A variety of tax-favored vehicles exist for employers and their employees to donate cash or even accrued leave to assist those impacted by Hurricane Harvey’s devastation.
In the wake of Hurricane Harvey and the resulting devastation to significant portions of Texas and Louisiana, many employers have expressed an interest in providing disaster relief assistance to employees and others adversely impacted by the hurricane and resulting floods.
This LawFlash describes four types of employer-sponsored relief programs that allow employers to provide assistance on a tax-advantaged basis:
- Charitable leave donation programs
- Disaster assistance leave banks
- Qualified disaster relief programs
- Employer-sponsored charitable organizations
The first program is targeted at broad-based relief to victims of disasters like Hurricane Harvey, and the last three programs are methods to assist an employer’s own employees who have been directly impacted by this major disaster.
The key features of these programs are as follows:
Charitable Leave Donation Programs—Employee Donation of Cash Value of Leave to Charities
One of the most popular, cost-effective, and easiest tax-favored programs to help those impacted by disasters such as Hurricane Harvey is to create an employer-sponsored program that permits employees to donate vacation, sick, or personal leave in exchange for employer contributions to charitable organizations that are providing relief to disaster victims. IRS guidance is imminent and is expected to confirm that charitable leave contribution programs can be used to benefit charities assisting victims of Hurricane Harvey. Once this guidance is released, Morgan Lewis will immediately release detailed information to help employers establish these programs.
These tax-favored programs allow employees to donate the cash value of unused leave—paid through the employer—to charities that provide assistance to the victims of major disasters like Hurricane Harvey. The donations are made on a pretax basis, meaning that the amounts are exempt from income taxes and Federal Insurance Contributions Act (FICA) taxes, resulting in a higher donation value to the charity. The employer, in turn, deducts the amounts as charitable contributions (subject to the applicable limitations) or as business expenses and reduces its FICA tax liability.
Disaster Assistance Leave Banks—Employee Donations of Leave to Impacted Employees
An employee leave bank is a method to donate leave to affected coworkers in addition to or in lieu of charitable leave donations. Employees can deposit unused leave into the leave bank, which can be used by coworkers who have exhausted or will exhaust their paid leave to address an illness, family crisis, or a disaster such as Hurricane Harvey.
The additional leave taken by the affected coworkers to address issues such as illness, death, or loss of home attributable to Hurricane Harvey would be taxed as compensation, but the coworker donating the leave would not be taxed. Although leave banks are used with some regularity by the IRS and other government entities, leave banks are not widely used in the private sector. The programs were expanded in the wake of Hurricane Katrina and can be used for those who are victims of Hurricane Harvey.
Qualified Disaster Relief Payments—Direct Employer Donations to Impacted Employees
A “qualified disaster relief program” is a program that employers can establish to allow both the employer and coworkers to assist employees affected by “qualified disasters” like Hurricane Harvey. A qualified disaster relief payment provides tax benefits for the employer in the form of a business expense deduction and FICA exclusion, and to the employee in the form of income and FICA exclusions.
A “qualified disaster” is broadly defined to include any federally declared disaster—not just disasters of Hurricane Harvey’s magnitude. Employers that wish to provide qualified disaster relief payments to employees must make such payments only for reasonable and necessary unreimbursed expenses attributable to the qualified disaster. As such, employers should adopt a written policy limiting the use of funds to actual losses. Other tax considerations may apply depending on an employer’s specific facts and circumstances.
Employer-Sponsored Charitable Organizations
Large employers have several options for providing disaster assistance to employees through employer-sponsored charitable organizations. These include the following:
Employer-Sponsored Public Charity
Employer-sponsored public charities can provide a broad range of assistance to employees impacted by Hurricane Harvey. Employer-sponsored public charities must receive financial support from many diverse sources (e.g., employees of the company)—not just the employer. Employees making donations to the charity to assist coworkers receive a charitable contribution deduction, and the assistance payments received by the coworkers are excludable from income.
There are three principal requirements for providing employee assistance through an employer-sponsored public charity:
- The relief program generally must be available to employees affected by current and future disasters or emergency hardships.
- The charity’s recipients must be selected based on an objective determination of need.
- Recipients must be selected by an independent selection committee, which cannot include senior management of the company but can include retired employees or human resources personnel.
A company seeking to establish an employer-sponsored public charity to assist employees affected by Hurricane Harvey as well as future disasters or other hardships can set up a charity and begin collecting contributions in as little as a single day. Tax-exempt status is retroactive to the incorporation date, so the exemption application can be filed with the IRS after formation.
Employer-Sponsored Donor-Advised Funds
Donor-advised funds (DAFs) are charitable accounts sponsored by and maintained at local community foundations or national charitable organizations, over which donors have advisory privileges. Although DAFs generally cannot be used to make payments to individuals, there is a special rule that permits certain types of DAFs to make payments to victims of qualified disasters. Such DAFs must meet the requirements set forth above for employer-sponsored public charities. In addition, the recipients cannot include the employer’s officers, directors, or members of the selection committee, and the DAF must maintain records that establish the recipients’ need for the disaster assistance provided.
Employer-Sponsored Private Foundations
A final charitable tool for large employers is to make payments through a corporate foundation. As a general rule, corporate private foundations cannot make charitable assistance payments to employees of the sponsoring company. However, there is an exception for assistance to employees affected by a qualified disaster such as Hurricane Harvey, as long as the requirements set forth above for DAFs and employer-sponsored public charities also are met. If such requirements are met, the corporate foundation’s payments to company employees in response to a qualified disaster will be treated as made for charitable purposes, will not result in an act of self-dealing, and therefore will not result in taxable compensation to the employees.
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We know that many employers want to provide disaster relief assistance to their employees, and we hope that this information will assist in taking advantage of the tax-relief provisions applicable to such assistance.