Nonprofit Resources
Important Considerations for Benevolence Programs
In addition, a carefully crafted policy can help prevent misunderstandings about the program’s purpose, and assist those responsible for disbursing funds in making consistent evaluations and remaining accountable for following set guidelines. If your benevolence program or disbursements are ever challenged in an audit, a written policy will provide evidence that your program was set up in a manner that is consistent with your exempt purpose.
Benevolence Program Best Practices
We recommend the following best practices for benevolence programs:
- Create and implement a written policy.
- Define what types of contributions will be allowed. To be tax-deductible, contributions must be made to the fund, not to a specific individual or family.
- Appoint a committee or personnel to review and approve requests. Avoid giving one person control over fund distribution without adequate oversight and accountability measures.
- Decide what types of need will receive support. Typically, assistance is allowed for basic needs such as shelter, food, clothing, and medical.
- Develop adequate criteria for determining individual need.
- Document the need and obtain (and document) external verification before disbursing larger amounts. (More on this below.)
- Include reasonable limits per person during a specified time period. The tax law does not require limits, but larger amounts and longer-term assistance require more investigation and consideration than can be addressed in a policy for routine assistance.
- Make disbursements from a general fund or a benevolence fund, so that they can be properly recorded.
- Pay assistance (rent, mortgage, utilities, etc.) directly to the service provider, rather than to the individual.
- Always keep a written record of all funds disbursed.
We examine some of these best practices in further detail below.
Determining Individual Need
The amount of data you should gather for an assessment of need depends on the type of request. For example, if short-term assistance is needed during a disaster, it may be sufficient to view the disaster and then confirm that the individuals seeking assistance live in the affected area.
A prudent practice is to establish contact with other entities providing benevolence in your geographical area. The purpose is to communicate and compare whether the same individuals are seeking and obtaining benevolence from the other entities. This will daylight the extent of support being provided and avoid instances of people working the system to obtain benevolence from more than one source.
For larger disbursements or longer-term assistance, we recommend that you do a financial assessment by having individuals complete an application. Information to consider requesting includes, but is not limited to:
- Employment status
- Dependents
- References
- Present income and expenses
- Assets owned
- Other sources of support or benevolence
The ECFA offers subscribers and accredited organizations a sample benevolence policy here.
In addition, external verification is recommended for larger disbursements. This involves verifying the information provided by the applicant with another source, such as the applicant’s employer or references.
Documenting Individual Need
You should keep adequate records and case histories on each aid recipient, including:
- Name and address of recipient
- Amount distributed
- The purpose for which the aid was given
- How the recipient was selected
- Any relationship between the recipient and leadership or board members of the organization
Note that the organization does not need to issue a 1099-Misc for benevolence funds disbursements over $600. This is because benevolence is a gift, rather than a payment for services.
Making Disbursements
It may be tempting to just take cash out of an offering plate or similar source to help someone in need. There are two issues with this, however. First, it does not provide a record of the assistance. Funds should never be disbursed without supporting documentation and a written record of the transaction, as described above.
Secondly, it does not provide adequate accountability, creating a significant opportunity for abuse. Even a trusted employee under significant pressure — pressure others might not be aware of — may rationalize an inappropriate disbursement. Limiting the opportunity for misuse will protect the organization as well as its employees and volunteers.
Further Considerations
We are sometimes asked if it is ever okay for the organization to receive benevolence donations that are designated for a specific individual or family. Gifts that the donor requires to be used for a specific individual or family will not be tax deductible.
Your organization may agree to collect funds specifically designated for one or more individuals. If you do, it is important to clearly communicate to the donors that their payment is a personal gift and will not be handled as a tax-deductible contribution.
There also may be instances where a donor recommends an individual in need to the benevolence committee. In this situation, the committee, not the donor, should determine what amount, if any, will be given to the individual. The donor should understand that the benevolence committee will exercise control and discretion over the donation, and that the recommended recipient will be put through the same approval process as other individuals.
Benevolence program disbursements to employees also require special considerations. To give benevolence funds to an employee without having to show it as taxable income on their W-2, you need to have a formal hardship assistance plan in place before the assistance is given. See IRS Publication 3833 for the requirements of a hardship assistance plan.
Conclusion
When emergencies and financial hardships arise, loving and caring people respond and care for those in need. A well-documented benevolence program process will ensure that assistance is provided in a way that does not jeopardize your organization’s tax-exempt status or the integrity of your mission.
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6 Comments
Hello Amy,
This is a helpful article. I have a question for you. I work for a campus ministry that puts on an annual conference in OKC. This conference is attended by campuses as far west as Arizona. While doing campus ministry and recruiting students to attend this conference, which is a key element in our overall strategy to evangelize and disciple these students, many of those students say that they “cannot” pay the travel expenses, such as flights from Arizona to OKC. Would this be an acceptable circumstance for which to give benevolence? How would we go about knowing whether or not the student is making a personal decision not to want to pay for a flight or they truly cannot pay for the flight due to their financial situation?
The real issue comes down to not being able to recruit students to a conference that is so far away. I’m sure that some students truly cannot pay for this travel, but does that mean that they could qualify for benevolent assistance? Is there any other tax or legal issues that I’m missing that could have an impact on this circumstance?
Thank you!
Evan,
We’re glad you found the article helpful! We’ll respond to your question via email. Thank you.
Hello my name is Victoria Hunt. I have a some questions. We have a 501c3 non-profit organization. If we have a church bible school member that need financial assistance on a continual bases can the organization assist the member on a continual bases without jeopardizing the organization non-profit status?
Do we need to open a separate benevolent account to issue theses funds? Should the funds be issued in the form of a check payable to the member or is it best to make the check payable to the bill collector? Is their a maximum amount that should be allocated to the same member?
Thank you
Victoria,
Whether financial assistance provided on a long-term, continuing basis would be permissible is a function of whether the church Bible school member is a member of a charitable class and the nature of the church Bible school member’s need. I’m unclear on what is actually meant when describing the recipient as a “church bible school member.” Does this mean the individual is a student? A professor? An administrator? If the individual is an employee (even a student employee), then sec. 102(c) requires the inclusion in taxable income of “any amount transferred by or for an employer to, or for the benefit of, an employee.”
As for the determination of whether the individual is a member of a charitable class, the IRS uses a test for eligible recipients of benevolence that measures the size of the eligible class of potential beneficiaries and/or the indefiniteness of that class. If this is a one-off effort to assist a single individual with no plans to assist anyone else in the future, then it is unlikely the individual meets the definition of a charitable class.
If we can assume that we can satisfy the charitable class requirement, then we turn to the mechanics of making the payments. In general, the best practice is to make the check payable to the vendor (or in this case, bill collector). As to whether there is a maximum amount, most organizations establish a maximum that is based upon practical considerations of how to balance the amount of resources available with the pool of eligible recipients. There is no statutory or regulator maximum.
These are general principles. This scenario probably requires more information to truly provide a reliable answer.
We have a nonprofit learning center. We’d like to be able to provide benevolence for families and employees. My understanding of the IRS (disaster) relief information is that this would be an indefinite “charitable class.” My question is, at what level of policy does this need to be defined? Articles of Incorporation, By laws, governance policy or simple operational policies?
Thank you
Nicole,
This type of policy should be a governance policy adopted by the board of directors.
My concern with the way the question is fashioned is that “disaster relief” is a specific circumstance of providing assistance. While this is not necessarily problematic for benevolence to the learning center families, generalizing from the disaster relief rules to a broader benevolence program is not without risk of misapplying the rules in the case of employees. This is because benevolence assistance is excludible from income under either sec. 102 as a gift or under sec. 139 in the case of qualified disaster. Sec. 102(c) of the Internal Revenue Code provides that the general rule that excludes gifts from income does not apply to “any amount transferred by or for an employer to, or for the benefit of, an employee.” The exclusion under sec. 139 is only applicable in a narrow set of circumstances.*
IRS Publication 3833 (https://www.irs.gov/pub/irs-pdf/p3833.pdf) sets forth criteria for a disaster relief program that benefits employees (“employer-sponsored assistance programs” or “ESAPs”). The Publication notes that programs that provide assistance to employees are generally viewed as providing impermissible private benefit to employers unless certain limitations apply. The Publication is generally aimed at for-profit ESAPs. It does not specifically address the establishment of an ESAP by a nonprofit employer for the benefit of its own employees. But note that the principle of impermissible private benefit is equally applicable to for-profit and nonprofit employers.
The most conservative approach a nonprofit can take if it endeavors to create a self-administered ESAP is to follow the rules applicable to private foundations as these rules are designed to limit any conflict of interest and, by extension, private benefit. Those requirements include:
• The affected employees are affected by a qualified disaster,* as defined in section 139 of the Internal Revenue Code;
• The class of beneficiaries is a charitable class (i.e., is large or indefinite);**
• The recipients are selected based on an objective determination of need; and
• The selection 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 problem with the first of these criteria is that it would not permit assistance to an employee who experienced a personal crisis or loss, such as an unexpected illness or loss from a fire. In contrast, this type of personal crisis or loss is contemplated when the ESAP is sponsored by a third-party public charity. See page 16 of Publication 3833. A public charity that seeks to create a self-administered ESAP would be taking an aggressive position if it were to not limit its distributions to circumstances involving a qualified disaster.
* A qualified disaster under section 139 is a disaster that:
• results from terrorist or military actions,
• results from an accident involving a common carrier,
• is a Presidentially declared disaster, or,
• is an event that the Secretary of the Treasury determines is catastrophic.
** With respect to the definition of a charitable class, the IRS states:
“If the group of eligible beneficiaries is limited to a smaller group, such as the employees of a particular employer, the group of persons eligible for assistance must be indefinite. 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. Accordingly, if a charity follows a policy of assisting employees who are victims of all disasters, present or future, it would be providing assistance to an indefinite charitable class. If the facts and circumstances indicate that a newly established disaster relief program is intended to benefit only victims of a current disaster without any intention to provide for victims of future disasters, the organization would not be considered to be benefiting a charitable class.”
***A selection committee is independent if 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.