Category Personnel/Employment
Title Love Gifts and Benevolent Assistance
Author/s
Preview Love Gifts and Benevolent Assistance
Text

Love Gifts and Benevolent Assistance
By John Butler, CapinCrouse LLP

Teachers, administrators, or other school employees occasionally have emergency needs or other needs that are not in their personal budgets. Families in the school may have serious, unexpected needs. The loving Christian community of students, parents, alumni, and others want to help. What are their options? What can the school do to help?

Even though the specific need of an individual arrives unexpectedly, schools will experience these situations. Establishing a plan before the traumatic event allows a prompt, gracious response. This article describes some available options for such a program.  

Quick Review of Tax Law  

Contributions are only tax deductible when given to and under the control of the school. A contribution to the individual or to the school designated for the individual is not tax deductible (IRC 170; Rev. Rule 62-113; Rev. Rule 79-81). This tax law affects love gifts and handling of all solicitations for a benevolence fund, as discussed below.  

Gifts or assistance to the school's employees (or to their spouses or dependents) by the school cannot be excluded from employee's income as a gift, with a few exceptions noted in IRC, section 102(c). Essentially, the tax code treats gifts to employees as just another form of compensation, like a bonus. It does not matter that the school's intent was to help the employee in need. Unless the payment fits a specific exception, it must be reported and be subject to the normal payroll tax requirements.  

Gifts to an employee that are based on a relationship other than the employment relationship may be excludible from income (Proposed Reg. 1.102-2(f)). This possibility may allow a related church to use its normal benevolence process to assist school employees, as described below.  

Reimbursement of medical expenses under a written plan that does not discriminate in favor of the highest paid 25 percent of employees is not taxable (IRC 105). This statute may allow a school to set up a discretionary medical expense reimbursement program, as described below.  

Payment for medical or personal needs including damages to a person's home resulting from a federally designated "qualified disaster" can be tax-free (IRC 139; IRS Pub. 3833). This exception can even allow a school to offer tax-free help to an employee. While this option is not often useful, a school in a community that experiences a flood, tornado, earthquake, terrorist event, or other disaster should investigate this option.        

Options  

Several options using and complying with one or more of the above tax-law requirements are available. There are pros and cons to each.  

Personal gifts. Making a personal gift certainly is the simplest. A personal gift is not tax deductible to the person making the gift, no matter how loving or charitable the motivation. On the other hand, a personal gift is not taxable to the person who receives it. There are practical reasons why personal gifts are not always useful. Many people may not have a personal relationship to the individual in need or they would rather not be identified with the gift.  

Love gifts or offerings. Popularly, schools and individuals use love gifts to the school specifically for the individual. The term love gift has several possible meanings. Some types of love gifts have an unexpected and a potentially serious impact.  

  1. Love gifts initiated by the donor or required by the donor to be used for an individual will not be tax deductible. Generally, unsolicited contributions for a specific individual should be returned to avoid misunderstandings.  
  2. If the love-gift process is initiated and organized by the school for an employee or an employee's family, the payment will be taxable income to the employee.  
  3. If love gifts are solicited by the school to fund a school-approved need, the donor must understand that the gifts are under the control of the school, with the school having the discretion to assess needs and to use or not use the contribution for the individual. Such gifts can be tax deductible even if it is anticipated that contributions will be used to assist a specific person or family.  

Clearly defined love gift programs can lawfully provide essential funds to meet serious needs. Because of significant misunderstandings about love gifts, however, schools should be careful in using them. Clarity of communication about school control and tax implications is essential.  

Tax-deductible general purpose benevolence fund of the school. The school can set up a benevolence fund that can be funded from the school budget, and undesignated contributions by employees or others would be tax deductible. Assistance could be provided to school employees or others for any needs, as determined by the school. Assistance to employees would be taxable, unless it was for a qualified disaster expense.  

Tax-deductible general purpose benevolence fund of a church. Many churches have benevolence programs that assist their members or persons in the community. Church members or attendees make undesignated tax-deductible contributions for the benevolence program fund, or it may be funded out of the general revenues of the church.  

Church benevolence program assistance to a school employee under the same procedures, policies, and amounts as other (nonemployee) applicants would be excluded from the employee's income. This would be true even if the school were controlled by the church or just a part of the church. Where the church and school are related, however, the church's normal benevolence process must be followed.  

Evidence of following the normal benevolence process establishes that the assistance is unrelated to the school employment relationship. Any preference to school employees in amounts or types of assistance would be evidence that the assistance was paid because of employment, and the assistance would be taxable.  

Medical reimbursement plan of school. A school could set up a discretionary medical expense reimbursement plan to reimburse medical expenses of employees and their dependents not covered by insurance or other sources. Reimbursement of an employee and an employee's dependent's medical expenses under the program would not be taxable.  

The medical expense reimbursement plan must be established before the expense is incurred, but it does not need to be prefunded. This is not a flexible spending account, and it is not associated with a cafeteria plan. It could not be funded by designated contributions.   As with any employer medical reimbursement plan, nondiscrimination requirements would apply. To avoid discrimination issues from the discretionary nature, eligibility generally should be restricted to employees who are not highly compensated (defined by the statute as the lower paid 75 percent of employees).  

Setting up programs that meet the medical reimbursement plan requirements and lawful coordination with other health benefit programs requires professional assistance.  

Nondeductible private benevolence fund. A trusted individual or group of individuals could establish a benevolence fund for a specific person or family. This would allow large numbers of smaller gifts to be pooled, and the individuals could give anonymously. Gifts to the benevolence fund would not be tax deductible. To avoid taxation of the employee, the school should have no involvement in promoting the fund, collecting contributions, or distributing payments.  

School Selection  

Prioritizing goals should guide selection of the option or options:

  • If tax deduction is critical (particularly for larger donors), then an undesignated benevolence fund would be better.
  • If amounts paid will be taxable, then some additional assistance would help to cover the tax.
  • If many small donations were expected for a specific person or family need, then contribution deduction would probably be less critical and the private benevolence fund would meet the individual givers' motivation.
  • If the focus is extraordinary medical needs that are not covered by insurance, then the medical reimbursement plan may be useful.  

Assisting God's people with their generous motivation should be taken seriously. Advance planning will help provide the optimum available solutions.    

John Butler is a tax counsel attorney for CapinCrouse LLP, www.capincrouse.com. He is an expert on tax and tax-related issues. CapinCrouse serves the not-for-profit community with assurance, tax, and advisory services. CapinCrouse is dedicated to helping clients operate with financial integrity so that they can dedicate themselves to fulfilling their mission. For questions, John Butler can be reached at jbutler@capincrouse.com or 317-885-2620, ext. 1150.  

LLU 23.1   

Notice: This article is designed to provide accurate and authoritative information in regard to the subject matter covered. It has been provided to member schools with the understanding that ACSI is not engaged in rendering legal, accounting, tax, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional should be sought. Laws vary by jurisdiction, and the specific application of laws to particular facts requires the advice of an attorney.  

Association of Christian Schools International
731 Chapel Hills Drive
Colorado Springs, CO 80920
Phone: 719.528.6906
ACSI.org  

Download Love Gifts and Benevolent Assistance