Local Associations That Are Labor Unions Can Make Benevolent Distributions To Members
By Attorney Carol Grob
Cullen Weston Pines & Bach LLP

It is not unusual for local police associations to desire to help their members in times of need. That help often takes the form of cash payments of various amounts determined on an ad hoc, case-by-case basis by the local association’s board of directors. Recently, the Dane County Deputy Sheriffs’ Association asked whether there might be a better way to approach the spending of benevolent funds by the Association. They also wanted to know whether there are any restrictions on how much the Association can distribute to a person or family and whether there are any tax ramifications to the recipients as a result of the distributions.

These same questions have probably arisen for other WPPA local associations. The following is information each association should consider.

Providing death, sick, accident and similar benefits to individual members is a proper activity for a police association that is a labor union.

According to the governing documents of most local police associations, the association exists to promote the social and economic welfare of its members. The association enjoys exemption from income taxation because the IRS views the association’s purpose and activities as that of a nonprofit labor union. The association exists not to produce a profit or income for its members, but for the broader purpose of improving the wages, hours, working conditions, effectiveness, and efficiency of past, current, and future members.

Unlike other types of tax exempt organizations which, in order to enjoy tax exempt status, must be careful not to let any of the income or assets of the organization benefit any one individual, the IRS allows a labor union to pay sick, accident, death, and similar benefits to individual members without jeopardizing the union’s tax exempt status. In addition to acting as the collective bargaining representative, the IRS views the association as a mutual benefit organization. In other words, many local associations can pay benefits to individual members as part of the association’s regular activities.

Helping members, however, must be limited to death, sick, accident, and similar benefits.

IRS regulations give the following guidance about the types of benefits allowed.

2. Life benefits. The term life benefits means a benefit (including a burial benefit or a wreath) payable by reason of the death of a member or dependent. A life benefit may be provided directly or through insurance....
3. Sick and accident benefits. The term sick and accident benefits means amounts furnished to or on behalf of a member or a member’s dependents in the event of illness or personal injury to a member or their dependent. Such benefits may be provided through reimbursement to a member or a member’s dependents for amounts expended because of illness or personal injury, or through the payment of premiums to a medical benefit or health insurance program. Similarly, a sick and accident benefit includes an amount paid to a member in lieu of income during a period in which the member is unable to work due to sickness or injury. Sick benefits also include benefits designed to safeguard or improve the health of members or their dependents. Sick and accident benefits may be provided directly by an association to or on behalf of members and their dependents, or may be provided indirectly by an association through the payment of premiums or fees to an insurance company, medical clinic, or other program under which members and their dependents are entitled to medical services or to other sick and accident benefits. Sick and accident benefits may also be furnished in noncash form, such as, for example, benefits in the nature of clinical care services by visiting nurses, and transportation furnished for medical care.
4. Other benefits. The term other benefits includes only benefits that are similar to life, sick or accident benefits. A benefit is similar to a life, sick or accident benefit if:
   1. It is intended to safeguard or improve the health of a member or a member’s dependents, or
   2. It protects against a contingency that interrupts or impairs a member’s earning power.
5. Examples of nonqualifying benefits. Benefits that are not other benefits ... include the payment of commuting expenses such as ... train fares, the provision of accident or homeowner’s insurance benefits for damage to property, the provision of malpractice insurance, or the provision of loans to members except in times of distress. .... the provision of savings facilities for members ... any benefit that is similar to a pension or annuity payable at the time of mandatory or voluntary retirement, or a benefit that is similar to the benefit provided under a stock bonus or profit-sharing plan.

The IRS does not require that a labor union pay death, sick, accident, or similar benefits from a dedicated trust account. However, using a dedicated account is one way for an association to set aside funds to use exclusively for paying benevolent benefits.

The IRS does not seem to require that a labor union paying death, sick, accident, or similar benefits to its members do so from an account set aside, managed exclusively for and dedicated to the payment of such benefits. Because providing such benefits is viewed as expected activity of a labor union, such benefits can be paid from the organization’s general operating funds and accounts. There are motivations, however, other than IRS regulation, to create a dedicated account.

A non-tax related reason for creating a dedicated account would be to segregate funds dedicated to benevolent grants from funds used to pay for the general operations and other activities of the labor union. If an association wants to make certain it always has a reserve for paying death, sick, accident, and similar benefits to individual members, regardless of varying amounts needed from year to year to conduct bargaining, process grievances, pay legal fees, hold trainings, and give to other causes, the association could create a separate entity or an account exclusively dedicated to providing benevolent benefits.

Another reason for a separate entity or fund with its own set of rules or policies for how it is used and how the funds held in reserve are managed, is to attempt to ensure fairness among the members. A committee or “board of trustees” appointed and perpetuated from year to year to make distribution decisions and to manage the reserve, would be dedicated to making fair and consistent decisions about amounts distributed to members.

ERISA may apply.

Associations should be aware, however, that the Employee Retirement Income Security Act (ERISA), the provisions of which are enforced by the Department of Labor, can be triggered by a benefit “plan” operated by a labor union. Use of a trust fund might trigger ERISA obligations. Such obligations may include having to provide members annual reports.

After an association decides how it wants to structure a program of paying death, sick, accident, or similar benefits to members, it should consult with an attorney on whether the plan triggers any ERISA obligations. The likelihood is that the program can be modified so that ERISA does not apply.

While the IRS has not provided many “bright lines” on the question of how much benefit can be paid to or on behalf of any individual member or how much can be distributed in the aggregate each year, there are limits.

In our research, we did not find a tax or ERISA source or precedent which comprehensively addressed the limits or restrictions on the amount of death, or retirement, or sick, or accident, or other benefit any individual member or member’s family could receive from a labor union. We also did not find an IRS pronouncement of a dollar limit on the total amount a union may pay out in a year in benevolent benefits. We reviewed IRS precedents which address the provision of benefits to individual members by labor unions, however, and they do make clear that an association can go too far and it is possible for a labor union to jeopardize its tax exempt status if it abuses the provision of benefits to members.

An association needs to be careful, sensible, consistent, nondiscriminatory, and not overly excessive in providing death, sick, accident, and similar benefits to members. Otherwise, benevolent acts could create problems. Associations should create in advance policies to govern benevolent distributions and consider creating and implementing benefits which involve more than just writing a check. For example, rather than paying a large sum of money to a member or member’s family because a spouse is suffering from a rare and debilitating form of cancer, the association could:

• pay the doctor or hospital directly for some of the uncovered expenses;
• buy groceries or supplies for the family, or have a restaurant deliver dinner several times each month;
• give the family a gas card to pay for hospital trips;
• reimburse other union members for their expenses to drive the member’s family to appointments or school activities; to provide daycare; to run errands or pick up prescriptions;
• pay the member’s heat or electricity bills;
• pay for a school activity for the children the family could not otherwise afford because of the circumstances;
• purchase other helpful products or services; or
• some combination of the above.

Benefits paid in these forms may be more credible in the event of IRS review than paying cash to the member.

The receipt of a benefit from the union by an individual member may not be taxable to the member.

The value of a gift is excludable from gross income for tax reporting purposes. There is tax precedent holding that the value of food, clothing, and rent payments furnished as strike benefits by a labor union to a needy worker participating in a strike may be considered gifts.

There is other tax precedent holding that some payments by a union during a strike are not gifts, but they are not salary or wages either (subject to FICA tax or income tax withholding); they are “other income.” More recent precedent seems to categorize “strike pay,” which is paid based on a union member being a union member and not based on the member providing any services (like picketing for a certain number of hours), as nontaxable income.

In a private letter ruling issued on November 14, 2002, the IRS stated that the recipients of benefits from a tax exempt fund set up to make grants or loans to employees of a large nationwide employer, who demonstrate need, do not have to report the grants or loans as taxable income. The IRS said that the employee-recipients of grants from the fund could treat the grants as gifts. The elements of the benefit/grant program that the IRS seemed to rely on in finding “gift” treatment were that the selection of recipients was based on “an objective determination of need” as determined by an independent committee. The IRS found that the charitable purpose of the fund was primarily being accomplished.

While tax sources are not entirely clear on this point, it appears that if your local association provided a benefit to a member or member’s family because of a death or serious illness in the family or because the family has suffered some economic or financial hardship, and the award of the benefit was made to serve a charitable purpose, then the receipt of the benefit should be a gift or non-taxable income to the member-recipient.

At the least, the distribution to the member should not be treated as salary or wages subject to employment tax withholding, provided, the benefit is not paid to the member in return for the member providing services to the union. The association should not have to issue an IRS Form 1099 to the recipient if the benefit is a gift and not being paid in return for services.

Some recommended steps for an association that wants to create a benefit program include:

1. define the process for carefully and consistently considering requests for benefit distributions;
2. make each distribution with the goal of helping a member who has suffered an interruption in earning capacity or increased expenses due to illness, injury, accident, victimization, or other calamity and for no other purpose, and
3. advise the member who receives a distribution that the union believes the distribution to the member should be treated as a gift for income tax purposes, but
4. also advise each member who receives a benefit to check with their individual tax return preparer or advisor for confirmation of the proper income tax treatment of the benefit.