What is a tax-advantaged employee crisis fund, and what are the guidelines for establishing such a fund?

A tax-advantaged employee crisis fund is a program to help employees cope with financial problems that render them unable to provide for basic necessities in their personal lives. To establish these funds as tax-advantaged plans, the employer sets up a nonprofit entity that receives contributions and disburses grants (not loans) to employees. 

When a fund operates through a qualified nonprofit setup, contributions from employees as well as from the company are tax-deductible, and employees are not subject to tax on the grants they receive. Formally established funds also have rules and structures for involving both management and nonmanagement employees in overseeing funds' operations and in applying established criteria for awarding grants. 

A typical rule is that applicants' financial need must stem from a setback such as a medical problem that causes family members to stop working, funeral expenses, an emergency that necessitates travel, or a fire or flood that damages an employee's home. In addition to the direct aid and tax benefits, assisting employees in need can improve workforce morale, enhance the organization's reputation and create a culture of caring.

There are three types of tax-advantaged employer-provided assistance programs, with guidelines for establishing them as indicated starting on page 15 of Internal Revenue Service (IRS) Publication 3833: a public charity, a donor-advised fund or a private foundation. Funding for charitable programs is typically derived from tax-deductible employee contributions, fundraising events and employer matching contributions to the fund. The two categories of emergency assistance under IRS guidelines are disaster assistance and nonqualified disaster relief.

An alternative to a tax-advantaged fund is to provide employees with interest-free loans or direct monies to the employee from the employer. However, these programs usually result in the money being considered taxable income for the employee. Neither this type of program nor a tax-advantaged program is intended to assist employees who are unable to meet their personal financial obligations as a result of poor financial management skills.

In deciding whether an organization needs such a fund, it should try to determine if many employees run into unforeseeable financial difficulties. Employees in geographic regions prone to natural disasters may also benefit from this type of program.