While the damages to life and property caused by Hurricane/Tropical Storm Harvey on the Texas and Louisiana coasts are still being assessed, Hurricane Irma appears to be on a collision course with Florida. Employers that wish to provide assistance to their employees and their families who have been impacted by these historic storms should be aware of certain tax provisions that could help facilitate disaster relief efforts.
An employee relief foundation would provide tax advantages to employers and their employees affected by a disaster. Also, the IRS has reinstituted certain enhancements to the tax treatment of an employee leave donation program that make such programs especially effective in funding disaster relief for the victims of Hurricane Harvey.
Employee Relief Foundation
Employers can provide tax-deductible assistance to employee victims of Hurricane Harvey and permit other employees and third parties to make tax deductible contributions to such efforts by establishing a foundation to receive and distribute these contributions. In this manner, employers and colleagues of the victims can provide relief such as food, clothing, housing, transportation, medical assistance, or similar necessities to employees and their families who are victims of Hurricane Harvey. Employees receiving relief will not have federal taxable income as a result. Long-term assistance, however, may not be provided if the recipient employee has adequate financial resources otherwise.
Once an Employee Relief Foundation is recognized by the IRS as a tax-exempt charity it can provide qualified disaster payments to employees of the sponsoring employer or their family members. Qualified disaster payments may include payments to or for the benefit of victims or family members of victims to provide reasonable and necessary personal, family, living, medical care, transportation, and funeral expenses as a result of a federally declared disaster.
The IRS will presume that qualified disaster payments made by a foundation to employees and their families in the federally declared disaster area are consistent with the foundation’s charitable purpose even though the employer of the victims makes substantial contributions to the foundation, if:
- The class of beneficiaries constitutes a “charitable class.” This means it must be “large” or “indefinite.” Assuming there are a substantial number of employees in these disaster areas and the foundation’s charter permits the foundation to benefit employees in future federally declared disasters if it has funds available, there should be an indefinite class of beneficiaries. It cannot be a Jack and Jane Doe family relief fund or involve contributions designated for specific individuals or families;
- The recipients of the “qualified disaster payments” are selected based on an objective determination of need, although emergency relief may be independent of financial need. There must be an objective set of criteria for making distributions to distressed individuals; and
- The selection of the identity of the employees and family members who receive the disaster payments is made using either (i) an independent selection committee or (ii) adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The 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. (Note: relatives of the members and members of the selection committee should not receive specific benefits, as that may constitute self-dealing.)
The foundation must maintain adequate records to demonstrate the victim’s needs for assistance and further charitable purposes of the payments. The documentation should include:
- A complete description of assistance, i.e., food, clothing, rent, etc.;
- The purpose for which the aid was given;
- The foundation’s objective criteria for disbursing assistance;
- How the recipients were selected;
- Name, address and amounts distributed to each recipient; and
- Any relationship between a recipient and officers, directors or key employees of substantial contributors of the foundation, i.e., the employer
A foundation distributing only short-term emergency assistance would only be expected to maintain records such as the type of assistance provided, criteria for disbursing assistance, date, place, estimated number of victims assisted, cost of aid and charitable purpose.
The scope of the disaster and tragedy is still unfolding and promises to be of staggering dimensions. It is possible that Congress could pass legislation providing further relief for employers to help employees, as has been done for some past disasters. The IRS is providing and may provide further relief independent of Congress.
Yesterday, September 5, 2017), the IRS issued a special notice (IR-2017-143) regarding employee leave donation programs relating to Hurricane Harvey. Employees may forgo their vacation, sick or personal leave in exchange for cash donations the employer would make – before January 1, 2019 – to charitable organizations providing special hurricane. Donated leave will not be included in the income or wages of the employees, and employers are permitted to deduct the cash payments as business expenses. This is similar to relief made available in the aftermath of the 2016 Louisiana floods, Hurricane Sandy, and Hurricane Katrina. There may be significant tax and morale advantages in combining an employee relief foundation with an employee leave donation program to use for Hurricane Harvey assistance.
With our home office located in Nashville, Tennessee, we empathize with the communities affected by Hurricane Harvey. After the May 2010 flood in Nashville and Middle Tennessee, many of our employees, clients and colleagues were confronted with the daunting challenge of rebuilding after a disaster. Waller established an Employee Relief Foundation, and our attorneys became well-versed with the tax regulations and FEMA rules related to disaster relief.
We have compiled summary materials on tax and other relief available for victims of natural disasters here.
For additional information, please contact Leigh Griffith, John Bunge or any member of Waller’s Tax practice at 800-487-6380.
The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.