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Key takeaways:

  • As a business owner navigating through the coronavirus crisis, you might be considering ways you can provide financial assistance to your affected employees. 
  • Employer programs that provide monetary assistance under Internal Revenue Code (“IRC”) Section 139 (disaster relief payments) and/or through an employee relief fund have been available to taxpayers before the current crisis and could prove a valuable tool now and for future crises. These programs offer tax advantages to both the employer and employee.
  • If you decide to pursue an employee relief fund, special consideration must be given as to whether you as an employer have enough current and future employees to constitute a “charitable class”. Please consult with a tax professional on what constitutes a “charitable class”.

What this may mean for you:

  • If you are interested in providing financial assistance to your employees, reach out to an income tax professional to understand the advantages and disadvantages of using one or both of these strategies. 

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As a business owner, you are facing a variety of challenges navigating through the coronavirus crisis. Declines in demand, supply chain disruptions, liability concerns, and personal health and wellness are just a few of the considerations you are dealing with at this time.  You may also be concerned about your employees that have been affected by the pandemic and are looking for options to help them financially.  Employer programs that provide monetary assistance under IRC Section 139 and/or through an employee relief fund are strategies that have been available to business owners during times of crisis. These programs may prove to be invaluable to employees both now and in the future; if structured properly, they can be advantageous from a tax perspective as well.  Alternatively, if you decide these programs are too restrictive in nature, and would still like to provide assistance to your employees, you could increase your employee’s compensation. You would still benefit from the income tax deduction, however, the employee would be subject to income tax on the additional compensation.

IRC Section 139 Disaster Relief Payments 

Employers may provide assistance to individual employees to pay for or provide reimbursement for costs that are incurred as a result of a qualified disaster , such as the coronavirus. These payments may be excluded from the recipient’s gross income for tax purposes, and are tax-deductible to the employer. Qualified disaster relief payments include reasonable and necessary personal, family, living, or funeral expenses incurred as a result of the disaster. Also included are expenses related to the repair of a personal residence or its contents to the extent that the financial need is attributable to a qualified disaster. Under these provisions, there is no defined requirement for the employer to conduct an assessment of the employee’s financial need.

Employee Relief Funds

If you are interested in providing a longer lasting legacy for your company, employees, and community, a relief fund may be established as a resource for those impacted by both current and future disasters. Depending on structure, these funds can offer tax advantages that are similar to those offered under Section 139. As with all charitable organizations, these funds must serve the public interest as well as a charitable class, in the case of an employer, the proposed relief program must be open-ended and include employees affected by the current disaster and may be affected by a future disaster.  Furthermore, they may not provide private benefit to the sponsoring employer, nor may their governance or operations be driven by the employer. The form of the employer-sponsored relief fund (either a public charity, a donor advised fund, or a private foundation) determines the range and types of assistance that it can provide to beneficiaries. 

Employer-sponsored relief funds may provide benefits in lieu of, or in addition to, direct assistance under IRC Section 139.  Similar to payments made under IRC Section 139, contributions made to the fund by the employer or by other individuals may be tax-deductible. Also, payments received by beneficiaries can be excluded from taxable income. A key difference for employer-sponsored funds, when compared to Section 139 payments, is that the governance, compliance, and recordkeeping requirements are substantially greater. Therefore, choosing the appropriate form for an employer-sponsored relief fund requires evaluation along multiple dimensions. 

The following table summarizes these two forms of employer-provided financial assistance:

IRC Section 139 Relief Employee Relief Funds
How are the funds administered? Employer makes direct payments to affected individual(s) to provide relief in cases of qualified disaster. Employer establishes a public charity, donor advised fund, or private foundation. In some cases, an existing charitable fund (such as a public charity or private foundation) could be used.
What are considered qualifying expenses? Additional expenses incurred by a taxpayer that are directly related to a qualified disaster (e.g., unreimbursed medical and health care expenses, costs to repair a damaged home, etc.). Expenses incurred as a direct result of a qualified disaster; however, public charities may provide benefits for a broader range of hardships. Public charities, in comparison to private foundations and employer sponsored donor advised funds, have more flexibility and could provide both longer-term benefits and/or financial assistance for any type of economic hardship, above and beyond assistance provided in the wake of a qualified disaster.
Who can contribute? Anyone, to include the employer, employee, and other individuals may contribute. Anyone, to include the employer, employee, and other individuals may contribute.
Who can benefit? Any individual who has experienced incremental costs associated with a qualified disaster (“affected individual”). Recipients of aid must comprise a sufficiently large and indeterminable group of individuals (the “charitable class”), which must be broad enough to go beyond current employees and currently contemplated circumstances (i.e. future qualified disasters).  As long as the employer has proved that its fund benefits a large enough charitable class, the class can be limited solely to current and future employees.

The charity must establish a written and objective set of criteria that guides decisions on aid. Recipients of aid must be selected based on a demonstrated and objective need.

Neither the owners of the sponsor, nor members of the selection board, can receive any type of benefit. Additionally, the charity’s governing body and/or selection committee must be comprised of a majority of persons who do not exercise control over the affairs of the sponsor.
How quickly can the funds be distributed to a beneficiary? Immediately, if direct cash payments are made to the affected individual. The selection board must meet regularly to decide upon disbursements of aid. Recipients of aid must not be limited to those affected by current qualified disasters, but must include those affected by future disasters.  If no existing tax exempt organization exists, additional time required to establish a new fund.
What are the income-tax benefits? Tax-deductible contributions for the employer; tax-free income to the beneficiary. Tax-deductible contributions for the employer; tax-free income to the beneficiary.
What are the associated costs? No additional costs if direct payments are made to the recipient. Setup, administration, and investment costs of managing a tax-exempt organization.
What are the record-keeping requirements? None; however, employer should consider retaining documentation of the recipient’s name, criteria in selection of beneficiary, and amount contributed to each beneficiary. Adequate records must be kept to indicate: how the assistance supported the affected employee; how the selection process occurred; how the determination of relief was made; details of the recipient’s name, address, and amount received.

If you are in a position to provide financial assistance to your employees, you have options, and you should work with your legal and tax professionals to determine which approach is appropriate for you.  Section 139 payments can be a quick way to provide assistance to individuals, with the advantage of minimal transactional costs and limited formal record-keeping requirements. A longer-lasting legacy may be enabled by the establishment of an employee relief fund, but the increased administrative and compliance costs should also be considered.

Authors: Andrew McPhail, Senior Wealth Planning Strategist, Wells Fargo Private Bank; Christina Williams, Senior Wealth Planner, Wells Fargo Private Bank