From the record number of hurricanes in the Atlantic and Gulf of Mexico, to significant wildfires across the western United States, and more recent flooding in the Northeast, an unprecedented number of disasters have affected individuals throughout the country over the past year.
Disasters of this nature demand a massive response from the federal, state, and local governments, as well as regular citizens. Before Hurricane Harvey unleashed its devastation on Texas and Louisiana, Federal Emergency Management Agency (FEMA) Administrator Brock Long said, “People need to be the help before the help arrives.”
If your company has employees who are impacted by major disasters, you may be thinking about how you and your nonimpacted employees can “be the help before the help” for those employees affected. Insurance and FEMA monies take time, and not all losses will be covered. You may have employees who want to donate to their colleagues and are asking the company to coordinate their efforts. Even if you don’t have employees impacted by a hurricane, wildfire, flood, or other disasters, you may be thinking about what your company could do if something like this does happen to your employees.
Disaster Relief Donations
A simple and direct option for employers to provide aid to impacted employees is to pay qualified disaster relief payments (QDRPs).
In general, the Internal Revenue Service (IRS) is highly suspect of gifts from employers to employees. However, in the wake of the September 11, 2001, terror attacks, QDRPs were created to provide a clear income tax exclusion for employer-funded relief payments to victims of federally declared natural disasters and other catastrophes.
This means that an employer can quickly provide cash payments to affected employees to help them deal with the immediate aftermath of a disaster while also sparing the employee from being taxed on those payments.
Importantly, these relief payments are generally deductible business expenses for employers. However, with all good things come some bad, and as with most situations involving the IRS, there are important requirements and conditions that employers must consider before providing relief payments to employees.
What if an employer wants to supplement its own relief efforts by facilitating donations from employees unaffected by a disaster? Unfortunately, this is where things get more complicated. There are a number of options available, but they may not offer the kind of quick solution disaster relief often requires.
- Establish a charitable 501(c)(3) employee relief fund. An employer can establish a 501(c)(3) nonprofit corporation to receive and disburse donated funds to affected employees. This approach yields the best tax results to all parties involved (e.g., tax deductibility for donors, no tax liability for the recipients, and no tax liability for the employer) and offers complete control over distribution of aid—subject, as always, to IRS requirements.
This approach does require the creation of a corporate entity along with the attendant formalities and also requires an application to the IRS to secure tax-exempt status for the entity. Aside from the initial time commitment to establish a new charitable organization, this approach presupposes an ongoing charitable mission. In other words, an employer probably wouldn’t want to establish a new 501(c)(3) entity solely to provide relief for a single disaster situation.
- Establish a donor-advised fund with an existing charity. An employer may be able to set up a fund under the umbrella of an existing charitable foundation and achieve the same tax advantages as would be available with a new 501(c)(3) entity. Under this approach, donations could be made by the employer and others to the new fund, and the existing charity would then be responsible for distributing those funds, with significant input from the employer, subject to applicable IRS regulations.
- Crowdfunding. As crowdfunding has become a more accepted way of fundraising for startups, charitable activities, and other similar ventures, many employers have naturally considered its uses for providing disaster relief on an expedited basis. This approach might involve establishment of a new bank account to receive donations or might involve the use of a third-party online funding aggregator.
Although this approach does have the benefit of relative simplicity and speed—very desirable characteristics when disaster relief needs are urgent—in the final analysis, it may not be quite as simple or cost-effective as other alternatives. This approach does not yield the favorable tax benefits to donor employees mentioned above, and it may present some tax-related complexities for the employer that organizes the funding campaign, which may be simplified to the extent the relief payments qualify as QDRPs. Moreover, third-party aggregators tend to impose fairly substantial administrative fees for their services, and they do not assume responsibility for actually disbursing funds.
Low-Cost Ways to Help Affected Employees
Maybe your company was heavily impacted by a recent disaster and you are not in the financial position to make donations to employees, and/or you lack the administrative resources to set up a donation platform. There are still no-cost and low-cost ways you can also help your impacted employees right now:
- Allow loans and hardship distributions from your 401(k) plan to disaster victims and members of their families, under streamlined loan procedures and liberalized hardship distribution rules recently announced by the IRS for certain specified disasters.
- Consider providing no-interest or low-interest loans to employees. Keep in mind that such loans must be properly documented and may result in additional taxes for the employee.
- Consider implementing a paid time off (PTO) leave-sharing program. Although it would require some additional administrative time for an employer, this approach doesn’t require any additional out-of-pocket money for employers, and special IRS rules allow employees to donate PTO tax-free in the case of a major disaster.
The need for quick action in disaster situations understandably often prompts a “Ready! Fire! Aim!” response, but hasty actions can have unexpected consequences for both employers and employees. The good news is that there are viable options available to concerned employers to facilitate donations from employees, fund relief payments, and provide other help to affected employees through existing benefit plans and programs.
 Timothy G. Verrall is a shareholder in the Houston office of Ogletree Deakins where he advises a diverse range of clients on a wide variety of employee benefit plan issues arising under ERISA, the Internal Revenue Code, and related federal and state laws.
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Aimee E. Dreiss, senior counsel in Ogletree’s Houston office, is an employee benefits generalist, with a broad and comprehensive practice that covers nearly all aspects of employee benefits and executive compensation.
Eric Penkert, an associate in Ogletree’s Greenville, S.C., office, practices in the areas of employee benefits law, ERISA, and taxation. His practice includes qualified plans, fringe benefits, and compliance with other federal laws relating to employee benefits.