Why Objective Criteria for Funds is Critical

When setting up your companies Disaster Relief or Employee Hardship Funds, you may have done so as a response to a large natural disaster that affected many of your company’s employees. You think you are doing the right thing, which you are, but sometimes these funds when initially established stray from outside IRS regulations or guidelines and often use “common sense” rather than regulatory requirements when designed and administered.

According to the IRS, “Disaster relief organizations may provide loans or grants in the form of funds, services, or goods to ensure that victims of a disaster have the basic necessities such as food, clothing, housing (including household repairs), transportation, and medical assistance (including psychological help). The type of aid that is appropriate to relieve distress in a particular case depends on the individual’s needs and resources. Individuals might be in need of short term assistance but not long-term assistance.

For example, following a devastating flood, a family may be in need of funds to meet immediate necessities because its readily available cash flow (income, insurance proceeds, etc.) or other resources are inadequate or unavailable. Or they may need basic necessities that are not available for purchase because of the nature of the disaster. The same family, however, may not have the need for a low interest loan for home repair because its home is covered by insurance or it can reasonably obtain and repay a commercial loan. Another family or individual may have suffered the loss of a family member and may need financial assistance with funeral expenses or help with the cost to have immediate family members attend the burial, which would help promote the family’s emotional healing.”

Some tips that may help you before problems occur are being very specific on your funds guidelines and not generic. If your employee is able to select “other” when filling out a form, how will the person reviewing the application know if this meets your policy for approval? This catchall term is dangerous for many reasons, including being subjective, which isn’t allowed by the IRS, because it is not objective. According to regulations, “[t]he organization establishes specific written criteria for the application, selection and disbursement of funds.” Thus, the guidelines and / or list of events and expenses should be specific enough that an applicant and the objective reviewer would come to the same conclusion about a grant application.

If two reviewers, Joe and Jim were sitting in different rooms, would they come to the same objective conclusion when reading an application? If not, then you should consider what changes are needed to satisfy the IRS’s requirement that “[t]he selection process must be objective and non­discriminatory,” which means avoiding criteria that are not clear or provide too much flexibility. Living in the grey area can be a safe place, but when setting up your fund criteria, you will need to draw a line in the sand and be specific.

Below are the most common criteria selections:

Qualified Disaster:

• Results from terrorist or military actions
• Results from an accident involving a common carrier
• Presidentially-declared disaster
• Deemed catastrophic by the Secretary of the Treasury

Personal Hardship:

• Non-routine medical expense
• Serious illness or injury
• Fire, flood or natural disaster (not a Qualified Disaster)
• Violent crime
• Death of employee or eligible dependent
• Domestic violence
• Military deployment
• Unemployment issues with family
• Housing – Extraordinary expenses not covered by insurance