Pitfalls to Avoid When Establishing an Employee Relief Fund

Douglas Stockham


January 18, 2024

Relief Fund Pitfalls

Whether it is a natural disaster or illness that affects thousands, or a housefire or injury that affects a single individual or family, unexpected hardships can have devastating impacts. In anticipation of these scenarios, many companies have established disaster and hardship relief funds to provide essential financial assistance to team members in need.

When an organization sets up a relief fund, several important choices must be made regarding program design and administration that can impact the overall success of the fun. Unfortunately, many self-administered disaster and hardship relief funds are created haphazardly and do not follow appropriate regulations or guidelines.

Organizations need to avoid the following 10 pitfalls when establishing a disaster hardship relief fund.

1. Non-Specific Grant Guidelines  

Problems with relief funds can occur when grant guidelines use general “catch-all” categories containing non-specific words like “other.” This wording can result in subjective grant decisions being determined subjectively and is contrary to IRS requirements. According to the IRS, “[t]he organization establishes specific written criteria for the application, selection and disbursement of funds.” Thus, the guidelines and/or list of events and expenses should be specific enough that an applicant and the objective reviewer would come to the same conclusion about a grant application. To verify if guideline wording is effective, ask yourself if 10 different reviewers would all come to the same objective conclusion after reading them. If not, then consider making any necessary changes to avoid unclear criteria and excessive flexibility to satisfy the IRS’s requirement that “[t]he selection process must be objective and nondiscriminatory.” 

2. Nonspecification of Qualified Disaster vs. Hardship Requirements

The IRS definition of a “qualified disaster” is often unclear. Regulatory compliance gaps widen even further when the funds expand to include “hardships” in addition to “natural disasters.” Funds that are designed to provide grants for “personal hardships” can meet the requirements for “qualified disasters,” but not vice versa. Remember to be specific about the circumstances and requirements for the grant. 

3. Misuse of Needs-Based Test

If a program is designed based on regulations for “qualified disasters,” it is inappropriate to use it to administer to non-qualified disaster or personal hardship victims. According to the law, disbursements of aid to victims of a disaster should be based on “an objective evaluation of the victim’s needs at the time the grant is made.” IRS form 3833 states it is “appropriate for charities to conduct individual financial needs assessments. Those who require additional assistance can have it, but those who do not need such continuing assistance should not use charitable resources.” 

4. Inappropriate Use of Advisory/Oversight Committee

Funds not administered by an independent third party often use a committee of employee and/or retiree volunteers, which may result in an inconsistent and less objective process. Regulations require that “[t]he organization establishes a committee to administer the program consisting of persons who aside from serving on the committee have no financial interest in the employer, or the committee consists of persons representing a broad spectrum of employees who understand that they are acting in a personal capacity as agents of the organization rather than as representatives of the employer.”

5. Failing to Meet IRS Employment Eligibility Guidelines

Many programs do not meet the IRS guidelines that “[t]he conditions are designed to ensure that employment is merely an initial qualifier for eligibility, that the ultimate recipients are not chosen based upon employment-related factors, and that those responsible for selecting recipients are independent from the employer.” For example, grant guidelines cannot require that management or a supervisor sign an employee’s application, or consider an employee’s position in the corporation, length of service, or performance record as a condition for eligibility.

6. Risk-Enhancing Fund Structure

Some relief funds take more risks than are necessary, primarily due to poor fund structure  or by administering the grant application process in ways that are not in full regulatory compliance. These mistakes can affect both the tax deductibility of the employee donations and the tax-free status of the grants. Meanwhile, others recognize the problem and run programs stating that donations are not tax-deductible and/or grants are not tax-free, and they send their employees a Form 1099 for the grant amounts.  

7. Failure to Communicate

Is your program communicated to all employees providing a clear and specific understanding of what grant is available? IRS publications require that “[t]he organization informs all charitable class members of the corporation that disaster relief and emergency hardship funds are available, including the criteria for application and selection.” While many programs strive to make the program known to individuals, some do an inadequate job. A few minimize communication due to concerns that a team member might game the system, or that too many grants will exhaust the fund’s limited resources.

8. Failure to Register in Each Solicited State

Almost all state governments typically require annual registration if you solicit donations from employees located there, as well as registration prior to solicitation of charitable donations. In a few states, the charitable solicitation registration requirements mandate that a charity also qualify to do business in the state and file the appropriate foreign qualification paperwork with the secretary of state’s corporations division.  

9. Not Understanding Domestic and International Liabilities

Global employers considering instituting a company-wide relief fund can encounter some unique challenges as they must comply with the laws of multiple countries, plus regulatory and tax hurdles. Further, there may be significant differences between each country’s language, culture or documentation requirements. An industry best practice is to include all company team members in a program from its inception rather than provide piecemeal approaches for different groups of team members. It is also critical to avoid involving the company’s payroll as part of the distribution of grants to non-U.S. recipients to avoid the related legal liabilities and costs. Using payroll can also have unforeseen negative management and personal impacts, such as potentially increasing individuals’ tax rates.  

10. Failure to Address Applicant Hesitancy

Team members often participate at a lower rate if they perceive issues with privacy, fairness and impartiality when applying for relief. Not only do many feel that internal teams will inhibit objectivity when reviewing and approving applications and grants, but evidence shows that approximately 75% of team members do not want their employer to know of their personal problems.   

Douglas Stockham is president and co-founder of Emergency Assistance Foundation, based in West Palm Beach, Florida, and serving organizations worldwide.