Employee Care Funds: A Guide to Assistance for Employees in Crisis

Life is unpredictable, and financial hardship can strike at any time due to illness, accidents, natural disasters, or other unforeseen circumstances. For employees facing such crises, an employer-backed employee care fund can serve as a crucial safety net, providing financial assistance during difficult times. These funds, when structured properly, can qualify as tax-exempt organizations under Section 501(c)(3) of the Internal Revenue Code, ensuring their efficiency and compliance with federal tax laws.

What Are Employee Care Funds?

Employee care funds are employer-sponsored initiatives designed to provide financial relief to employees and their families during times of economic hardship or disaster. These funds typically offer aid in the form of grants or loans, helping employees secure essential resources such as food, clothing, housing, transportation, and medical assistance.

Key Considerations for Tax-Exempt Status

To qualify for tax-exempt status under Section 501(c)(3), an employee care fund must meet several criteria:

• Charitable Purpose: The fund must be established for charitable purposes, particularly the relief of distress and poverty.
• Indefinite Beneficiary Class: The fund must serve an open-ended group of beneficiaries, not a pre-selected list of individuals.
• Objective Selection Criteria: Assistance must be based on clear, pre-existing criteria related to financial need, without consideration of employment status beyond initial eligibility.
• Avoidance of Private Benefit: The fund must ensure that any benefit to the employer is incidental and does not constitute taxable income to employees.

How Employee Care Funds Operate

Employee care funds typically provide assistance in two forms:

1. Disaster Relief: Funds are used to help employees recover from natural disasters, accidents, or other emergencies by covering essential needs such as food, shelter, and medical care.
2. Emergency Hardship Relief: Assistance is provided to employees facing severe financial difficulties due to unexpected personal hardships, ensuring they can meet basic living necessities.

Funding and Administration

Funding for employee care funds comes from various sources, including employee contributions (via payroll deductions or direct donations), employer matching contributions, and external donations from individuals or government entities. While employers may provide administrative support, the fund must remain independent to maintain its tax-exempt status.

Ensuring Compliance with IRS Regulations

The IRS has established specific guidelines to prevent employer-related funds from being classified as taxable employee benefits. To comply:

• The fund must be operated by a public charity rather than a private foundation.
• It must not be excessively controlled by the employer.
• It must not serve as a substitute for employee compensation or benefits.
• The selection process for aid recipients must be objective, ensuring employment status does not influence the assistance provided.

Breaking the Employer-Employee Nexus

A key challenge in structuring employee care funds is breaking the “nexus” between the employer and the fund to prevent distributions from being considered taxable employee income. The IRS has established a safe harbor framework to address this issue, requiring that:

• The fund be operated by an independent public charity. The fund is often supported, in part, by employee payroll deductions which help it to pass the public support test.
• The governing body making assistance decisions must be independent of the employer. Independence is often established by having a majority of the board (or committee making grant decisions) made up of rank and file employees or retired employees rather than executives or managment.
• The organization must receive broad public support to avoid private foundation classification.

Alternatives for Structuring Employee Care Funds

Organizations looking to establish an employee care fund have several structuring options:

1. Standalone Public Charity: Establishing a new, independent 501(c)(3) organization to administer the fund.
2. Affiliation with a Community Foundation: Partnering with an existing community foundation to house the fund.
3. Employer-Operated Welfare Benefit Plan: Though less tax-efficient, employers may provide direct assistance through a structured benefits plan.

Conclusion

Employee care funds play a critical role in providing financial relief to employees in times of crisis. However, careful planning and adherence to tax regulations are essential to ensure these funds maintain their tax-exempt status and do not inadvertently create taxable benefits for employees. By structuring funds properly and ensuring compliance with IRS guidelines, employers can effectively support their workforce while maintaining the fund’s intended charitable purpose.

Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on federal tax and fundraising regulations nationwide. Ellis also advises donors concerning major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.