Financial First Response Part I: Employee Hardship Relief Funding

With the Corona virus (COVID-19) crisis continuing and most public events cancelled, many individuals are struggling with the physical, financial and emotional effects. People across the world are wondering how they can assist those in need. Thankfully, there are ways for existing organizations to provide help.

Employers can offer their employees financial assistance during qualifying disasters like the Coronavirus. It is becoming increasingly common for large to mid-size companies to implement an employee assistance program that allows the organization to process grants quickly in times of personal hardship and disaster. This method of financial assistance is more efficient and effective than options like GoFundMe.

Employee assistance programs allow the employees to receive tax-free grants in real-time and provides opportunities for employees to make tax-deductible donations. These programs are often run by charities with employers acting as sponsors. Alternatively, employers can choose to administer a more limited program in-house.

Funding a Relief Program

Regardless of the approach, properly funding these programs is very important. The funding is usually led – at least in the beginning – by the employer. The program is typically run by an independent charitable organization. Most corporations will donate a large sum to an employee relief fund upfront to kickstart fundraising efforts. However, it’s essential not to forget about employee participation in the donation process. Empowering employees to donate to the organization’s fund is a great way to boost company morale and positively impact culture. Employee donations will also help increase the fund’s balance, which is vital as a large-scale crisis like COVID-19 will likely result in a high number of grant requests and applications. There are many ways companies can provide employees the opportunity to donate, such as direct

donations during employee giving campaigns and payroll deductions. Don’t forget to plan a well-executed employee giving campaign around these efforts and connect with the marketing / communications department to help spread the word across the organization. Depending on company structure, this can be accomplished through email campaigns, handouts, flyers, employee-led pop-up groups, etc. The key is to make it easy for employees to contribute to the fund. Effective communication, as above, is the starting point. Once employees become motivated to give, employers should provide them with an easy opportunity to do so. This can include things like contributing through payroll deduction or enabling donations through mobile devices.

IRS Requirements

One advantage of employee relief funds run by U.S. charities is that contributions (from employees, employers, vendors, and the public alike) are tax-deductible, and grants are tax-free. However, in exchange for this favorable tax treatment, the IRS requires employee relief funds meet certain standards. One of the most important rules is the “needs test.” The legal purpose of charities is to give relief to the distressed. The IRS requires charities to have a “needy or distressed test” in the form of an objective set criteria. These rules allow charities to make unbiased decisions based on the applicant’s needs. This is important not only for meeting IRS requirements, but also so that grant administration appears fair to employees and applicants. Grant awards for a personal hardship should be made based on the financial burden to the applicant. How should a fund assess “financial burden?” The criteria should examine reasonably available cash and additional assets, including anticipated future income. If those resources are expected to be insufficient to cover existing obligations and basic needs, the applicant has satisfied the needs test.

Two important items to note about the needs test:

• The grant does not need to make the applicant whole. The needs test should only account for what is necessary to relieve the distress. This means individuals with considerable financial means will have a harder time satisfying the needs test.

• Qualifying applicants must experience a sudden financial burden due to events beyond their control. Applicants who consistently operate at a financial deficit do not meet the needs test.

The above factors are some of the elements that can determine whether an applicant will qualify for an employee relief grant. Financial burdens are determined by the level of liquid assets which are available along with annual household income, based on United States federal poverty guidelines. Such guidelines are based on income and the size of the household. For Alaska, Hawaii and large metropolitan areas with a higher cost of living, the base amounts are substantially higher.

The Quick Takeaway: Employee relief funds can offer a highly efficient approach for employers and employees alike. To optimize the tax advantages, the fund should be run in partnership with a public charity and effective communication is key to a successful operation. Employers should fine-tune their programs so that they can be easily funded with contributions. On the flip side, these programs have specific IRS requirements to maintain tax-free grants for recipients.

Further Reading:

Financial First Response Part II: Grantmaking For Employee Relief Funds

Financial First Response Part III: Admin of Employee Relief Funds