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Signed into law on August 2006, the Pension Protection Act of 2006 (PPA) makes substantial changes to federal tax law governing charitable organizations and also reforms pension and retirement plans. This legislation imposes the most sweeping changes since the Tax Reform Act of 1969, which defined many rules that govern today’s nonprofits and donor contributions.
The California Community Foundation (CCF) initiated a review of its 1,400 charitable funds to identify potential issues and assure compliance with these new legal requirements. We are committed to keeping donors and advisors informed of these changes. For instance, we are conducting outreach to affected donors and advisors and preparing new resource materials that incorporate these changes. The foundation is also working with the Council on Foundations, a national association of philanthropic institutions, to advocate for changes to the PPA legislation that would improve the philanthropic sector’s ability to address the needs of the communities served.
Following is a summary of key provisions that are most relevant to community foundations. The provisions are effective July 1, 2007 unless noted otherwise. CCF expects to be in full compliance as of July 1.
We encourage you to contact us to receive updated information regarding on-going compliance and advocacy efforts as well as legislative revisions.
View a list of frequently asked questions related to the Pension Protection Act of 2006.
Donor Advised and Scholarship Funds
The PPA provides the first legislative definition of donor advised funds. Donor advised funds are:
- Separately identified with reference to a donor(s)’s contributions
- Owned and controlled by a sponsoring organization (i.e. CCF)
- Managed by a donor or person appointed by the donor to advise on investments or distributions relating to the fund
The law enacts a range of specifically permitted grants and prohibited activities, including the following notable changes:
- Distributions from donor advised funds that provide anything more than an incidental benefit to the donor or related parties (i.e., making loans to the donor or reimbursing the donor for expenses) are prohibited.
- Charitable funds that make grants to individuals, such as scholarship funds, that were previously structured as donor advised funds must be reformed to have a governance structure that the donor does not control (i.e., a scholarship selection committee on which the donor and related parties represent a minority).
- Contributions of closely-held business interests to donor advised funds are now limited by the same rules that apply to such gifts made to private foundations (known as the “excess business holdings rule”). Gifts that meet the definition must now be sold within a specific period after the donor’s contribution.
The new law also mandates a Treasury Department Study to be performed by the IRS on contributions to and distributions from donor advised funds to provide a full picture of the use of these funds in the philanthropic sector. Full details can be found at the Council on Foundation’s Web site.
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Substantiation and Disclosure
Organizations that sponsor donor advised funds are required to include a statement indicating that they have legal control over affiliated funds when contributions are given to these funds. For example, CCF now includes the statement, “Contributions to the California Community Foundation represent irrevocable gifts subject to the legal and fiduciary control of the foundation's Board of Directors,” on all affected funds’ pages on our Web site as well as on its contribution acknowledgments.
In addition, aggregate information about donor advised fund assets, contributions and gifts will be included in our Form-990 filed at the end of our next fiscal year.
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Supporting Organizations
A supporting organization is a 501(c)(3) organization that qualifies as a public charity because of its close relationship with another publicly-supported 501(c)(3) organization. The PPA outlines new requirements for the three types of supporting organizations (known as Types I, II and III). Supporting organizations are frequently used as a private foundation alternative by individual donors and families and by nonprofit organizations to house particular charitable activities or programs (much like subsidiaries).
Under the new PPA rules, all supporting organizations:
- Cannot distribute grants, loans, compensation or make expense reimbursements or similar payments to contributors and related parties
- Must complete a Form-990 and include a list of supported organizations, indicate the type of supporting organization it is and certify that qualified persons directly or indirectly control the supporting organization
Types I & II. These supporting organizations are typically controlled by one or more supported organizations that are public charities. Many of these organizations will have a donor or family members representing a minority of the directors on a supporting organization’s board. Others have boards that are entirely chosen by the supported organization (such as a hospital or university).
- Supporting organizations that accept contributions from a person who controls the supported organization (i.e. the foundation) will be reclassified as a private foundation. CCF generally creates Type I supporting organizations in collaboration with its donors and controls each supporting organization through its board appointments – meaning that our existing supporting organizations will remain classified as public charities rather than private foundations.
*Effective – Retroactive, applied to transactions on and after July 25, 2006.
Type III. These supporting organizations are the most independent and attenuated in their relationship with their supported organizations and have been a particular focus of recent Congressional and IRS investigation. These organizations:
- May not support a foreign organization, with a three-year transition rule for existing organizations
- Must distribute a percentage of either income or assets that is determined as a “significant amount” by the Treasury Secretary to supported organizations
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IRA Charitable Rollover
This provision permits persons 70 ½ years and over to transfer up to $100,000 a year in retirement funds directly to a qualified charity without first counting the distribution as taxable income. The law applies to both traditional Individual Retirement Accounts (IRAs) and Roth IRAs, but not to company-sponsored 401(k) retirement accounts, unless the assets are rolled over to an IRA first. Split-interest gifts, such as contributions to charitable remainder trusts, and gifts to donor advised funds, supporting organizations and private foundations do not qualify for the income exclusion. The Public Good IRA Rollover Act of 2007, which was recently introduced in both the Senate (S819) and House (HR1419), makes these gifts permanent, increases the distribution amount and broadens the impact by eliminating the exception for donor advised funds, private foundations and split interest gifts.
*Effective– Contributions made between August 17, 2006 and December 31, 2007. Please note the Public Good IRA Rollover Act of 2007 has not yet passed. Effective dates are good only for PPA.
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Continuing Advocacy
The Council on Foundations, CCF and its partners have identified key areas where the PPA could be clarified and improved to ensure that revisions do not unintentionally restrain charitable activities that benefit communities nationwide. The three areas are:
Extending the IRA Charitable Rollover distribution through enactment of the Public Good IRA Rollover Act of 2007, which would:
- Remove the $100,000 annual cap
- Decrease the minimum age requirement to 59 ½ years old and allow transfers into split interest vehicles such as charitable remainder trusts
- Permit contributions to donor advised funds, supporting organizations and private foundations
Clarify and improve regulation of donor advised funds:
- Repeal the excess business holdings rule applied to donor advised funds
- Exclude funds that award grants to individuals to alleviate poverty and distress
- Clarify that sponsoring organizations may use donor advised fund assets to purchase goods and services needed to conduct charitable activities
- Exclude funds created by public charities and governmental entities
Clarify and improve regulation of supporting organizations:
- Allow Type I & II supporting organizations’ transactions to be governed by the same rules as private foundations
- Suspend penalties for donor advised funds and private foundations that award grants to certain Type III supporting organizations until the Internal Revenue Service makes a final decision about applicable organizations
Our development professionals are available to answer any questions you may have about PPA. Contact Director of Gift Planning Carol Bradford , or Senior Vice President, External and Donor Relations, John Kobara , at (213) 413-4130.
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Additional Resources
Frequently Asked Questions: Pension Protection Act and CCF Donor Advised Grantmaking
Council on Foundations: Government Relations
Chronicle of Philanthropy
Foundation Center’s Philanthropy News Digest
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