Generally, 501(c)(3) organizations can make grants to individuals and to businesses if such grants are made in furtherance of their 501(c)(3) tax-exempt purposes and are not expended in a manner inconsistent with 501(c)(3). In Part One of this series, we focused on mission-consistency, charitable class, and prohibited private benefits. In this Part Two, we look more specifically at a public charity’s provision of grants to individuals for disaster relief and emergency hardships.

General Standards

Providing aid or relief to victims of a disaster is generally a charitable activity if it’s provided to benefit a charitable class. To assure a public charity is meeting this standard, it must apply a needs-based test and maintain appropriate documentation.

Needs-Based Test

Disbursements of aid to victims of a disaster must be based on “an objective evaluation of the victim’s needs at the time the grant is made.” Merely being a victim of a disaster does not automatically qualify an individual for charitable aid. However, an eligible recipient need not be totally destitute to lack the resources to obtain basic necessities. According to the IRS, the needs requirement is applied “with common sense and sympathy for the plight of victims:

• In the chaotic and disorienting aftermath of a disaster, a charity can attend to a victim’s immediate needs without regard to financial means.  When flood waters drive people from their homes, everyone urgently needs shelter, warmth, food, clothing, medicine, transportation, and some cash for incidental expenses.  A charity may provide this immediate aid to everyone without pausing to conduct an individual needs assessment.  However, the charity is still responsible for documenting and maintaining records of this type of assistance.
• But as time goes on, the danger recedes, and people are able to call upon their individual resources, it becomes increasingly 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.  For example, families displaced by a hurricane may have a need for longer term emergency housing assistance if they do not have adequate resources to meet basic living needs.”

Documentation

The IRS states that the following documentation should be maintained in connection with disaster relief grants:

• a complete description of the assistance,
• cost of the assistance,
• the purpose for which the assistance was given,
• the charity’s objective criteria for disbursing assistance under each program,
• how the recipients were selected,
• the name, address, and amount distributed to each recipient (unless the grants represent short-term emergency assistance),
• any relationship between the recipient and officers, directors, or key employees of or substantial contributors to the organization, and
• the composition of the selection committee approving assistance.

Charities providing short-term emergency assistance should maintain records that describe the type of assistance provided, criteria for disbursing assistance, date, place, estimated number of victims assisted (individual names and addresses are not required), charitable purpose intended to be accomplished, and the cost of the aid. Examples of such short-term emergency aid would include blankets, hot meals, crisis shelter, electric fans, and clothes.

Types of Aid

Charities may provide assistance in the form of money, services, or goods to ensure that victims have the basic necessities, such as food, clothing, housing (including repairs), child care, transportation, medicines, and medical assistance (including psychological counseling). The type of aid that would be appropriate will depend on both the individual’s needs and resources. 

For example, immediately following a natural disaster like a hurricane or earthquake, a family may be in need of food, clothing, and shelter, regardless of their financial resources. To some extent, this may also be true after a pandemic like COVID-19 that results in historic levels of death, health problems, and unemployment and uneven and insufficient public aid, though it’s clear that many of those with ample financial resources may not be in danger of losing access to basic necessities. In either case, long-term assistance to persons with adequate financial resources may not be charitable.

Other examples of aid based on individual need are provided in IRS Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organization:

• assistance to allow a surviving spouse with young children to remain at home with the children to maintain the psychological well-being of the family,
• assistance with elementary and secondary school tuition and higher education costs to permit a child to attend school,
• assistance with rent, mortgage payments or car loans to prevent loss of a primary home or transportation that would cause additional trauma to families already suffering, and,
• travel costs for family members to attend funerals and to provide comfort to survivors.

Employee Relief

Charities may provide assistance to employees of a particular employer if they are part of the charitable class and meet the needs-based test. Further, the IRS provides that the selection of employees receiving assistance “must be made using either an independent selection committee or substitute procedures adequate to ensure that any benefit to the employer is incidental and tenuous.”

The charitable class requirement can be met even if only a small number of employees of a particular employer are to be benefited so long as the group of persons eligible for assistance is indefinite. IRS Publication 3833 provides: “To be considered to benefit an indefinite class, the proposed relief program must be open-ended and include employees affected by the current disaster and those who may be affected by a future disaster.”

Employer Sponsored Charities

When an employer sponsors a relief program operated by a public charity to benefit its employees, there is an inherent concern that the employer’s contribution may be less charitably inclined and more self-interested – intended to enhance its ability to attract and retain employees. Accordingly, the IRS may review whether the employer is exercising excessive control over the charity to determine whether it the charity is conferring a prohibited private benefit upon the employer.

To recap, the public charity employee relief program funded by an employer should meet the following requirements:

• the beneficiaries are members of a charitable class,
• the selection of beneficiaries is based on an objective determination of need, and
• the beneficiaries are selected by an independent selection committee (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) or adequate substitute procedures are in place to ensure that any benefit to the employer is incidental and tenuous.

IRS Publication 3833 makes clear:

If these requirements are met, 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: (1) to be made for charitable purposes, and (2) not to result in taxable compensation to the employees.

Employer Sponsored Donor Advised Funds

Donor advised funds are generally funds held by public charity sponsoring organizations that make grants to other public charities, typically following the recommendations of donors or donor advisors to the specific donor advised fund (DAF). DAFs generally cannot make distributions to individual persons. However, there is an exception for certain employer-related DAFs established to benefit employees and their family members who are victims of a qualified disaster.

A qualified disaster is defined in Section 139 of the Internal Revenue Code as a disaster that: results from terrorist or military actions, results from an accident involving a common carrier (provider of transportation for hire), is a Presidentially declared disaster determined to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act, or, is an event that the Secretary of the Treasury Department determines is catastrophic.

This qualified disaster exception relies upon the following requirements (many of which are duplicative of the general requirements applicable to all public charities):

• the fund serves the single identified purpose of providing relief from one or more qualified disasters,
• the fund serves a charitable class,
• recipients of grants are selected based upon an objective determination of need,
• the selection of recipients of grants 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 selection committee is considered independent if a majority of its members consists of persons who are not in a position to exercise substantial influence over the employer’s affairs),
• 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 [see Documentation section above].

Resources

Disaster Recovery – What Donors and Nonprofits Need To Know (National Council of Nonprofits)

Providing COVID-19 Disaster Relief: A Legal Field Guide for Charitable Organizations (Davis Wright Tremaine)

Employer Sponsored Disaster Relief Programs – Four Options to Consider (Seyfarth Shaw)

In Part Three of this series, we will focus on a public charity’s provision of grants to businesses for disaster relief and emergency hardships.