Guidelines for Companies Wanting to Provide Disaster Relief

"Providing aid to relieve human suffering that may be caused by a natural or civil disaster or an emergency hardship is charity in its most basic form." IRS Publication 3833

The recent spate of weather related emergencies prompted a flurry of inquires regarding the provision of disaster relief. Legislation passed after the September 11, 2001 terrorist attacks makes it easier for a corporation to provide assistance, directly or through a charitable organization, to address the needs of employees and their families affected by natural and civil disasters. However, there are fairly precise protocols that must be followed in order to qualify. Being prepared for such emergencies by setting up a disaster relief program in advance not only permits quicker response but also greater flexibility.

If you have an existing charitable organization, but no disaster relief program in place, the first step is to check your organization’s Articles of Incorporation to ensure that the planned activities fall within your current corporate purposes – in terms of geography, types of services offered, population served and other possible limitations. If a disaster relief program is outside the charitable purposes of your organization, you may need to amend the organization's articles. In addition, the board should adopt resolutions establishing the program, an appropriate mission statement for the program and guidelines for distributing the funds.

The type of assistance a charitable organization may provide depends on whether it is a public charity or a private foundation. Because a public charity receives broad public support, it may establish an employer-sponsored assistance program to respond to any disaster or employee emergency hardship situation. A private foundation, on the other hand, may only make "qualified disaster" relief payments. A "qualified disaster" is defined as one resulting from certain terroristic or military actions, a presidentially declared disaster, a disaster that results from an accident involving a common carrier or any other event that the Secretary of the Treasury determines is catastrophic.

The IRS will presume that qualified disaster payments made by a private foundation to employees (or their family members) of an employer that is a disqualified person (such as a company that is a substantial contributor), or payments made by a public charity to employees (or their family members) for employer-sponsored disaster relief and emergency hardship are consistent with the foundation or charity’s charitable purposes if certain requirements are met: (1) the class of beneficiaries must be large or indefinite: (2) the recipients of the aid must be selected based on an objective determination of need; and (3) selection of the recipients 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. An organization must also maintain adequate records that demonstrate victims’ needs for the assistance provided by the charity and show that the organization’s payments further charitable purposes.

If these requirements are satisfied, the payments: (1) are treated as made for charitable purposes; (2) do not result in prohibited self-dealing merely because the recipient is an employee (or family member of an employee) of the employer-sponsor (in the case of a private foundation); and (3) do not result in taxable compensation to the employees.

Finally, if you have no charitable organization in place or do not wish to establish a disaster relief program through a charity, the September 11, 2001 legislation also amended the Internal Revenue Code to provide that direct payment to victims of "qualified disasters" to reimburse the individuals for certain expenses, including reasonable and necessary personal, family and living expenses and the costs of repairing and rehabilitating housing, are not included in the employee’s income for federal income tax purposes and are not treated as earnings for self-employment tax purposes or as wages or compensation for employment tax purposes, to the extent the expense is not compensated by insurance or otherwise. While payments made by an employer to its employees from its own funds generally are deductible by the employer as ordinary and necessary business expenses, payments to employees are not deductible if made from funds donated by other employees, whether directly or through a fund sponsored by the employer, unless the fund is itself a charitable organization.

If you have questions regarding this article, you may contact Thomas Schnellenberger and James Betley.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader must consult with legal counsel to determine how laws or decisions discussed herein apply to the reader's specific circumstances.