerated.

Care is supposed to be directly related to a particular need. For example, a person who is the victim of a natural disaster may require temporary shelter and food, but not recreational facilities. However, a radio may qualify if it is a source of emergency announcements. Under Regs. Sec. 1.170A-4A(b)(2)(ii)(D), a needy person is a qualifying recipient of charitable amounts; thus, a benevolent fund's board or trustees should have a "needs" test in place to identify qualifying needy persons before making any distributions.

Private Benefit/Inurement

An outright transfer of funds to a person involved in a disaster, without meeting his or her particular needs, would result in a prohibited private benefit, as would a payment to replace lost income, rather than to meet basic living requirements.

An employer benevolent fund may not make a person whole, nor maintain a person's standard of living. The goal is merely to meet basic needs.

When considering financial needs, a fund's board or trustees should obtain documentation to establish the needy person's financial condition, including proof of available cash, investments and other assets that can be disposed of without causing additional personal financial hardship. They should also document income and expenses and insurance proceeds due, to determine whether the retirement of existing obligations may be satisfied timely. They can then disburse funds to continue to meet an applicant's basic living requirements.

Emergency financial hardship criteria allowable for an employer-assistance charitable program include the following:

1. A death in the family, funeral expenses and travel expenses, if travel is required to attend the funeral. In such cases, income from future services cannot be available. The board or trustees may then consider making a loan to the applicant.

2. Unusual medical expenses caused by severe illness or accident.

3. Uninsured losses caused by fire, crime, flood or other similar events.

4. Unusual expenses for the care of a disabled dependent.

5. Insupportable debt occurring for reasons beyond the individual's control.

Documentation

An affidavit should be secured from the applicant to ensure that he or she has exhausted all of his or her efforts. For example, it could document an applicant's unsuccessful attempts to obtain a loan from an employer or from family members. The affidavit would provide maximum flexibility in the decision-making process, while protecting the fund's tax-exempt status.

IRS Guidance

Rev. Rul. 2003-12 addressed income tax issues for persons receiving state aid, charitable organizational aid or an employer grant to cover medical, transportation or temporary housing expenses due to their involvement in a Presidentially declared disaster area. Events that qualify as a disaster are usually of a mass proportion (e.g., a fire or hurricane).

In the ruling, the Service analyzed holdings in several prior rulings dating back many years. This included Rev. Rul. 131, which was modified based on (1) the Supreme Court's holding in Glenshaw Glass Co., 348 US 426 (1955), and (2) Sec. 102(c), to indicate specifically that disaster relief received by employees is includible in gross income unless specifically excluded by another Code section. The Service had previously held that such payments, which were to assist employees who incurred losses due to a tornado, were not gross income under Sec. 61, because they were gratuitous in nature, measured solely by need, not related to services rendered and designed to place the employees in about the same economic position as before the disaster.

In addition, the Service has concluded repeatedly that payments received by persons from governmental units under legislatively-provided-for payment programs are not gross income for Sec. 61 purposes; see Rev. Ruls. 98-19 (disaster relocation assistance) and 76-144 (general welfare assistance after exposure to a disaster).

Rev. Rd. 2003-12

According to this ruling:

1. State aid is not a Sec. 102 gift, but is excludible from income under Sec. 139's general welfare exclusion rule.

2. Charitable organization aid is excluded from income under Sec. 102; because these payments are received from a nongovernmental entity, the general welfare exclusion does not apply.

3. Employer aid is excludible under Sec. 139; it is not considered a gift under Sec. 102.

Conclusion

As organizations establish employer benevolent funds, those in charge of distributions will have to become familiar with the tax laws, to operate the funds legally and not jeopardize tax-exempt status. Although clearly, qualifying distributions are not includible in an applicant's gross income, a fund's board or trustees have to make careful administration of disbursements a top priority.

FROM JAMES P. SWEENEY, CPA, MBA, MTLC/LC, CHERRY, BEKAERT & HOLLAND, L.L.P., ST. PETERSBURG, FL