An “employer-sponsored donor advised fund” may be just the answer for institutions beleaguered by qualified disasters.
Marathon Bible College (MBC) is a private college exempt under Internal Revenue Code section 501(c)(3) and section 170(b)(1)(A)(ii). MBC incurred significant damage to their campus from Hurricane Irma. All of their employees had property damage – but, thankfully, no injuries.
As a result of the disaster, MBC has several tax-advantaged options that they might employ to assist/benefit their employees’ families who were victims of the hurricane. These options include qualified disaster relief payments, charitable leave donation programs, disaster assistance leave banks, tax-advantaged distributions from retirement plans, and employer-sponsored charitable organizations.
MBC decided – as an initial step – to establish a “qualified disaster relief program” (last week). After further discussion, the administration looked closer at another option: an “employer-sponsored donor advised fund.” They understand that the “DAF” must maintain certain records, that MBC’s officers, directors, nor member of the “benefit selection committee” may be recipients. Also, they must follow three principal requirements for providing relief to disaster-affected employees and their families:
- The relief program (DAF) must be available to employees affected by current or future disasters or emergency hardships
- The DAF’s recipients must be selected based upon an objective determination of need
- Recipients must be selected by an independent selection committee, which may not include senior management of the company (but may include retired employees or HR personnel).
From IRS Publication 3833:
EMPLOYER- SPONSORED DONOR ADVISED FUNDS
Certain community foundations and other public charities maintain separate funds or accounts to receive contributions from individual donors. These individual donors then receive advisory privileges over investment or distribution of the donated funds.
In general, these organizations, known as donor advised funds, can make grants to 501(c)(3) public charities and, under certain conditions, to other organizations for charitable purposes, but cannot make grants to individual persons. However, there is an exception for certain employer-related funds or accounts established to benefit employees and their family members who are victims of a qualified disaster.
A donor advised fund or account can make grants to employees and their family members in the following circumstances:
- the fund serves the single identified purpose of providing relief from one or more qualified disasters as in the discussion of section 139 of the Internal Revenue Code,
- the fund serves a charitable class,
- recipients of grants are selected based upon an objective determination of need,
- the selection of recipients of grants is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous (the selection committee is considered independent if a majority of its members consists of persons who are not in a position to exercise substantial influence over the employer’s affairs),
- no payment is made from the fund to or for the benefit of any director, officer, or trustee of the sponsoring community foundation or public charity, or members of the fund’s selection committee, and,
- the fund maintains adequate records to demonstrate the recipients’ need for the disaster assistance provided.
The [DAF] may provide assistance in the form of funds, services, or goods to ensure that victims have the basic necessities, such as food, clothing, housing (including repairs), transportation, and medical assistance (including psychological counseling). The type of aid that is appropriate depends on the individual’s needs and resources.
For example, immediately following a devastating flood, a family may be in need of food, clothing, and shelter, regardless of their financial resources. However, they may not require long-term assistance if they have adequate financial resources. Individuals who are financially needy or otherwise distressed are appropriate recipients of charity. Financial need and/or distress may arise through a variety of circumstances. Examples include individuals who are:
- temporarily in need of food or shelter when stranded, injured, or lost because of a disaster;
- temporarily unable to be self-sufficient as a result of a sudden and severe personal or family crisis, such as victims of violent crimes or physical abuse;
- in need of long-term assistance with housing, childcare, or educational expenses because of a disaster; and,
- in need of counseling because of trauma experienced as a result of a disaster or a violent crime.
- There are numerous tax-advantaged opportunities for providing relief to disaster-affected employees and their families.
- Employer-sponsored charities (public charities, donor advised funds, private foundations) may be the answer for an institution seeking to provide disaster relief to affected employees and their families.
- Donor advised funds have several requirements and restrictions that should be carefully analyzed.
- Other opportunities include establishing “charitable leave programs” for employees who are victims of hurricanes and other qualified disasters.
Specific questions? Email Dave Moja
The information provided herein presents general information and should not be relied on as accounting, tax, or legal advice when analyzing and resolving a specific tax issue. If you have specific questions regarding a particular fact situation, please consult with competent accounting, tax, and/or legal counsel about the facts and laws that apply.