Employer sponsored public charities (“ESPCs”) are a valuable employee recruiting and retention tool as well as a way for founders and senior management of an employer to include their employees in their charitable giving plan on a tax advantaged basis. An ESPC is a type of 501(c)(3) public charity that an employer can sponsor with the purpose of providing disaster and other emergency relief to its employees.
If an employee is affected by a natural disaster (whether federally declared, or not), fire, flood, medical or other emergency the ESPC can provide the employee with financial assistance. Such assistance is not taxable income to the employee when received and contributions to the ESPC will be deductible to the same extent as contributions to any other 501(c)(3).
As a 501(c)(3), an ESPC does not have any owners, so the ESPC cannot be a subsidiary of the employer. But, the employer can reserve the power to appoint the board of directors of the ESPC.
As a public charity, an ESPC must receive a substantial portion of its funding from the general public. An ESPC can satisfy this requirement if a substantial portion of its funding comes not only from founders and senior management, but also from small donations from rank-and-file employees. Employers may give employees an option to have a small amount deducted from each paycheck and contributed to the ESPC or even to contribute the value of unused vacation or sick time.
If it is not possible to achieve substantial funding from the general public or rank-and-file employees, an employer has the option to set up a tax exempt private foundation to provide disaster relief to employees. However, such private foundations will generally only be able to provide relief to employees affected by a federally declared natural disaster.
As is the case whenever a tax exempt entity makes financial donations to individuals, ESPCs are required to have an objective criteria to qualify for a grant and to thoroughly document the application, review and approval process. If you are interested in establishing an ESPC, or if you have questions about how to keep an ESPC compliant, please reach out to the author of this alert, Doug Jones.