Taxes on Taxable Distributions from Donor Advised Funds

March 20, 2024

Corporations often seek to use their own employer-sponsored public charities or private foundations to provide financial assistance to employees in the aftermath of an unforeseen disaster or personal emergency hardship.  Because these charitable vehicles can receive tax-deductible charitable contributions and their payments to employees are not taxable, they are subject to a very restrictive tax regime enforced by the IRS to ensure that they are operated for charitable purposes and are not used merely as a device to provide extra compensation, an employee incentive or an employee fringe benefit. 

Moreover, an employer-sponsored relief fund maintained by a public charity that is considered to be a donor advised fund (“DAF”) under proposed regulations issued by the U.S. Department of Treasury on November 13, 2023 will effectively be disqualified from providing any assistance to employees.  Therefore, it is imperative that such a fund be structured so as not provide an employer with advisory privileges so as to fall within the definition of a DAF under these recently issued proposed regulations.  While it is not subject to the DAF rules, an employer-sponsored private foundation is prohibited from making payments for personal hardships and can only provide disaster relief payments in the case of a federally declared disaster. 

Whether dealing with an employer-sponsored public charity or private foundation, compliance with the applicable tax rules in connection with relief payments to employees is complex, although the following are the general requirements:

• The class of beneficiaries must be large or indefinite;
• The recipients are selected based on an objective determination of need;
• The majority of the selection committee consists of persons who are not in a position to exercise substantial influence over the affairs of the employer; and
• Appointment of members to the selection committee is based on objective criteria related to the expertise of the member in the particular field of interest or purpose of the fund.

It is imperative that relief funds operated by an employer-sponsored public charity or private foundation fully comply with the applicable IRS rules.  Failure to do so may result in substantial adverse tax consequences to both the charity operating the fund, as well as employees receiving relief payments.

Author: Richard L. Fox

Richard L. Fox is the founding partner of the Law Offices of Richard L. Fox, LLC. He concentrates his practice in the areas of charitable giving, private foundations, tax-exempt organizations, estate planning, trusts and estates, and family planning. Mr. Fox writes and speaks frequently on issues pertaining to nonprofit organizations, estate planning, and philanthropy, including speaking on philanthropic topics at the Heckerling Institute on Estate Planning (University of Miami Law School).

He has been named by Worth Magazine as one of the Top 100 Attorneys in the country representing families and individuals – including in the areas of estate planning, private foundations, and philanthropy, as well as a Pennsylvania Super Lawyer in these areas.