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How to Help Your Employees With Tax Advantageous Hardship and Disaster Grants

March 23, 2020Alerts

During this unprecedented crisis, for-profit corporations have strategic options to assist their workers by providing deductible hardship and disaster grants that are tax-free to employees.

Hardship and disaster grants that qualify for a charitable deduction can be provided to employees through a public charity, a related private foundation or a donor-advised fund. Many for-profit corporations already maintain related charitable vehicles that may be used to provide hardship and disaster grants.

Qualifications for these grants depend on the type of charitable vehicle used to award the grants. To ensure that the grants are made for charitable purposes and are not treated as taxable income to the employees, the following requirements must be met:

Grants from Public Charities:

  • Each recipient must be a victim of a hardship or disaster (not just a “qualified disaster”);
  • The charitable class must be large or indefinite;
  • Recipients must be selected based on objective determinations of need; and
  • Recipients must be selected by an independent selection committee.

Grants by Related Private Foundations:

  • Each recipient must be a victim of a “qualified disaster”;
  • The charitable class must be large or indefinite;
  • Recipients must be selected based on objective determinations of need; and
  • Recipients must be selected by an independent selection committee.

Grants by Donor-Advised Funds:

  • Each recipient must be a victim of a “qualified disaster”;
  • The charitable class must be large or indefinite;
  • Recipients must be selected based on objective determinations of need;
  • Recipients must be selected by an independent selection committee;
  • Recipients cannot be a director or officer of the sponsoring organization or a member of the selection committee; and
  • Donor-advised funds must maintain adequate records to demonstrate the recipients’ need for the disaster assistance provided.

A “qualified disaster” is a disaster that: (1) results from terrorist or military actions, (2) results from an accident involving a common carrier (e.g., a plane crash), (3) is a presidentially-declared disaster or (4) is an event that the secretary of the treasury determines is catastrophic. The coronavirus pandemic has been declared a “qualified disaster.”

An objective determination of need is based on an assessment that a recipient is financially or otherwise in need.  The recipient does not need to be destitute, but merely lack the resources to obtain basic necessities. Just because an individual is the victim of a disaster does not mean he/she is an appropriate recipient of charitable funds.

If employers do not have the resources to establish a charitable vehicle to provide grants or if employers’ existing charitable vehicles do not allow for such grants, then employers can opt to provide disaster grants directly to employees.  Any such program must comply with the strict requirements of Code Section 139 to ensure that the grants will not be treated as taxable compensation to employees and can be deductible as an ordinary and necessary business expense to employers.

We are actively working with clients to manage existing employee assistance programs and establish new employee assistance programs to minimize the financial hardships that the current pandemic is causing. For any questions about this alert or employee assistance programs, please contact Jacqueline Motyl at [email protected] or 610.458.1420, or any member of the firm's national Taxation & Wealth Planning Group.