Employer Sponsored Foundation for Coronavirus Disaster Relief and Implications for Tax Planning

22 March 2020 Coronavirus Resource Center:Back to Business Blog
Author(s): Richard F. Riley Jr Jason J. Kohout Emmaline S. Jurgena

“You don’t want to be complacent. You always want to be ahead of the curve.” Dr. Anthony Fauci, M.D., Director of National Institute of Allergy and Infectious Diseases.

As the COVID-19 pandemic continues, businesses may consider having their affiliated company foundations take the lead on providing assistance to affected employees and their families. This is permitted, but companies must follow the rules to provide the benefits on a tax-favored basis. 

Many private foundations and company foundations may believe that this sort of direct assistance to an individual is not allowed, or that grants cannot be made to individuals or entities other than public charity 501(c)(3)s, or that it can only be done with significant amounts of paperwork filed with the IRS.  In many situations this is true.

However, the IRS has provided specific guidance (IRS Publication 3833) that allows private foundations to make direct charitable gifts to employees of an affiliated employer in certain circumstances.  A key requirement is that the gifts must be related to a “qualified disaster” as defined by Code Section 139.  A qualified disaster is a disaster that i) results from terrorist or military actions, ii) is a federally declared disaster under the Stafford Act, iii) results from an accident involving a common carrier, or iv) is an event that the Secretary of the Treasury determines is catastrophic.  President Trump declared the coronavirus pandemic to be an emergency under the Stafford Act on March 13, making it a qualified disaster under Code Section 139 (although there is some lack of clarity as to whether an emergency declaration would constitute a qualified disaster, we believe this point will be clarified shortly).  Other cases of employee assistance, such as emergency hardship assistance (assistance provided when an employee has an individual or family emergency or hardship), may not necessarily qualify for this exemption, although may be acceptable in some cases).

The intent of the IRS requirements is to ensure that the assistance provided by the company foundation is really for charitable section 501(c)(3) purposes of assisting employees with bona fide financial and health needs, and not a hidden employee benefit program or compensatory device for higher paid individuals.

A company foundation can provide employee assistance to the employees of the affiliated company if:

  • The foundation’s employee assistance program serves a sufficiently large charitable class.  Generally, an employer’s large work force will qualify as an appropriate charitable class if the foundation’s employee assistance program makes all employees eligible who are affected by the COVID-19 pandemic (now or in the future).
  • The foundation’s employee assistance program must select the recipients of the charity based on an objective determination of charitable need that can be met with financial or other assistance. 
    • Typically, this is done by using an application by which the employee describes his or her needs, as well as his or her available financial resources.  The foundation should adopt a written policy for the employee assistance program.  This can be short, but it should have stated criteria for assistance.
    • A foundation providing short-term, immediate assistance may focus on needs that are not strictly financial, such as shelter, food, and medicine. 
    • A foundation providing longer-term assistance may include financial need in the organization’s objective assessment.
    • A key issue is that the foundation’s criteria for receiving assistance should focus on the objective need of an applicant, and should not take into consideration the employee’s position, performance, or contribution to the company.  Specifically, this means that long-term employees should be considered the same as employees who were recently hired.
    • To avoid any issue of self-dealing, the terms of the policy may preclude executives, shareholder-employees, and high-paid employees from receiving payments under the plan.  Officers and directors of the company foundation should not receive payments.
  • The gift decisions to the employees should be made using an independent selection committee.
    • The IRS imposes this rule to ensure that the gifts are truly of a charitable nature, and not some sort of disguised compensation or benefit.
    • The IRS provides that the selection committee is sufficiently independent if a majority of the members are persons who are not in a position to exercise substantial influence over the affairs of the employer (such as an executive). 
  • A company foundation needs to maintain records of the committee’s selection process.  In general, the documentation should include a description of the provided assistance, the cost associated with the assistance, the purpose of the assistance, the identity of the beneficiary and their relationship to the employer, and the process that the committee used to apply their written policy and make their selections.  In its guidance, the IRS recognizes that the documentation for short term aid (such as the distribution of blankets, hot meals, or outwear) may be less detailed than the document required for long-term aid. 

If these IRS criteria are satisfied, the employer-sponsored foundation’s payments made in response to the qualified disaster are presumed to be made for charitable purposes. In addition, by meeting the IRS requirements, the payments from the company foundation to the employee are excluded from the employee’s taxable compensation and are not subject to employment taxes such as Social Security and Medicare and federal income tax withholding.  

In summary, employer-sponsored foundation have an opportunity to make tax-favored disaster relief in order to mitigate negative impacts from the COVID‑19 pandemic. For more information about recommended steps, please contact your Foley relationship partner or the Foley colleagues listed below. For additional web-based resources available to assist you in monitoring the spread of the coronavirus on a global basis, you may wish to visit the websites of the CDC and the World Health Organization

Foley has created a multi-disciplinary and multi-jurisdictional team to respond to COVID‑19, which has prepared a wealth of topical client resources and is prepared to help our clients meet the legal and business challenges that the coronavirus outbreak is creating for stakeholders across a range of industries.

Click here for Foley’s Coronavirus Resource Center to stay apprised of relevant developments, insights and resources to support your business during this challenging time. To receive this content directly in your inbox, click here and submit the form

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