In tough economy, charity can begin at the office

Workers in the current economy are facing considerable stress, with many of them living paycheck to paycheck. Many are one emergency away from financial ruin.

The troubled economy has resulted in companies looking to find ways to help employees in need, at minimal cost to the company and the employee. One way is for companies with a large number of employees to form an employer-sponsored public charity.

Employer-sponsored public charities are independent non-profit entities that qualify as 501(c)(3) public charities that provide financial assistance to a broad class of potential recipients — usually the employees of the sponsoring company. Generally, the financial assistance can be given to compensate for a loss, either as a result of a fire, flood or other disaster or as a result of a personal tragedy, such as illness or crime that results in substantial financial hardship.

Employer-sponsored public charities must meet all of the standard IRS rules for a public charity, including being organized and operated solely for charitable purposes and receiving at least one-third of their support from sources other than the sponsoring company. Fundraising for non-company-provided contributions often comes from company employees, a source that can lead the company and its employees to work together to help employees in need.

Poor planning not eligible

What kind of assistance can employer-sponsored public charities provide?

IRS guidance indicates that the charity can offer two types of financial assistance to individuals:

One is disaster relief, in the event of a fire, flood, storm or other similar large-scale events.

Generally, the money should be used to compensate for a loss, such as temporary housing, uninsured loss of furniture or other possessions, medical assistance and other financial setbacks. An employee whose possessions are destroyed in a fire, and whose loss is not covered by insurance, would be an example of a candidate for funding for disaster relief.

Assistance might also be available for emergency hardship situations in the event of a personal tragedy, such as illness, death, accident or violent crime, resulting in financial need or other distress. An employee who needs to take time off from work without pay to care for a spouse who is dying of cancer would be an example of a candidate for funding for an emergency hardship situation.

Generally, financial hardships resulting from poor financial planning are not eligible for
financial assistance, even if the result is the loss of a home.

Note that employer-sponsored private foundations (that is, charitable corporations that do not have broad-based support and are funded primarily by the sponsoring company) are able to provide only disaster relief and are not able to provide emergency hardship relief.
It is also important to note that this financial assistance cannot replace any obligations that the sponsoring company may have to its employees already.

Follow the rules
Are there any special rules for awarding financial assistance grants? As it happens, the IRS, to avoid having the charity become merely another employee benefit, has put in place certain requirements:
• The class of beneficiaries must be large or indefinite. Although there is no set minimum size of the class of beneficiaries, the larger the class, the more there is a benefit to the community as a whole, as required by the IRS. It is clear, however, that the charity cannot benefit a single individual or family.
• The recipients must be based on an objective determination of need, and the selection must be made by an “independent” selection committee (a majority of which must be individuals who are not in a position to exercise substantial influence over the company’s business).

It is important to maintain the independence of the selection committee apart from the company so the awards are not seen by the IRS as merely an employee benefit.
The charity is also required to maintain detailed documentation on the selection criteria and amount distributed to each recipient.

Tax benefits

If the employer-sponsored public charity is properly structured, there are substantial benefits to the company and employees who receive assistance. The company and other donors receive a charitable deduction for their contribution to the charity, and the employee is not taxed on the amounts received from the charity.

Although the IRS has not provided guidance directly on this issue, we believe that smaller companies may be able to band together through trade associations or chambers of commerce to offer an employer-sponsored public charity that is sponsored by multiple companies and would provide grants to employees of sponsor companies.
In conclusion, establishing an employer-sponsored public charity can be a perfect way for a company to show it cares about its employees and is committed to finding ways to provide financial assistance in times of need. However, doing so requires compliance with general charitable corporation rules as well as special rules relating to employee-sponsored public charities.

C. Forbes Sargent III is a partner and chairman of the corporate department at Sherin & Lodgen in Boston, and Michael M. Sullivan is of counsel at the firm.