Employers are facing unique challenges as they work to understand and implement policies and practices to support employees in this current crisis. Employers in industries most severely impacted by closing of segments of the global economy face a dual challenge. They must balance their need for financial solvency, while intelligently and compassionately addressing the issues challenging their employees.
Employers should consider options that they may not have contemplated over the last decade of economic growth. At Gallagher, we have compiled the following list of alternative strategies to provide relief to employees during an economic winter.
Supplemental Unemployment Benefit Plan
A supplemental unemployment benefit plan (SUB plan) is a statutorily recognized arrangement that may enable employers to provide unemployment benefits without subjecting those benefits to FICA (Federal Insurance Contributions Act) or FUTA (Federal Unemployment Tax Act) payroll taxes. Only employees who have involuntarily separated may receive SUB plan payments. The FICA and FUTA exemption for SUB plan payments might be able to create substantial savings for employers and employees; further, organizations may integrate the plan with their overall severance program. There are numerous rules to consider before adopting a SUB plan; however, for the right employer, this is an arrangement worth considering because the benefits may be significant.
While not a common practice for many employers, providing modest loans of up to $10,000 to employees to cover urgent financial needs may be a suitable solution. Based on the terms and conditions, the employer-employee loans may not be treated as taxable income to the employee, and can provide a bridge for employees in challenging economic circumstances. Employers should take care to comply with the rules that apply to employer loans in order to achieve the desired outcome.
Amounts defined by the Internal Revenue code as Qualified Disaster Relief Payments that employees receive from employers might not be treated as wages or income. Federally declared disaster or emergency is a qualified event, which includes the COVID-19 pandemic. Relief payments include reimbursement or pay for personal, family, living or funeral expenses incurred as a result of the disaster.
Funding a Charitable Organization
If an employer manages or establishes a tax-exempt charitable organization, that charity may be able to make assistance payments to qualifying employees. The employer as well as employees might be able to make charitable contributions to the organization and, if structured properly, employees may also be able to deduct those contributions from their taxes, and charity recipients would not pay taxes on the amounts received. Additionally, employers that sponsor charitable organizations might be able to use the charity when responding to future disasters.
Creating a Private Foundation
A company can also establish a private foundation to provide employee assistance in the event of a disaster or to meet other needs. Generally, employer contributions or a small group of donors fund private foundations. Such foundations are subject to federal and state rules that restrict how foundations can use their assets. If the foundation is carefully drafted and complies with the governing rules, then payments to impacted employees might not be taxable as income. Depending on an employer’s objective, sponsoring a private foundation may be appropriate.
Employee gifting programs represent a less formal approach to helping employees in need. Such gifts serve as an alternative to establishing a charitable entity or foundation. Under this approach, employees may make donations to a designated fund or account administered by the employer or a third party. The employer then distributes these gifts to eligible employees. The value of gifts received under the program might escape taxation if handled properly, although the donating employees likely will not be entitled to a charitable deduction.
Leave-sharing plans allow employees to donate earned but unused paid leave time to colleagues experiencing hardship due to a major disaster or medical emergency. By following certain technical rules, the employee donating the hours may not have to include the value of the leave as income. However, the recipient employee must report the value of the leave taken as wages.
We at Gallagher are happy to discuss with you any of these potential solutions to support the financial wellbeing of employees who may be struggling during the pandemic. By investing in the wellbeing of your people, you also invest in the overall wellbeing of the organization.
Employers interested in adopting any of the items listed above should consider all aspects of implementing such programs including administration complexity, overall costs versus benefits, employee privacy considerations, as well as federal and non-federal laws.
©2020 Arthur J. Gallagher & Co.
Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc. is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Neither Arthur J. Gallagher & Co., nor its affiliates provide accounting, legal or tax advice.