How a 501(c)(3) Can Issue Hardship Grants Effectively

Many nonprofit organizations are founded with a profound mission to help people in their greatest time of need. Hardship grants provide financial assistance to individuals and families affected by natural disasters and other hardships.

While there are many 501(c)(3) organizations that provide assistance to those in need, it is key to know how to set up a hardship grant program that is in line with IRS regulations.

Understanding Financial Assistance Programs

So what is a hardship grant? A hardship grant is a one-time monetary payment provided to a person experiencing extreme hardship as a result of a significant, unforeseen situation. Examples of a significant, unforeseen situation that would result in hardship may include a serious illness or injury, a foreclosure or loss of home, unexpected unemployment, family emergencies, or natural disasters.

When creating hardship funds for individuals experiencing financial difficulties, some organizations may wonder about the difference between hardship grants and benevolence funds. A benevolence fund is a pool of money, commonly created to provide occasional, often smaller-scale assistance to individuals in need. It is an ongoing source of assistance, which may be administered informally or with minimal structure. Hardship grants, on the other hand, are a one-time payment, usually part of a more formalized program—often run by nonprofits (including 501(c)(3) organizations)—with defined eligibility criteria, application processes, and documentation requirements.

The IRS Framework for Individual Aid

Many nonprofits provide grants for personal hardship for those in need. However, there are important federal requirements that must be met in order for a tax-exempt organization to provide individual hardship grants and remain in compliance. Let's break down IRS Publication 3833 - guidance from the IRS about hardship assistance programs run by charities.

1. The Charitable Audience for Emergency Assistance

To remain tax-exempt, a nonprofit must establish a charitable audience, or general group they want to serve, for emergency assistance. The charitable audience must be large or indefinite. For example, the victims of recent natural disasters, or single mothers in a city who are in danger of being evicted, would be considered a sufficiently broad charitable group. Grants for hardship should never be provided for the benefit of a "closed" group, such as one family or individual.

2. Preventing Insider Benefit

To remain tax-exempt, a nonprofit must prevent private inurement and private benefit in grantmaking. In grantmaking, insiders of a nonprofit (i.e., its board members, founders, contributors to the nonprofit, or family members of the aforementioned parties) should not receive special treatment or benefit from the funds.

Designing Your Grant Program Step-by-Step

Develop a nonprofit financial aid program to efficiently and legally distribute funds.

Setting Objective Criteria for Financial Assistance

Create legitimate criteria for financial assistance and basic program parameters. Discuss the types of hardships that will be assisted (e.g., medical expenses, job loss, home damage due to a natural disaster). Establish triggers that qualify individuals for a hardship grant, i.e., situations that are qualified and why. Clearly state your timelines for selection and awarding of funding. These are crucial as you develop a hardship grant application.

Optimizing the Application Process for Emergency Assistance

Simplify the application process to inform your website visitors how to apply for a hardship grant efficiently. Keep the application process clear and do not make applicants feel like they are sharing too much personal information by requesting only relevant financial and situational details and documentation.

You can use the prompts below as an outline for your application.

• What happened: “Describe the event or situation that caused your hardship.”
• Impact: “How has this affected your income, expenses, or stability?”
• Need: “What assistance do you need to stabilize your situation?”
• Qualification: “Why does this situation prevent you from resolving the issue without support?”

Will your organization hyperfocus on certain areas of aid, or be open to all hardship qualifiers? Qualifications for a hardship grant can include, but are not limited to:

• Loss or Reduction of Income: Job loss (layoff, termination, business closure), Reduced work hours or furlough, Inability to work due to caregiving responsibilities, Self-employed income loss due to economic downturn
• Medical or Health Emergencies: Unexpected medical bills or hospitalization, Chronic illness requiring ongoing treatment, Injury or disability preventing the applicant from working, Mental health crisis requiring time off work
• Housing Instability: Facing eviction or foreclosure, Temporary displacement due to unsafe living conditions, Homelessness or risk of homelessness
• Family or Personal Crisis: Death of a primary income earner, Domestic violence or need to relocate for safety, Divorce or separation causing financial strain, Supporting dependents after a sudden family change, Funeral or burial expenses
• Disaster or External Events: Impact from natural disasters (flood, fire, hurricane, etc.), Pandemic-related financial hardship, Community emergencies affecting employment or safety
• Education or Essential Needs Interruptions: Risk of dropping out due to financial hardship, Inability to afford childcare needed to maintain employment, Lack of access to basic needs (food, utilities, transportation)

A Fair Selection Committee

Implementing a fair selection committee ensures there is a non-discriminatory process for selecting individuals to receive charitable grants. Gather a committed and dedicated group of reviewers who will use the objective criteria established to review applications.

Establish triggers that qualify grant applications for approval and have reviewers recuse themselves from cases where there is a conflict of interest due to a personal or professional relationship with the individual seeking the grant.

Disbursement and Audit Readiness

Before issuing the hardship grant, formalize the selection process by documenting each grantee, noting why they were selected, with signatures from those on the selection committee. This proof of selection, paired with the grantee's application, are key documents to have on file, especially come audit season. How funds are distributed and documentation of procedures is perhaps as important as the actual funding approval.

• Pay Vendors Directly: It is best practice to pay the landlord, utility company, medical provider, etc. directly, rather than giving cash to the hardship victim.
• Address Immediate Needs: For nonprofits, disaster and hardship relief means addressing the immediate and basic needs of the victims over the short term (i.e., grocery store gift certificates, hotel rooms, blankets, warm clothing, etc.), followed by long-term relief possibilities.
• Maintain Pristine Records: Documentation of the committed relief is imperative to demonstrate the impact on the victim’s financial distress during your next audit. All forms, disaster/hardship documentation, and committee approval notes should be safely stored. These records will be needed in the event the IRS conducts an audit of your organization.

Conclusion

Hardship grants for a 501(c)(3) require some thought, a plan, fair and objective policies, and accurate documentation. Creating a proper charitable audience, using fair criteria for hardship grants, and tracking and documenting all actions and decisions taken on any hardship grants are key components in meeting the standards set forth by the IRS and successfully creating and administering hardship funds.