April 26, 2021
When setting up a Disaster and Hardship Relief Fund, the sponsoring organization may have done so in response to a large natural disaster that affected many of organization’s team members. Unfortunately when a fund is initially established, the organization often does not follow IRS regulations or guidelines, and therefore does meet regulatory requirements.
According to the IRS, “Disaster relief organizations may provide loans or grants in the form of funds, services, or goods to ensure that victims of a disaster have the basic necessities such as food, clothing, housing (including household repairs), transportation, and medical assistance (including psychological help)." The type of aid that is appropriate to relieve distress in a particular case depends on the individual’s needs and resources.
For example, following a devastating flood, a family may be in need of a grant because their income, insurance proceeds, etc. or other resources are inadequate or unavailable. They may also need basic necessities that are not available for purchase because of the nature of the disaster, but they may not need a low interest loan for home repair because the home is covered by insurance, or they can reasonably obtain and repay a commercial loan. Another family or individual may have suffered the loss of a family member and may need financial assistance with funeral expenses or help with the cost to have immediate family members attend the burial, which would help promote the family’s emotional healing.
Part of establishing a Disaster and Hardship Relief Fund is being very specific about the relief funds guidelines for those who are eligible to receive a grant. For example, if a charitable class member can select “other” when filling out a form, how will the person reviewing the application know if this meets the policy for approval? This catchall term is dangerous for many reasons, including being subjective, which isn’t allowed by the IRS, which requires objective review. According to regulations, “[t]he organization establishes specific written criteria for the application, selection and disbursement of funds.” Thus, the guidelines and/or list of qualified events and expenses should be specific enough that an applicant and the objective reviewer would come to the same conclusion about a grant application.
If two reviewers, Joe and Jim, were sitting in different rooms, would they come to the same objective conclusion when reading an application? If not, then the sponsoring organization should consider what changes are needed to satisfy the IRS’s requirement that “[t]he selection process must be objective and nondiscriminatory,” which means avoiding criteria that are not clear or provide too much flexibility. When setting up relief fund criteria, be very specific.