Providing Disaster or Hardship Assistance to Employees

The Victims of Terrorism Tax Relief Act of 2001 enables employers to fund relief programs through charitable organizations aimed at helping their employees cope with the consequences of a disaster or other hardship. Special rules apply to these employer-sponsored charities. One is that they should not fulfill a legal obligation of the employer. For example, the program should not be part of a collective bargaining agreement or a written employee benefits plan. Similarly, the organization should not be used by the employer to recruit employees or induce employees to continue their employment, or follow a certain course of action sought by the employer.

The organization should also aim to meet the “public support test,” meaning at least one-third of its total support must come from government agencies, contributions from the general public, and contributions or grants from public charities. The group of individuals that may properly receive assistance is called a “charitable class.” A charitable class must be large enough or sufficiently indefinite so that the community as a whole benefits when a charity provides assistance.

If the organization qualifies as a public charity, then donors who make contributions to the organization generally would be entitled to a charitable deduction. The public charity’s payments to the employer-sponsor’s employees and their family members in response to a disaster or emergency hardship are presumed to be made for charitable purposes, and not to result in taxable compensation to the employees.