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Employee relief funds are a smart way for employers to help employees in need, particularly during times like the current Coronavirus (COVID-19) crisis. These funds, when run by independent public charities, can provide tax-free grants to qualifying employees. At the same time, they allow the employer and employees to make tax-deductible contributions.
This article focuses specifically on the grantmaking process. What do employees need to do to receive cash from the fund? How do they qualify? Who is even eligible? These questions are very essential to the practical operation of the fund, and need to be answered by the sponsoring employer before launching a program.
A typical grant process flow looks different for every company depending on the type of fund, how it is managed, and the resources available to process grants effectively.
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It is much easier to administer the relief fund if there are pre-determined methods of payment. Ideally, the fund should only allow applicants one or two choices, such as electronic check or digital payment system (such as Zelle). Allowing three or more options greatly increases the administrative burden. No payment option is a “silver bullet” that will work for all employees.
Who Gets Help?
Companies must maintain objectivity during the grant review and approval process. Having an independent charity operate the fund helps establish this objectivity and appearance of fairness. A key step in achieving this goal is to outline qualifying criteria that will determine an individual’s eligibility to receive a grant. This makes the grant evaluation process easier for the review team and fair for applicants.
Employee relief funds refer to this theoretical eligible group of applicants as the “charitable class.” The IRS defines charitable class as “[t]he group of individuals that may properly receive assistance from a charitable organization…” (see https://www.irs.gov/pub/irs- tege/eotopick99.pdf).
In other words, a company must first define who may apply and qualify to receive a grant. The emphasis there is important – the charitable class is the group of eligible people. Funds should certainly consider elements like what occurred to make someone apply for a grant, when such an event occurred and how much money the applicant is applying for, they are not part of defining a charitable class.
Relatives of a victim of Covid-19 mourn outside the Enrique Cabrera hospital at the Lomas de Tarango … [+]
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After defining the charitable class, the fund should consider which events make applicants eligible for a grant. The IRS gives some guidance here – see Publication 3833 in particular. It is important to note that the way the fund is organized matters – employer-sponsored private foundations and donor-advised funds do not have as much latitude for different events they can respond to. On the other hand, the IRS notes that employee relief funds run by independent public charities can make grants for disasters or emergency hardships, which is a relatively broad category. This allows additional flexibility in terms of categories. With that said, sponsoring employers and, if applicable, partnering charities must establish in writing which types of disaster or hardship are eligible.
The next step in achieving objectivity is to make sure the review process remains unbiased and confidential. Companies sometimes develop a committee dedicated to the unbiased review and approval of grant applications when the fund is run in-house. For this process to truly remain objective it is wise to keep an applicant’s name and personal information confidential. Another way to ensure objectivity is to hire a third-party administrator to handle the entire application review and grant approval process. If partnering with a charity, it is possible that organization will instead handle the application review and grant approval process.
It is important to understand the regulations surrounding grant-making, objectivity and applicant eligibility. Regulatory compliance can be challenging to navigate, which is why many organizations choose to partner with a charity or other third-party administrator that manages compliance and grant processing.
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