In late-August, Hurricane Harvey has caused widespread devastation in parts of eastern Texas due to record breaking amounts of rain and flooding. As a result, a large portion of southeast Texas has been declared a federal disaster area including Aransas, Bee, Brazoria, Calhoun, Chambers, Fort Bend, Galveston, Goliad, Harris, Jackson, Kleberg, Liberty, Matagorda, Nueces, Refugio, San Patricio, Victoria, and Wharton counties.
Postlethwaite & Netterville knows all too well the impacts of natural disasters as South Louisiana experienced record-breaking rain fall leading to severe flooding in August 2016. This article will outline several ways that employers are able to provide disaster relief to their employees, including direct giving to employees, donations by employer-sponsored donor advised funds, and donations by employer-sponsored public charities in the aftermath of Hurricane Harvey.
Many employers are now looking for ways to help employees in the wake of this crisis. A few ways employers can help employees include:
Before establishing employee disaster benefits, employers should understand the tax consequences to both employers and employees as a result of employer contributions. Below are a few tax consequences to consider:
One way that employers can help employees in times of a disaster is direct giving to employees. Generally, all amounts received by an employee from an employer are included in gross income. However, I.R.C. § 139 allows employers to contribute to employees in the wake of “qualified disasters” in a manner that is tax-free to the recipients. For purposes of this statute, a “qualified disaster” includes, in relevant part, a federally declared disaster. Pursuant to I.R.C. § 139, gross income does not include any amount received by an individual as a qualified disaster relief payment even if paid by an employer. For this purpose, “qualified disaster relief payment” includes an amount paid to or for the benefit of an individual:
Importantly, however, “qualified disaster relief payments” do not include payments for expenses otherwise paid for by insurance or other reimbursements nor do they include income replacement payments, such as lost wages, lost business income, or unemployment compensation.
In addition to the tax benefit to employee/recipients for excluding such payments from gross income, employers are permitted to deduct the amounts paid as qualified disaster relief payments to the same extent they would be if such payments were includible in gross income.
In this case, the current Texas flooding has been declared a federal disaster. As a result, employers who give amounts that meet the requirements for “qualified disaster relief payments” will be able to deduct those amounts for tax purposes while the amounts received by the employees will be excludible from gross income, to the extent that those same expenses are not otherwise compensated for by insurance/other means.
Employers may also be able to help employees affected by disasters through donations to employer-sponsored donor advised funds. In general, a donor-advised fund is a fund that is established with a sponsoring organization, generally a public charity (e.g., a community foundation), where the contributions by the donor are separately identified and with respect to which the donor can advise on how the money should be used.
Donations to donor advised funds are generally eligible for a charitable deduction if certain eligibility requirements are met. Donor-advised funds are generally not allowed to make grants to individual persons. In certain circumstances, however, employer-sponsored funds or accounts can make grants to employees and their family members. In order for the employer-sponsored donor advised fund to be able to make charitable donations to employees, the following criteria must be met:
These records should show type of assistance provided, criteria for disbursement, date, place, estimated number of victims, charitable purpose intended, and the cost of aid.
In this case, as this Texas flooding has been declared a federal disaster, employers may also be able to contribute to their employees in this time of need by using an existing donor-advised fund set up for this purpose or setting up a new donor-advised fund with a local public charity. If the above requirements are met, then the donation to the employee should be excludible from income while the donations to the fund should be deductible to the donors.
Like employer-sponsored donor-advised funds, employers may also aid employees through the use of an employer-sponsored public charity. In general, public charities are those entities who meet the requirements for tax exemption under I.R.C. § 501(c)(3) and who meet the qualifications for being a public charity pursuant to I.R.C. § 509(a). In general, donations to public charities are deductible pursuant to general charitable deduction rules and donations received by individuals are excluded from gross income as gifts.
In the employer-employee context, employers can establish employer-sponsored public charities to provide assistance in disaster or other employee-hardship situations as long as the employer does not assert “excessive control” over the charitable organization.
If you have any questions regarding employee leave sharing programs, please contact your P&N representative or contact us below to speak to one of our tax professionals.