In churches and other nonprofits, benevolence programs are established to identify and meet the needs of under-resourced individuals—people who are unable to meet essential needs for themselves or their families. Benevolence programs stem from a church's desire to do good to others, show goodwill, extend kindness, and extend charity to those in need. While benevolence is most commonly considered in light of finances, any program that provides resources is a benevolence program. In the majority of circumstances, no matter the method of meeting a need, there are financial considerations involved.
The concept of a charitable class
For a benevolence program to fall within the parameters of a church's tax exempt status, the program must serve a "charitable class." There are several acceptable charitable classes, including children, the elderly, the poor, distressed, or underprivileged. A charitable class must be comprised of either an indefinite or sufficient size to avoid benefiting private interests. For example in Private Letter Ruling 201205011, a nonprofit organization formed to aid children with special needs was denied exemption because all of the children belonged to the same family. While the target group—children with special needs—qualified as a charitable class, the size of the group was too small to constitute a valid exempt program.
If a program does not serve a charitable class, then more than likely, it does not meet the test for being a recognized exempt-purpose program. While churches may operate programs for several charitable classes, most benevolence programs are aimed at providing relief to those suffering a financial hardship or experiencing an unusually stressful situation.
Structure of a benevolence program
The key to operating a successful benevolence program is in the structure of the program. The more structured a benevolence pro-gram, the easier it will be to operate, and the more successful it will be. In order for a program to be in accordance with the exempt status of the church, it must operate according to a formal structure. (Church in Boston, 71 T.C. 102 & PLR 201235022) Additionally, a well structured program protects the church's employees from being caught in the middle of a person in need and the church's decision to provide assistance.
Successful benevolence programs provide the following:
A method of verifying the person is a member of a valid charitable class, that a need exists and the applicant does not have available resources to meet his needs. Candidates for benevolence funds should be required to submit an application and interview with a church leader. The application and interview process will also document:
- the church's decision to make the payment;
- proof that the payment is within the guidelines established by the church; and
- proof that the payment fulfills the church's exempt purposes.
A set of guidelines so church staff members have the tools to operate the plan. Some common items that are addressed in a benevolence policy include:
- Who has the authority to approve the request, and how much can they approve?
- What types of needs will be considered, and what needs will not qualify?
- What type of third party confirmation will be required to confirm the existence of the need?
- What proof of other resources will be required?
- Who is the targeted group that will be considered—just church members, or is it available to the general community?
Caution: Do not link approval of a benevolence request to a person's tithing records. This could jeopardize their charitable contribution receipt.
- Are there certain situations that will disqualify an applicant?
- What does the applicant have to do to qualify for the assistance? Some churches require recipients who are not members of the church to watch an educational video or attend financial counseling before granting a request. The church may not require the recipient to perform any services for or on behalf of the church.
- What are the rules regarding meeting the need? Benevolence is not taxable to the recipient, but there may be times when the amount is still subject to reporting requirements. For example, some churches provide cash directly to the applicant and this is not reported to the IRS. But many times payments are made to a third party, such as the electric company or the landlord. When a payment is made directly to a third-party business, it must be considered as a payment made by the church in the course of its business transactions. The church therefore needs to determine if the recipient business is one that requires payments to be reported, either on a Form 1099-NEC or a Form 1099-Misc, and then file the appropriate form.
- How will multiple requests for assistance from the same person be handled?
- How will requests from employees and their family members be handled?
- What is the process for making the requests?
A manner of reviewing the above information by persons independent or disinterested from the person making the request.
Areas requiring caution
Many churches maintain a discretionary fund for a minister's use for various business items. It is not uncommon for these funds to be used for benevolence assistance outside of a church's established program.
The benevolence paid out of this fund should be limited in a dollar amount and must still meet the documentation requirements mentioned above. If the recipient of the benevolence funds does not complete the necessary application, then the minister should complete it for them. This should not be used as an avenue to avoid the church's formal benevolence program.
While most benevolence plans are designed primarily to address short-term needs, churches should consider how they will handle situations that require long-term assistance. Some people encounter extended illnesses or circumstances that prohibit them from working and providing for their families. These situations should be cautiously supported by the church. The church should take the following steps:
- Have the appropriate committee/board approve the situation;
- Perform regular reevaluations of the situation to document that the need continues to exist; and
- Assist the recipient in exploring other sources to meet a continued need.
The most common questions regarding benevolence usually center on the subject of designated contributions. It is not acceptable for a church to accept a contribution that is earmarked for an individual, even one with a need, and pass it through outside of the normal processes of the church. The church is allowed to solicit the congregation for additional funds for its benevolence program, but it is not allowed to raise unlimited or undefined funds for a specific individual.
Example. The Smith's house burned and the family has lost everything. The church should not raise funds for the Smith family. It should inform the congregation that it is raising money for the benevolence fund in order to be able to assist the Smiths as well as continue to assist others at this time.
The church should have a gift acceptance policy that states repeatedly that any designation is considered a "suggestion" and the final use of all funds is at the discretion of the governing body, such as the finance committee, board of directors, or elders. (I cover this topic in the article, "When Gifts Come with Strings Attached.")
Benevolence is not taxable to the recipient according to Internal Revenue Code Section 102, which provides an exclusion for true gifts. However, it specifically states that the gift exclusion is not available to amounts paid to an employee. For this reason, benevolence assistance to an employee should be approved as additional income. This income is also subject to employment taxes if the employee is not a minister.
Example. Reverend Jones has been diagnosed with a medical condition requiring expensive treatments. Reverend Jones meets all the criteria to receive assistance from the benevolence fund. The committee meets and determines that he is entitled to $1000 of assistance. Since Reverend Jones is an employee of the church, the $1,000 must be added to his Form W-2 issued by the church.
Special issues with employee benevolence
Employees Considered as Disqualified Persons. This is a special class of people defined by Internal Revenue Code Section 4958, which includes certain employees as well as nonemployees. In general, these are people who are in positions of control and authority. Since all of their income is required to be "reasonable" and "approved in writing," it is imperative that any additional payments to this group of employees be carefully documented. Failure to follow the correct procedures could result in the assessment of penalties to the employee ranging from 25 percent to 200 percent of the amount of the assistance.
Family Members of Employees. Benevolence to family members of employees is also considered to be income to the employee, if the employee is responsible for the care of the family member. There are times that the relationship may not trigger income to the employee as long as the employee is not a disqualified person. Assistance to family members of disqualified persons is virtually always attributed to the disqualified person.
Exceptions under IRC Section 139. IRC Section 139 was enacted to provide assistance to people involved in a natural disaster. It allows an employer to make assistance payments to employees on a tax-free basis. The disaster must be identified by the IRS. Family members of the employees, as well as major donors, are also eligible as long as they meet a charitable class and are objectively chosen by an independent selection committee.
Benevolence programs give churches a way to provide urgent care to individuals or groups of people facing extreme need. By following a structured policy for the program, churches will be able to maximize resources for the greatest benefit to those in need.