Members join clubs for a variety of reasons, including golf, entertainment and networking, and in doing so, they become part of a close-knit community. We are seeing that community come together, in trying times such as these, and are amazed at the generosity of the members in supporting the club’s employees. Many clubs are fielding questions from members wanting to make donations on behalf of the employees to provide relief caused by COVID-19 related club closures.
Creating an “Employee Hardship and Disaster Relief Fund Program” is one way to get money donated by members out to employees quickly and tax-free. Under IRS Code § 139, employers are permitted to provide tax-free relief to employees in disaster circumstances. The Federal Emergency Management Agency (FEMA) maintains a list of declared disasters here.
In order to qualify for tax-exempt distributions, the program must be set up so the distribution is not considered compensation in any way and the distribution decision is independent and free of employer control (i.e. cannot be linked to performance-based compensation). To be considered a grant, there should be an objective determination of need or distress.
The IRS provides guidance on documentation of these funds, which includes:
- a complete description of the assistance
- cost of the assistance
- the purpose for which the assistance was given
- the objective criteria for disbursing assistance
- how the recipients were selected
- the name, address, and amount distributed to each recipient
- any relationship between the recipient and officers, directors, or key employees
- substantial contributors to the organization
- the composition of the selection committee approving assistance
Additional best practice considerations include:
- Communication with employees regarding the nature of the monies as disaster relief, not compensation, is key
- Member donations should be maintained in a separate bank account, not comingled with operational funds
- Disbursements ought to be run through accounts payable
It is important to note, donations from members to the club are not tax-deductible to the member. If this is of concern to members, we suggest the club set up a 501(c)(3) organization. This would provide the benefit of a tax deduction, as well as allow for a continuance of the program post-COVID-19.