Beyond assisting employees, another strategy is for a company to make program-related investments in distressed businesses in its community or elsewhere through the company's own private foundation or through other charitable organizations. There is no single approach to philanthropy in this time of crisis. The right approach for a corporation will depend on many factors, including its internal capacity to run the charitable program, its existing charitable structure, and the specific needs of communities. However, there is a range of options available for a philanthropically oriented corporation.
When employers desire to provide emergency hardship payments to their employees, they may do so through DAFs or charitable foundations established by the employer or others. While donations to public charities providing disaster relief assistance may also benefit workers during times of unanticipated hardship, the programs discussed below may benefit the specific group consisting of service providers. To encourage corporate giving, under the Coronavirus Aid, Relief, and Economic Security Act or the ‘‘CARES Act,” released on March 25, 2020, Congress temporarily increased the limitation on charitable contributions by corporations from 10% to 25% of taxable income (there are certain exceptions to this increased limitation for DAFs).
Employer-Sponsored Donor Advised Funds
An employer may consider creating a DAF at a public charity. In general, DAFs cannot make grants to individuals except for such employer-related accounts established to benefit employees and their family members who are victims of a qualified disaster. The donor-employer will typically participate in designing the program and will receive advisory privileges over investment or distribution of the donated funds.
The fund must serve the single identified purpose of providing relief from one or more qualified disasters and must serve a charitable class. The COVID-19 pandemic is a qualified disaster.
The recipients of grants must be selected based upon an objective determination of need, and the selection of recipients of grants must be made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. According to the Internal Revenue Service (“IRS”), the selection committee is independent if a majority of its members consist of persons who are not in a position to exercise substantial influence over the employer’s affairs. Directors, officers, or trustees of the DAF, or members of the fund’s selection committee may not benefit from the fund. The fund must maintain adequate records to demonstrate the recipients’ needs for the disaster assistance provided. One of the benefits of establishing assistance funds through DAFs is the ability to outsource administration and reporting to a third-party.
There are a number of 501(c)(3) public charities that work with employers to establish funds targeted to benefit their workforce. These organizations will generally work with the employer to design the program and will administer the program and provide required reporting.
Employer-Sponsored Private Charitable Foundations
Employers may establish a 501(c)(3) charitable foundation, or use an existing one, to provide assistance payments to the employees. In order for an employer to receive tax benefits, relief programs must benefit an indefinite class. The IRS will treat employees of an organization as an indefinite class if the relief program is open-ended and includes employees affected by the current disaster and those that may be affected by a future disaster. Thus, if the program is designed to assist its own employees who are victims of all disasters, present or future, it would be providing assistance to an indefinite charitable class. If the facts and circumstances indicate that a newly established disaster relief program is intended to benefit only victims of a current disaster without any intention to provide for victims of future disasters, the organization would not be considered to be benefiting an indefinite charitable class. Furthermore, because of the requirement that tax-exempt 501(c)(3) organizations must serve a charitable class, the tax-exempt disaster relief or emergency hardship program cannot limit its assistance to specific individuals.
Similar to DAFs, the recipients of hardship payments must be selected based on an objective determination of need and the selection must be made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous. The foundation’s 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.
If the program satisfies the requirements of an indefinite charitable class, objective determination of need and independent committee (or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous), the IRS will presume that payments in response to a qualified disaster made by a private foundation to employees (or family members of employees) of the sponsoring employer are consistent with the foundation’s charitable purposes and will not result in self-dealing. As noted above, the COVID-19 pandemic is a qualified disaster.
If a private foundation fails to meet the above requirements for the presumption, the IRS may consider other procedures and standards as constituting adequate substitutes based on all the facts and circumstances. Conversely, even when a private foundation meets the presumption, the IRS may still review the facts and circumstances as sufficient to ensure that any benefit to the employer is tenuous and incidental. The IRS clarified that, for example, a program may not be used to induce employees to follow a course of action sought by the employer or designed to relieve the employer of a legal obligation for employee benefits. For example, payments via a charitable foundation may not be in lieu of severance or similar payments.
The presumption of consistency with charitable purpose does not apply to payments that would otherwise constitute self-dealing and subject the organization to excise taxes. For example, the presumption would not apply to payments made to directors, officers, or trustees of the private foundation or members of the private foundation’s selection committee.
Providing disaster relief payment via a charitable foundation would afford more control to the foundation in selecting the recipients of hardship payments compared to a DAF. Of course, using a charitable foundation for this purpose would require additional administrative expenses and work for the foundation that may not arise if the relief is via a DAF.
Hardship payments to service providers through employer-sponsored donor-advised funds and charitable foundations are not taxable to the recipients as long as the payment is “a qualified disaster relief payment” and do not serve any business purpose of the employer. A “qualified disaster relief payment” includes, among other things, any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living, or funeral expenses incurred because of a qualified disaster.
Program Related Investments
Private foundations (including corporate-sponsored foundations) may make investments in small businesses affected by the COVID-19 pandemic. Such investment would qualify as a program-related investment as long as:
- the primary purpose of an investment is to accomplish foundation’s charitable purposes and
- no significant purpose of an investment is in the production of income or the appreciation of property
If the investment qualifies as a program-related investment, it would not be a jeopardizing investment, and the expenditure will count toward the annual minimum distribution requirement applicable to private foundations. Private foundations may either invest in equity or extend loans to the affected businesses. Private foundations may also commit funds to charities, which extend and administer loans to affected businesses, such as Pursuit (formerly New York Business Development Corporation).
These are just a few examples of how philanthropically oriented corporations can provide assistance during times of disaster as well as during ordinary times. The right method of doing so for a particular corporation will depend upon its management style, its internal capacity to run such programs, and the extent to which it has an existing charitable giving program. There is no single program that will be the best for all corporations, but there are enough options that any corporation that wants to be involved in this type of philanthropy should be able to do so.