Employee funded emergency aid programs: are they charitable organizations?
The fact that these programs are focusing on the destruction caused by the two hurricanes has masked the possibility of a company creating a more long-range benefit by establishing this type of emergency aid program as a charitable benefit for employees at little or no cost to the employer. This can be accomplished by setting up a private foundation dedicated to aiding employees who are in distress and in need of charitable assistance. Employees and the company would make deductible charitable contributions to the foundation for this purpose. In many instances, an existing company foundation could be used, but the foundation's charter may have to be amended to add the new purpose.
Historically, the IRS has recognized that assistance programs developed to relieve the effects of natural disasters are charitable (OD 345 (1919)). However, the programs still must meet the exemption requirements of Sec. 501 (c)(3) to allow the employee contributions to be deductible. The most basic issue is whether the class of beneficiaries is broad enough to constitute a charitable class. in their 1991 Technical Instruction Program, the Service published the following guidelines on emergency funds and disaster relief organizations. * Organizational documents must establish the charitable purpose and the intended beneficiaries. * Criteria for receipt of aid must be established. * Assistance to principals and their families must not be disproportionate to that of other recipients. * Use of excess funds must be identified. * Fundraising and notices concerning the availability of funds should demonstrate public effort. * Adequate records must be maintained.
The question remains, then, whether a fund established for employees of a single employer benefits a sufficiently large enough charitable class. Company scholarship fund parallel Rev. Proc. 76-47 is helpful in determining whether an employee assistance fund is operated exclusively for charitable purposes. Although Rev. Proc. 76-47 explicitly states that it is directed only to the question of whether a scholarship qualifies for exclusion from gross income under Sec. 117, it does address the issue of whether the purpose of a program is to provide extra compensation in the form of an employee fringe benefit or is charitable in nature. The criteria include: * The program must not be used by the employer to recruit employees or to induce employees to continue their employment. * Selection of grant recipients must be made by a committee consisting wholly of individuals totally independent and separate from the employer. Former employees will not be considered totally independent. * The program must impose identifiable minimum requirements for grant eligibility. Eligibility must not be related to any employment-related factors, except for a minimum period of employment, which may not exceed three years. * Selection of grant recipients must be based solely on substantial objective standards completely unrelated to the employment of the recipients or their parents, or to the employer's line of business. * A grant may not be terminated because the recipient's parent terminates employment with the employer subsequent to the awarding of the grant, regardless of the reason for such termination of employment.
In Letter Rulings 9228045 and (TAM) 8818002, the IRS agreed that the employee assistance programs were operating for charitable purposes and that such grants were paid exclusively to accomplish a purpose described in Sec. 170(c)(2)(b). The Service's rulings were based on the determination that the programs were designed to provide relief from temporary hardship, the number of eligible recipients was sufficiently large and open-ended to constitute a charitable class, and the award was not related to an employee's performance.
Private foundations that directly aid the employees of a company must address the questions of self-dealing and taxable expenditures under Secs. 4941 and 4945. In Letter Ruling 9228045, the IRS ruled that if a program provides relief in a manner consistent with the charitable standards of Secs. 501(c)(3) and 170(c)(2)(b), payments under the program would be qualifying distributions and therefore would not be considered taxable expenditures under Sec. 4945. In addition, the Service ruled that, although the company "indirectly receives an incidental benefit," this was not considered an act of self-dealing under Sec. 4941 as long as the distributions made to principals were not disproportionate to total distributions.
Treatment of benefit
Whether the grants are considered taxable income to a recipient depends on whether the grant represents a fringe benefit/additional compensation or whether the employee assistance plan truly operates in a charitable manner. The concept of aid programs is similar to a company scholarship plan. In Rev. Rul. 57-286, the IRS likened the receipt of a fellowship grant to a gift and ruled that it would not require amounts received as fellowship grants to be included in gross income. A parallel can be drawn between the fellowship grant and the receipt of assistance from an aid program for purposes of excluding such monies from gross income. In both instances, the organization granting the funds must be operating in a charitable manner and must receive only an incidental benefit from the grant. In TAM 8818002, the Service ruled that because the grants were paid in accordance with Sec. 170(c)(2)(b), they would not be income to the recipient.
Note: The four significant points of a properly established emergency aid program are that the plan - allows for tax deductible contributions by the employees; - provides potential benefit for eligible employees; - creates inside build-up on investments subject to a tax rate of 2%; and - operates at little or no cost to the employer.
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|Publication:||The Tax Adviser|
|Date:||Mar 1, 1993|
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