30 August 2017 Hurricane Harvey relief — employer-sponsored charitable organizations to help affected employees In light of recent destruction and hardship wrought by Hurricane Harvey, numerous employers are asking whether they can offer disaster relief payments for employees affected by the storm. This can be complex, so this Alert serves to outline the rules for employers wishing to offer disaster relief to their affected employees directly or through employer-sponsored private foundations, public charities and donor advised funds. As a result of Hurricane Harvey, President Trump has declared that a major disaster exists for Texas and an emergency for Louisiana and FEMA has made the necessary formal declarations. Due to these disaster declarations under the Stafford Act, qualified disaster payments made to victims in these covered areas can be excluded from gross income and are not subject to federal income tax withholding or employment tax. Qualified payments can be made directly to employees or through charitable organizations as explained below. Employers can make tax-free "qualified disaster payments" directly to employees without the need to create a private foundation, public charity or donor advised fund. Such qualified disaster payments are not considered taxable income or subject to employment taxes or withholding. For more information, see Tax Alert 2017-1392. Historically, employer-sponsored charitable organizations that were used to assist employees in their time of need were considered by the IRS to be tools to enhance employee recruitment and retention, and were thought to result in prohibited private benefit to sponsoring employers. The IRS was also concerned that employers could influence the selection of recipients. As a consequence, the IRS developed special rules to apply to employer-sponsored charities. The IRS guidance for providing disaster relief through charitable organizations is provided in IRS Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations. 1. The types of benefits a charitable organization can provide through an employer-sponsored assistance program depend on whether the employer-sponsored organization is a private foundation, public charity or a donor advised fund. 2. When an employer-sponsored organization provides assistance to employees, certain limitations apply that help to ensure that the aid does not result in impermissible private benefit to the employer. 3. An organization applying for recognition of exemption under Section 501(c)(3) may request expedited handling of its application if it demonstrates that it is meeting an immediate need of disaster relief and that a non-expeditious review will adversely affect its ability to do so. All three types of employer-sponsored charitable assistance programs discussed in Publication 3833 are briefly summarized below. Employer-sponsored private foundations must exercise care to ensure they make payments only to employees or their family members who are affected by "qualified disasters" as defined in Section 139 (as opposed to non-qualified disasters or other emergency hardship situations) so they do not jeopardize their tax-exempt status. IRS Publication 3833 states that the IRS will generally presume that "qualified disaster" relief payments made by a private foundation to employees (or their family members) are consistent with the private foundation's charitable purposes and not for the business purposes of the employer if the following requirements are met: 3. The selection is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The selection committee will be deemed independent if a majority of its members consists of persons who are not in a position to exercise substantial influence over the affairs of the employer. If the requirements of this presumption are met, the private foundation's qualified disaster relief payments: (1) are treated as made for charitable purposes, (2) do not result in prohibited self-dealing merely because the recipient is an employee (or family member of an employee) of the employer-sponsor and (3) do not result in taxable compensation to the employees. This presumption does not apply to payments that would otherwise constitute self-dealing (e.g., payments to individuals who are officers, directors, or trustees of the private foundation). The presumption also does not apply to payments made to members of the private foundation's grant selection committee. Finally, Publication 3833 notes that, in each case, all of the facts and circumstances will be taken into account in determining whether a private foundation's payments further charitable purposes. Therefore, satisfying all the requirements of the presumption, or failure to meet such requirements, is not necessarily determinative. Since public charities are typically more transparent and are subject to a greater amount of public scrutiny due to their broad sources of financial support, they have more flexibility with respect to the assistance they may provide to employees than allowed for employer-sponsored private foundations or employer-sponsored donor advised funds. While they must still adhere to the three requirements previously set forth when providing assistance to employees (to ensure the related employer does not exercise excessive control over the employee assistance organization), public charities may establish employer-sponsored employee assistance programs to assist in any type of disaster or hardship situation (i.e., qualified or non-qualified), so long as the employer does not exercise excessive control over the charity. If these requirements are met, the public charity's payments to the employer-sponsor's employees and their family members in response to a disaster or emergency hardship are presumed to be made for charitable purposes and will not result in taxable compensation to the employees. A donor advised fund exists when a community foundation or other public charity maintains a separate fund or account to received contributions from individual donors, and the donor receives advisory privileges over investment and/or distribution of the donated funds. Generally, donor advised funds may only make grants to other Section 501(c)(3) public charities and cannot make grants to individual persons. There is an exception, however, for certain employer-related funds or accounts that are established to benefit employees (or their family members) that are affected by a "qualified disaster" as defined in Section 139. In addition to the three requirements previously set forth for both private foundations and public charities, the donor advised fund must be established to serve the single identified purpose of providing relief to employees and family members of the employer sponsor from one or more qualified disasters. Also, similar to the requirements of employer-sponsored private foundations, the DAF may not provide a benefit to any director, officer or trustee of the sponsoring organization or to members of the fund's selection committee. Finally, the DAF must also maintain adequate records that demonstrate the need for the assistance provided. Employers that are considering providing relief to employees affected by Hurricane Harvey or any other disaster or hardship situation should determine, based on all of the facts and circumstances, the best vehicle for the employer-sponsored assistance program. Charitable organizations should keep in mind that annual tax or information returns may need to be filed in addition to the requirements outlined in Publication 3833, and other requirements may also apply. For more information on employer-related relief charities, relief payments that may be made by existing organizations, types of employer-related relief charities an employer can establish, and how to apply for tax-exempt status, contact any of the individuals listed below or your EY tax professional. — For more information about EY's Exempt Organization Tax Services group, visit us at www.ey.com/ExemptOrg
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