Question: Our corporate foundation is planning to establish a scholarship fund for our employees' children. What do we need to keep in mind and what steps do we need to follow to ensure we are complying with the legal requirements?

Response: The granting of scholarships, fellowships and internships has long been considered charitable because it promotes and advances education.While these grants are subject to the same rules as any grant to an individual, they must also meet an additional requirement: the procedure and criteria for making the grants must receive advanced IRS approval before grants can be awarded. So, what does the IRS look for?

• Grantee pool: the pool of potential grantees must be broad enough to ensure the program's intent is charitable rather than to benefit a small group of individuals.
• Selection criteria: the criteria must be related to the purpose of the grant. For example, if the purpose of the grant is to reward academic excellence, the criteria should focus on ability and aptitude; or, if the purpose is providing financial assistance, economic need should be part of the criteria.
• Selection committee: those selecting the recipients may not be in a position to benefit personally from their choice, either directly or indirectly.

In addition to these general rules for all scholarships, there are some additional rules where the grantee pool is limited to employees and their children. These rules are designed to ensure that the scholarship program furthers charitable purposes and is not designed as an employee benefit or recruitment tool. First, in establishing the selection criteria, job performance, seniority or other employment-related criteria may not be used. Second, the selection committee must be totally independent and separate from the employer. Finally, the number of scholarships actually awarded may not exceed 10 percent of all eligible candidates or 25 percent of the number of candidates who actually applied.

Beyond the legal considerations, what are some common practices?

Generally, most corporations do not endow a special scholarship fund; rather, they make grants directly from the foundation or giving program. Some corporations use in-house staff to administer the program, but many use an outside intermediary organization to administer all or part of the program. However, you should know that using an intermediary does not free you from the rule covering employee-only scholarships, even if the intermediary independently selects the recipients.

Important issues to consider before you begin include eligibility and selection criteria, the award's duration and provisions for renewal. Eligibility requirements typically include that the parent or guardian of the applicant be a full-time employee of the company for at least one year, although some companies allow the children of part-time employees to apply. Applicants are usually high school seniors who plan to attend a two- or four-year college or university. Common award criteria include academic performance, participation in school and community activities, future potential and financial need. Award amounts commonly range from $500 to $5,000 per academic year, and some companies award up to $10,000.