4 Ways Employers Can Provide Financial Support to Employees

In the wake of the COVID-19 pandemic, many employers are searching for ways to support their employees in light of the financial hardships caused by the pandemic and the related quarantine. This alert summarizes four ways in which an employer may provide financial support to employees while excluding such support from the employee’s gross income.

1. Direct Payments to Employees

Under Section 139 of the Internal Revenue Code, employers may provide disaster relief payments directly to employees to cover reasonable and necessary expenses incurred as a result of a federally declared disaster. These payments will qualify under Section 139 only if the payments are for expenses that are not reimbursable by insurance or other assistance.

The payments could include coverage for expenses such as childcare, home office costs, medical costs, or funeral expenses. Distributions under Section 139 are not treated as taxable income to employees, and the employer is allowed to deduct those payments as ordinary and necessary business expenses. However, the payments cannot be used in lieu of (or to supplement) wages. There is no specific cap on the amount of assistance so long as the payments otherwise meet the requirements under Section 139.

2. Employee Relief Funds

Employers can also fund employee relief efforts by making a contribution to certain public charities that administer employee disaster programs on behalf of employers. These charities typically offer two types of employee relief programs: (1) general employee assistance programs, which provide financial assistance to employees who experience unexpected hardship causing financial distress, and (2) emergency relief programs, which provide financial assistance to employees who have expenses as a direct result of a federally declared emergency.

These two types of programs are administered differently. A general assistance fund can make distributions to an employee to help with financial need due to hardship if the employee applies for assistance and provides specific documentation of the need. An emergency relief program can distribute funds without specific documentation of need so long as the funds are reasonably expected to be used for unreimbursed and necessary medical, temporary housing, or transportation expenses incurred as a result of the emergency. As with funds paid pursuant to Section 139, employee relief funds cannot be used for wage replacement.

3. Private Foundation Funds

A private foundation that is funded or controlled by a company can also provide company employees with financial assistance if the following requirements are met: (1) the class of employees is large enough to constitute a charitable class; (2) recipients are selected on an objective, nondiscriminatory manner based on need; (3) a majority of the selection committee are not in a position to exercise substantial influence over the company; and (4) adequate records are maintained. Payments by the private foundation, if properly made and documented, will not be treated as taxable income to the employee and will not constitute self-dealing or a taxable expenditure for the foundation.

4. Donor-Advised Funds

An employer may also provide emergency financial assistance to employees through a donor-advised fund sponsored by a public charity, such as a community foundation, if the following requirements are met: (1) the class of employees is large enough to constitute a charitable class; (2) recipients are selected in an objective, nondiscriminatory manner based on need; (3) the selection committee for the donor-advised fund is controlled by the public charity that administers the advised fund; (4) no payments are made to company directors, officers, or selection committee members; and (5) adequate records are maintained.

Please contact us if you have any questions or would like assistance in establishing an employee assistance program.