Employer benevolent funds: helping needy workers after a disaster.

Recent events and legislation have sparked tremendous interest in employer benevolent funds, which help employees who are victims of natural disasters, national emergencies, financial hardships or family crises. Because the funds must adhere to strict rules to maintain tax-exempt status, their major concern is determining whether workers requesting aid qualify. CPAs should become familiar with such rules.

BACKGROUND

The Victims of Terrorism Tax Relief Act of 2001, section 111, enacted IRC section 139, which provides for tax-free reimbursements of reasonable and necessary personal, family, living or funeral expenses resulting from a qualifying disaster and for expenses to repair or rehabilitate a personal residence or its contents, to the extent the need is attributable to a qualifying disaster, or just to promote general welfare.

Under IRC section 139(c), a "qualifying disaster" (1) is presidentially declared; (2) results from terrorism, military action or an accident with a common carrier or from any other event the IRS determines to be catastrophic; or (3) is determined by an applicable federal, state or local government.

QUALIFYING FOR PAYMENTS

For eligible victims of natural disasters or national emergencies, a benevolent fund can replace basic needs such as food, clothing, housing (including repairs), transportation and medical assistance (including psychological help). The fund is not intended to make a person whole (which would be a private benefit jeopardizing the fund's tax-exempt status), just to meet basic needs.

A fund's board or disbursing trustees use several criteria in determining whether an applicant qualifies for financial relief. Most importantly, the board must keep records to substantiate need and require individuals receiving assistance to have an adequate supporting case.

IRS GUIDANCE

Revenue ruling 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 presence in a presidentially declared disaster area. According to this ruling

* State aid is not an IRC section 102 gift, but is excludible from income under section 139's general welfare exclusion rule.

* Charitable organization aid is excluded from income under section 102. Because these payments are received by a nongovernmental entity, the general welfare exclusion does not apply.

* Employer aid is excludible under section 139; it is not a section 102 gift.

CONCLUSION

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

For more information see the Tax Clinic, edited by Anthony Bakale, in the August 2003 issue of The Tax Adviser.

--Lesli Laffe, editor

The Tax Adviser

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