We are a 501(c)(3) public charity that provides financial assistance to individuals who have financial needs. Occasionally some of our employees meet the eligibility requirements and are in need of assistance for utilities, food, medical payments or rent, but we have a policy that we cannot help our employees and must refer them to other agencies. Could we change our policy and provide assistance to them? If we can change the policy, would we be required to report the assistance on their W-2 as compensation? All of our assistance is made directly to the service provider (i.e. landlord, utility company) not to the client.
Unless your funder(s) would have some sort of prohibition on your providing such assistance, I am not aware of any rule that would prevent you from helping employees who meet legitimate and non-discriminatory financial eligibility requirements. Even the excess benefit tax rules, which would apply to aid for a director, key employee or other “disqualified person,” provide that compensation does not include benefits provided to a charitable beneficiary within the class generally benefited by the organization. Therefore, such aid would not normally be considered a benefit and would not be reportable as compensation, even if given to an employee. You wouldn’t have to report it on a W-2 any more than you report income for other beneficiaries who are not employees.
Obviously, this could be abused if you reduced compensation for your employees close to the eligibility line and provided them benefits instead of salary to make up the difference. But assuming that it is an occasional assistance given in good faith and within your regular guidelines, you ought to be ok with the IRS.