How Employers Can Help Assist Workers Furloughed or Otherwise Hurt by the Coronavirus PandemicApril 2, 2020
Employers who have made the wrenching decision to furlough employees often cannot practically pay the full value of wages and benefits that employees would have earned for any substantial period of time; otherwise, they likely would not have decided on the furloughs. There are, however, other options available to help affected employees. The most recent federal stimulus package, the Coronavirus Aid, Relief, and Economic Security Act, substantially increases unemployment benefits for many workers, and employers may want to take care that any financial support to those workers does not put their unemployment benefits at risk or create increased tax liability for the business or its employees. S&C’s blog posts and memoranda regarding the key employer provisions in the Coronavirus Aid, Relief, and Economic Security Act and the Families First Coronavirus Response Act are available here.
Use of 501(c)(3) Organizations
Employer-sponsored charitable organizations can provide assistance to employees related to the Coronavirus pandemic under certain circumstances. Tax-exempt 501(c)(3) charitable organizations must be organized and operated exclusively for charitable purposes. Accordingly, the IRS has established special procedures for disaster-relief payments from employer-sponsored charitable organizations to employees and their family members in order to ensure that such payments serve a public interest as opposed to the employer’s interest. Employers should be mindful of the type of 501(c)(3) organization that they use to assist employees because different tax rules apply to public charities, private foundations and donor-advised funds.
If employers decide to utilize or establish a 501(c)(3) organization to assist employees, they should ensure that the organization maintains adequate records demonstrating that the organization’s payments further its charitable purposes and that the victims served are needy or distressed. Charities must also maintain appropriate records to show that they have made distributions to individuals after making appropriate needs assessments based on the recipients’ financial resources and their physical, mental and emotional well-being. Finally, the group of employees that can benefit should be indefinite (for example, by including employees affected by the current disaster and those who may be affected by a future disaster), and measures should be taken to ensure that any benefit to the employer is incidental and tenuous.
Employer-sponsored private foundations can make disaster-relief payments to employees or their family members only if the recipients are affected by a “qualified disaster,” which includes a disaster declared by the President of the United States to warrant assistance by the Federal Government under the Stafford Act. The IRS presumes that payments in response to a qualified disaster made by an employer-sponsored private foundation to employees (or family members of employees) are consistent with the foundation’s charitable purposes (and generally do not give rise to prohibited “self-dealing” or income to employees) if the program complies with the following requirements:
- the class of beneficiaries is large or indefinite;
- the recipients are selected based on an objective determination of need; and
- the selection 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 foundation’s selection committee is independent if a majority of the members of the committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer.
Distributions from the private foundation also should not relieve the employer of any of its otherwise existing legal obligations, and should not benefit directors or officers of the foundation, or members of the selection committee.
It is important to note that the Coronavirus pandemic is a “qualified disaster” in a number of states and jurisdictions, including, for example, New York, New Jersey, Connecticut and California, as a result of specific disaster declarations made by the President. It is currently unclear, however, whether the Coronavirus pandemic is a nationwide “qualified disaster.” On March 13, 2020, the President declared a nationwide “emergency” due to the pandemic, but has not yet formally declared a nationwide “disaster.” In addition, while the IRS referenced a “Federally declared disaster” in Notice 2020-18 (extending the deadline for reporting and payment of personal income taxes), the IRS has not explicitly stated or confirmed that the Coronavirus pandemic is a “federally declared disaster” on a nationwide basis for purposes of an employer-sponsored disaster-relief fund. Accordingly, employers considering use of a private foundation or donor-advised fund (or making direct payments to employees, as described more fully below), should obtain advice at the time to confirm that the employees receiving benefits are located in a federally declared disaster area.
Donor-Advised Funds at Existing Charities
A donor-advised fund is a fund operated by an organization that maintains separate funds or accounts to receive contributions from individual donors. The fund then considers advice from the donors to make grants to 501(c)(3) public charities (not individual persons) or, in some circumstances, to other types of organizations. Employers can donate to donor-advised funds and maintain advisory privileges over the distribution of donated funds, and, in limited circumstances, employers can ensure that such funds are used to benefit employees who are affected by a “qualified disaster,” including the Coronavirus pandemic where such disaster has been declared by the President. An employer-sponsored donor-advised fund can make grants to employees where:
- The fund serves the single identified purpose of providing relief from one or more “qualified disasters”;
- The fund serves a large or indefinite charitable class;
- Recipients of grants are selected based upon an objective determination of need;
- The selection of grant recipients is made using either an independent selection committee or adequate substitute procedures to ensure that any benefit to the employer is incidental and tenuous;
- 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.
Qualified Disaster Payments to Employees Directly
Under Internal Revenue Code Section 139, “qualified disaster-relief payments” from any source, including employers, are not taxable as income to the recipient and are not subject to employment taxes or withholding. A qualified disaster-relief payment includes any amount paid to or for the benefit of an individual to reimburse or pay reasonable and necessary personal, family, living or funeral expenses incurred as a result of a qualified disaster that are not reimbursed by insurance or otherwise. Such payments should not constitute wage replacement. Records should be kept of the justification for the payments.
Employers May Assist in Solicitation of Private Charitable Donations, Subject to Compliance with State Law Requirements
Employers affected by Coronavirus may be inclined to solicit the public for charitable contributions to pass to workers through, for example, private foundations, donor-advised funds or qualified disaster-relief payments (as discussed above). Although there are no federal laws prohibiting for-profit companies from soliciting donations, many states have laws that regulate the solicitation of funds for charitable purposes. Pennsylvania, for example, broadly defines a “charitable organization” as including “any person who in any manner employs a charitable appeal as the basis of any solicitation,” and requires such charitable organizations to (among other requirements) register with the state, file financial reports, and pay certain fees. 10 Pa. Stat. Ann. §§ 162.3, 162.5. In contrast with Pennsylvania, other states (including New York) define “charitable organization” more narrowly, such that for-profit businesses other than professional fundraisers might not be covered by charitable solicitation laws. See N.Y. Exec. Law § 171-a (defining “charitable organization” as “any benevolent, philanthropic, patriotic, or eleemosynary person or one purporting to be such”). Employers considering whether to solicit donations should therefore consult applicable state charitable solicitation laws.
Other Potential Options
Employers may consider assisting individuals in soliciting donations on a non-tax-deductible basis, for example, by facilitating the efforts of others in asking the public to donate to funds set up by customers, industry groups or other supporters. Such donations should not implicate the regulatory restrictions referred to immediately above.
Separately, not all affected employees will necessarily require financial assistance, and businesses can therefore consider taking non-financial actions that can help workers mitigate the effects of the Coronavirus pandemic. For example, businesses can explore the creation of employee leave donation programs or charitable gift-matching programs.
Payments to Workers Receiving Unemployment Benefits
Workers in industries affected by Coronavirus may be receiving or seeking to apply for unemployment benefits. Businesses considering assistance to furloughed employees need to be mindful of whether any form of assistance would affect the worker’s eligibility for unemployment benefits. Generally speaking, the distribution of funds from an employer or former employer may create risk that a worker is found to be employed. Most states, including New York, require that a worker receiving unemployment benefits be fully separated from a former employer. See, e.g., N.Y. Lab. Law § 591(1) (“[Unemployment] Benefits . . . shall be paid only to a claimant who is totally unemployed”); In re Baptista, 798 N.Y.S.2d 793, 794 (N.Y. App. Div. 2005) (affirming denial of unemployment benefits where evidence indicated that claimant was not unemployed because he was paid $50 per month and received a rent-reduced apartment). The charitable avenues discussed above, as well as the options of facilitating gifts by others, present possibilities for giving aid without these risks.
As the Coronavirus pandemic continues to develop, various regulations and laws, including any tax implications of employee assistance, will continue to change. Sullivan & Cromwell LLP’s recent memorandums and other information discussing various aspects of Coronavirus can be found here.