One of the most appealing features of the employee hardship and disaster relief fund is that an employer-sponsored fund can help provide financial assistance to employees in need without the employees being taxed on that assistance. However, this advantage is easy to lose, because the IRS heavily scrutinizes how grant decisions are made. The IRS’s main concern is that employer relief funds “impermissibly serv[e] the related employer” – in essence, that the fund is a disguised benefit or compensation.
The IRS allows a great deal of latitude in how employee hardship and disaster relief funds operate. However, it prefers grant decisions to be made independently. In Publication 3833, the IRS states:
“[T]he recipients must be selected by an independent selection committee or adequate substitute procedures must be in place to ensure that any benefit to the employer is incidental and tenuous. The charity’s selection committee is independent if a majority of the members of the committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer.”
Put simply, this means that grant decisions must not benefit the employer. For example, if the recipients are selected by management or human resources, the IRS would likely not view this as being sufficiently independent. One way to ensure maximum independence is to partner with a public charity that has disaster relief industry expertise. Letting the charity make the grant decisions ensures a high degree of independence.
Tax advantages are not the only reason to favor independent grant decisions. Employees are more comfortable applying and providing their personal information to a third-party administrator instead of management or human resources from their company. Having a selection committee comprised of their supervisors is something many employees are understandably uncomfortable with.
Having a third-party make grant decisions for your fund can be beneficial from a legal liability standpoint as well. With an independent third-party, there are no concerns about agent liability. Similarly, from a public relations perspective, disgruntled applicants will focus their attention on the independent administrator rather than on your organization. Combine these reasons with the tax advantages, and it is clear that having an independent body making grant decisions is the best way to operate your employee hardship and disaster relief fund.