How not to fail at employer-related scholarships: corporate foundations need to follow specific rules when implementing a successful employee scholarship program.

• Author: Oddy, John

Corporate foundations often wish to award scholarships to further their charitable missions and by doing so, help to brand their parent companies. This ability is one of the unique advantages conferred by a private foundation, and can benefit the corporation in multiple ways. For example, the foundation of a technology company might award scholarships to winners of a juried science fair, generating positive publicity and goodwill in the community while associating the parent company's brand with innovation and achievement.

In addition to giving scholarships to students outside the company, the Internal Revenue Service allows corporate foundations to award scholarships to the parent company's employees and their children. These employer-related scholarship programs are popular with corporate foundations because they contribute to employee morale and corporate culture, and they also count toward the foundation's annual 5 pen cent minimum distribution requirement.

A corporate foundation's scholarship program is considered employer-related if it:

* Treats the employees (and/or their children) of a particular company as a group to which the scholarships may be given;

* Limits the potential recipients for some or all of the foundation's scholarships to employees (or their children) of a particular employer; or

* Otherwise gives such individuals preference or priority over other applicants.

Because the beneficiaries of these awards are the company's own employees, employer-related scholarship programs are strictly regulated to prevent abuse, and IRS approval for these programs is harder to obtain. Foundations are granted tax-exempt status, after all, because their endowments are irrevocably dedicated to charitable purposes.

To ensure they don't violate their charitable purposes, the benefits that foundations confer to their parent companies should be indirect (e.g., visibility, branding and community goodwill). Regulations around employer-related scholarships are therefore intended to ensure scholarships are not the functional equivalent of extra pay, an employment incentive, or an employee benefit. They cannot be used as a tax-free perk to recruit employees (or dissuade them from leaving), enrich corporate executives and shareholders, or as a reward for employee performance.

The use of a scholarship program for any of these purposes could result in a self-dealing violation, which could result in stiff penalties being imposed on the company...