Legislation

The Pension Protection Act of 2006 (H.R. 4) was signed into law August 17, 2006. Various provisions in the bill directly affect Foundation donors and their charitable giving. To ensure compliance with the new law, Foundation For The Carolinas made a comprehensive audit of all funds.

Text summary of the charitable giving incentives and exempt organization reforms.

Foundation For The Carolinas’ Reference Guide to the Pension Protection Act of 2006 (H.R. 4)

Specific areas are impacted by the new legislation including:

• Donor Advised Funds
• Scholarship Funds
• Supporting Organizations
• Nonprofits
• IRA Charitable Rollovers

Changes to Donor Advised Funds

The Pension Protection Act of 2006 includes the regulation of donor advised funds. For the first time, a Congressionally-approved definition of a donor advised fund was created and states that a donor advised fund includes the following characteristics:

• It must be owned and controlled by a sponsoring organization.
• The donor, or a person appointed by the donor, must have or must reasonably expect to have the privilege of providing advice with respect to the fund’s distributions or investments.

One of the most important changes in the new law prohibits donor advised funds from paying grants, loans, compensation and similar payments to donors, advisors and persons related to them. Reimbursements are considered “similar payment” under the new law. Therefore, your donor advised fund can no longer be used to reimburse you for expenses related to charitable giving.

For details about changes to donor advised funds, download a copy of the Foundation’s Reference Guide to the Pension Protection Act (H.R. 4)

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Changes to Scholarship Funds

Congress has significantly altered requirements for administering scholarship funds. The Pension Protection Act primarily affects scholarship funds that have a committee to choose the recipients. Prior to this new legislation, Foundation For The Carolinas had already taken steps to increase and strengthen the oversight of its scholarship funds.
The new law states that a fund is a scholarship fund only if it meets the following criteria (otherwise it will be considered a donor advised fund and gifts to individuals will be prohibited):

• The sponsoring organization appoints all of the members of the committee and the donor’s advice is given solely as a member of the committee.
• A donor and parties related to the donor cannot control the committee directly or indirectly.
• All grants awarded on an objective and nondiscriminatory basis using a procedure that has been approved in advance by the board of directors of the sponsoring organization and the procedure is designed to ensure that all such grants meet the requirements of the legislation.

For details about changes to scholarship funds, download the Foundation’s Reference Guide to the Pension Protection Act of 2006 (H.R. 4)

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Changes to Supporting Organizations

A number of the Pension Protection Act provisions are intended to improve accountability of supporting organizations. The primary intent of these new provisions is to identify organizations with substantial donor control and apply or mirror the private foundation rules and guidelines.
The new legislation imposes a number of restrictions and conditions upon supporting organizations and funders of the organizations, dependent upon the type of supporting organization (Type I, Type II or Type III).

Provisions in the Pension Protection Act that apply to all supporting organizations include:

• Reporting requirements
• Prohibition on payments to substantial contributions and related parties
• Limitations on payments by private foundations to supporting organizations
• Gifts to Type I or Type III supporting organizations
• Excess benefit taxes

Provision applicable to Types I and III:

• Reclassification to private foundation if contributions are accepted from a person who controls the supported organization

Provisions that apply only to Type III supporting organizations include:

• Minimum payout requirements
• Demonstration of responsiveness to supported organizations
• Prohibition on foreign supported organizations
• Excess business holdings

For details about changes to supporting organizations, download the Foundation’s Reference Guide to the Pension Protection Act of 2006 (H.R. 4)

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Reform Provisions Applicable to Nonprofits

In addition to pension reforms, the Pension Protection Act contains a significant set of charitable giving incentives and exempt (i.e. nonprofit) organization reforms. The reforms include:

• The Foundation is no longer eligible to reimburse donors, advisors or related parties for expenses. All fundraising groups must submit a vendor invoice for expense payments.
• Donors must have a bank record or written communication from the charity to substantiate any cash contribution
• Public disclosure of Form 990-T
• IRS disclosure of information to state officials
• IRS filing requirement for split-interest trusts
• Exempt organizations with gross receipts below $25,000 are required to electronically file an annual notice with the IRS
• IRS reporting requirements for and Treasury study of charity-owned life insurance

For details about reform provisions applicable to nonprofits, download the Foundation’s Reference Guide to the Pension Protection Act of 2006 (H.R. 4)

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IRA Charitable Rollover

As part of the Emergency Economic Stabilization Act of 2008, the U.S. House of Representatives passed a two-year extension of the Charitable IRA legislation.

During 2008 and 2009 only, holders of traditional IRAs who are at least 70 ½ years old can make direct charitable transfers up to $100,000 per year. A single person can transfer $200,000 free from federal tax; a married couple can transfer up to $400,000 free from federal tax from separate accounts.

Prior to 2006, IRA holders faced a disincentive for giving retirement assets to charity during their lifetimes because all withdrawals from traditional IRAs were subject to income tax. With the renewed tax provision, retirees will be able to give far more support without being penalized. 

While the law does not allow these transfers to donor advised funds, supporting organizations or private foundations, donors can make contributions to any of the Foundation's scholarship funds, nonprofit endowments, field-of-interest funds and others. In addition, split interest gifts such as charitable annuities, charitable lead trusts and charitable remainder trusts do not qualify. Contact Bart Landess, Senior Vice President of Development & Planned Giving at 704.973.4540, or your relationship manager to discuss the details of making a gift.

Using IRA assets to make a gift during your lifetime, as opposed to giving via bequest in your will, enables you to experience the joy of making a major gift. As a qualified public charity, Foundation For The Carolinas can help execute the transfers to an existing fund or create a new one.

For more information about legislative affairs, please contact:

Holly Welch Stubbing
Senior Vice President
Client Services
& Legislative Affairs
704.973.4515
hwelch@fftc.org