Employers, Disaster Relief, and Taxes

I was particularly moved by the outpouring of relief in the wake of Hurricanes Milton and Helene this fall, and it made me think about the role of charities in this important work. Likewise, I thought about what other entities that may not be organized as nonprofits could do to help. As it happens, there’s quite a lot of good that can be done by employers of those affected. This short post examines a few such avenues.

For-Profit Employer-Sponsored Disaster Relief

For employers wanting to support employees impacted by disasters, disaster relief programs can be structured in a number of ways. Each has distinct requirements based on IRS regulations. Here are three ways this can be done.

1. Employer-Sponsored Public Charities: Employers can create public charities to aid employees affected by any disaster. These charities must define a charitable class (e.g., all employees affected by a disaster) and maintain an independent selection committee. In short, these requirements help ensure that any benefit to the employer is incidental and doesn’t disqualify the program as charitable.
2. Private Foundations: Private foundations established by employers may also provide disaster relief, but only in connection with “qualified disasters” in affected areas. Only recently were Helene and Miltondeclared as such. So, this approach is somewhat limited.
3. Donor-Advised Funds (DAFs): Employer-sponsored DAFs can also provide relief to employees during a qualified disaster, following similar requirements to public charities. DAFs must target a charitable class, rely on an independent selection committee, and—like public charities—maintain rigorous record-keeping to demonstrate need.

But What about the Tax Implications?

In most cases, disaster relief payments made by a 501(c)(3) organization to individuals are considered gifts and are excludable from gross income. The IRS presumes these payments are nontaxable if made according to charitable guidelines. But in the above scenarios, they aren’t necessarily coming from a 501(c)(3). For example, payments from private foundations may be subject to stricter rules, especially if they are intended for employees of the sponsoring entity, and should be carefully structured to avoid unintended tax implications. In other words, the 102(c) requirement of including as gross income “any amount transferred by or for an employer to, or for the benefit of, an employee” comes into play, making the first of these options outlined above superior to the rest.

 

Christopher J. Ryan, Jr.

Indiana University Maurer School of Law