In the face of the COVID-19 pandemic, many charitable organizations are asking how they can participate in relief efforts while complying with the requirements of their IRC Section 501(c)(3) status and with state charities laws. This advisory summarizes the legal guidance for charities that fund or directly provide disaster relief, solicit public contributions for disaster relief efforts or offer employers a way to provide relief to their employees.
Assisting a "Charitable Class" as Opposed to Specific Individuals
As a threshold matter, in order for a charity’s disaster relief program to be “charitable” and therefore permissible, it must be designed to benefit a “charitable class.” A charity should never solicit or accept donations that are designated to assist specifically identified individuals, and any such donation will not be tax deductible by the donor as a charitable contribution.
For a charity’s relief program to be “charitable,” it must be for the benefit of a “charitable class.” A charitable class must be either large or “indefinite.” A class is indefinite if the universe of its members is not known at the time the charitable fund is created. For example, a solicitation, donation, or program to assist the class of persons who have been or may be severely harmed (physically and/or economically) by COVID-19 is a charitable class. It is both large and indefinite. A class that is much smaller as a result of a geographic limitation may still be charitable on the basis that it is indefinite.
For example, the class of persons who have been or may be severely harmed by COVID-19 within a specific county or town is a charitable class. As discussed below, in some cases the employees of a particular employer may constitute a charitable class. On the other hand, a group of specific named individuals or the members of an identified family is not a charitable class, and programs designed to benefit such individuals or groups are not charitable.
Making Grants to Other Organizations to Support COVID-19 Relief
A grantmaking charity may make grants to other qualified charitable organizations or organizations treated as equivalent to qualified charities, such as public hospitals and certain international organizations, including the World Health Organization. In some cases, a charitable grantmaker may make a restricted grant to a non-charity for use solely for charitable purposes by following special procedures.
In all cases, however, the grantmaker must ensure that its organizing documents and any donor restrictions permit use of the grantmaker’s assets to fund disaster relief. For example, a foundation formed under an organizing document that sets out a purpose exclusively to fund the arts could not make a grant to a nonprofit hospital to fund medical equipment and supplies. It could, however, make grants to nonprofit arts organizations to support them through closures caused by the pandemic.
Providing Direct Disaster Relief to Individuals
Numerous charities are forming COVID-19 Rapid Response Funds or Emergency Funds to support the communities they have historically worked with that are directly affected by the pandemic. Such direct aid is generally consistent with a charity’s Section 501(c)(3) status, provided the charity operates within the parameters described below.
A charity may provide direct aid to victims of a disaster, such as medical care, protective gear, clothing, food, housing and financial aid. The type of aid that may be provided will depend on the nature of the disaster and the needs and resources of the affected individuals. Needs in the face of a pandemic may be different from those in the context of an earthquake or fire. Examples of appropriate aid in the current crisis include:
- Financial aid to the needy and financially distressed who have lost their income source as a result of the pandemic;
- Donating or delivering meals to alleviate food insecurity for the needy resulting from the pandemic; and
- Shelter and medical care for homeless and other needy individuals adversely affected by the pandemic.
Generally speaking, in providing COVID-19 relief, a charity should apply written objective, non-discriminatory, need-based criteria in selecting recipients of its aid from among members of the identified charitable class that the charity seeks to benefit. It should in addition keep sufficient documentation to be able to demonstrate that its aid recipients are needy or distressed. The charity’s leadership team and their family members should generally be excluded from receiving aid.
A charity should also keep documentation of the assistance that it provides, including:
- The type of aid provided and the purpose for which it was given;
- Costs associated with providing the aid;
- How the recipients were selected; and
- Identifying information, such as name and address, of recipients and the amount provided to each recipient.
Providing Disaster Relief for Employees of a Specific Employer
When a disaster occurs, employers will often seek to work with a charitable organization to provide assistance to their employees, or the employees of a related group of employers. By working with a charity, either related to or independent from the employer, the employer can provide funding to the charity and enable its employees to make charitable donations in support of their fellow employees in need.
Charities that provide such aid include community foundations and similar charitable sponsors that operate a variety of types of charitable funds, employer-related public charities and, in certain cases, private foundations that may be funded and controlled by the employer. While it is possible for an employer to create a new charity or foundation to provide assistance, given the probable urgency of need, it will likely be more practical for an employer to work with an existing charitable organization.
In all cases, the threshold question is whether the employee group is a charitable class. As discussed above, to qualify as a charitable class, the group of employees to be benefitted must be either large or indefinite. In the case of national or global employers, the class will likely qualify on the basis that it is large. Even with smaller employers, however, the benefitted employees may constitute a charitable class in the context of COVID-19, because the class of individuals who will become severely adversely affected by the disease remains uncertain for so long as the pandemic and its economic fallout continues.
Often when an employer creates an employee relief fund at a charity, it is desirable to provide that the purpose of the fund is to assist those employees who may be adversely affected by the current disaster and those affected by any future disaster. This broader purpose helps to ensure that there is a charitable class benefitted and enables the fund to be used in the future to assist employees harmed in other disasters.
The IRS imposes additional requirements on charitable funds that provide assistance to employees of an employer or group of employers:
- The recipients must be selected on the basis of an objective determination of need; and
- The recipients must generally be selected by an independent selection committee, a majority of whose members must consist of individuals who are not in a position to exercise substantial influence over the affairs of the employer (e.g., not directors, officers or members of the senior management team of the employer).
The policy goal of these requirements is to ensure that the primary effect of a charity’s employee relief fund is to provide relief to those most in need, and not to benefit the employer or effectively provide additional compensation to certain employees.
If a fund at a public charity satisfies the requirements above, the payments to employees and their families are generally considered made for charitable purposes (and are therefore permissible), and the payments generally are not taxable income to the recipients. Special additional requirements apply to charitable organizations that are classified as “private foundations,” as described below, and to community foundation funds.
Private foundations are Section 501(c)(3) organizations that generally receive their funding from one or a few individuals or business entities. Commonly an employer that seeks to have a private foundation provide disaster relief to its employees is the sole or primary funder of a private foundation. A private foundation may provide disaster relief to the employees of such an employer and their families only if the disaster is a “qualified disaster.” A qualified disaster includes a federally-declared disaster. President Trump declared COVID-19 to be a national emergency on March 13, 2020.
A private foundation may accordingly provide relief to employees of such an employer in the current crisis, and the IRS will presume such relief to be “charitable,” so long as the foundation satisfies the other requirements above.
In addition, private foundations must take steps to ensure that no assistance goes to “disqualified persons,” including members of the foundation’s board of directors, its officers, members of the employee relief selection committee, and the families of such individuals.
Soliciting Donations for COVID-19 Relief
For charities that solicit funds from the public, it is important to retain flexibility in how the funds may be spent. A charity’s solicitation that represents that all funds donated in response to the “ask” will be used for COVID-19 relief creates a binding obligation on the charity to use donor contributions only for that purpose. A charity that has surplus funds from its donors’ contributions in response to a disaster relief appeal may not use those funds to respond to another disaster or for the charity’s other programs.
To avoid creating restrictions, charities should consider, in their requests for contributions to support COVID-19 relief, framing the solicitation as raising funds for COVID-19 relief as well as the other key purposes of the charity.
Providing Disaster Relief for Businesses
The provision of assistance to businesses, as opposed to individuals, may be a charitable activity in which a charity may engage, but only in fairly limited circumstances. Situations in which assisting businesses may serve a charitable purpose include those in which:
- The business owners themselves are financially needy or otherwise members of a charitable class; and
- The community in which the business is located is deteriorated (e.g., a low-income census tract) and in need of assistance.
A charity that establishes a program to aid businesses should use appropriate objective written criteria to select beneficiaries and retain documentation similar to that outlined above for aid to individuals. Any such program should also include criteria for determining the point at which aid is no longer needed and should be discontinued.
Additional helpful information is available from the IRS here.
The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.
DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.