May a for-profit business form a nonprofit (with the for-profit initially funding it and allowing employees to make additional charitable contributions) to assist employees of the for-profit facing personal emergencies and catastrophic illnesses? If ok, would the nonprofit need an independent Board of Directors to select recipients of the largesse?
The Internal Revenue Service recognizes that providing aid “to relieve human suffering caused by a natural or civil disaster or an emergency hardship is charity in its most basic form.” It recognizes the role that churches, community funds like the United Way or the Red Cross, and other established charities play in the process.
It also recognizes the role that for-profit businesses can plan with respect to aid for their employees, so long as the assistance provides a public — not a private — benefit and is not just a way to enhance employee recruitment and retention or a way to provide disguised compensation. It recognizes three different means to provide relief to employees: creating a public charity, working through a donor advised fund, or creating a private foundation.
A public charity can provide a broader range of benefits than a donor advised fund or a private foundation. A public charity can be used if the beneficiary class is large or indefinite (it wouldn’t work for a 10-person employee base), recipients of aid are selected on an objective determination of need, and the selection committee has a majority of members who are not in a position to exercise substantial influence over the affairs of the employer. It can be used to provide aid in an individual disaster, such as an automobile accident or gun violence incident, as well as federally certified disasters.
Although a DAF cannot normally make grants to individuals, an exception exists for grants to individuals who are victims of a federally certified disaster, such as Covid-19 or a major hurricane or wildfire. It would not be available for personal catastrophes unrelated to a federally certified disaster. Again, the class must be large enough to be classified as a charitable class, selection must be based on objective needs by an independent selection committee, and no grants may be made to benefit officers or directors of the sponsoring public charity or members of the selection committee.
A private foundation (which presumably would be funded primarily with employer donations and not employee donations) can be also used only for federally certified disasters and will be subject to more scrutiny to assure that no benefits are provided to the company or other disqualified persons.
For more detailed information, See IRS Publication 3833, Disaster Relief: Providing Assistance Through Charitable Organizations.