Most employee relief funds are created in response to a particular natural disaster or personal hardship. However, this often means that the funds are devised as a one-of-a-kind effort without a detailed understanding of non-profit regulations and common disaster relief industry practices. As a result, donations to your fund may not be fully deductible, and grants may not be tax-free to recipients. This means that your fund is far from tax-optimized, and may even be a burden to employees because of the additional taxes due.
How can funds fall out of compliance? Often it has to do with the event categories for which the fund awards grants. This difficulty arises because of the “regulatory gap” between the specifically-defined, IRS-approved Qualified Disasters and more intuitive concepts like natural disasters and personal hardships. The issue is that the IRS defines Qualified Disasters much more narrowly than a natural disaster (see the diagram for a visual aid). Fund guidelines are often not tailored for tax optimization because of these distinctions. Worse still, some funds choose to avoid the tax regime entirely – meaning that it can cost almost twice as much in pre-tax dollars to achieve the same after-tax results for grant recipients.
How can you avoid these less-than-ideal results? Your grant-eligible event categories must be clearly defined. You must also ensure that the program is widely advertised to employees (an often overlooked IRS requirement). Perhaps most importantly, the best way to tax optimize your fund is to have a fully independent grant review process. The more independent, the better – a fund administered by a public charity is best. Without taking these steps, your fund may be out of compliance, or may be highly inefficient from a tax perspective. Staying in compliance ultimately means that your fund will maximize the donated dollars available to help employees in need.