Legislative Update

Pension Protection Act of 2006 (H.R. 4)

On August 17, 2006, President Bush signed the Pension Protection Act of 2006, which contained several key provisions that will affect grant makers. Some provisions take effect immediately and at least one has a retroactive effective date. Among the ones that require immediate attention by grantmakers are:

The provision which requires expenditure responsibility for grants by private foundations to Type III supporting organizations, other than those that are “functionally integrated,” and which bars such grants from counting toward a private foundation's payout requirement. Somewhat simplified, a functionally integrated Type III supporting organization is one that provides its support by carrying on activities that its supported organizations would otherwise have to do themselves rather than by providing grants to the supported organizations. This provision, enacted upon signature, also requires expenditure responsibility for grants to any type of supporting organization if someone, who is a disqualified person with respect to the private foundation, controls the supporting organization or the organization it supports. These grants also do not count toward payout. Note that this provision only limits grants to the supporting organization. It does not affect grants made directly to the supported organization even if control is present.

A provision, enacted upon signature, that prohibits the payment of grants, loans, compensation or similar payments from a donor-advised fund to the donor, the advisor, members of their families, or businesses they control. Because expense reimbursements are considered to be “similar” payments, community foundations that permit donors to raise money for advised funds will be prohibited from using the advised fund’s assets to reimburse donors’ expenses effective on the date of enactment.

Similarly, the new legislation prohibits all three types of supporting organizations from the payment of grants, loans, compensation or similar payments to the supporting organization’s substantial contributor, members of his or her family, and businesses they control. This prohibition is retroactive, applying to any transaction occurring after July 25, 2006.

The IRA charitable rollover incentive is effective upon signature for contributions made during 2006 and 2007. It permits individuals who have reached 70 ½ to exclude from income of up to $100,000 a year in retirement plan assets of contributing to a qualifying charity. Split-interest gifts and gifts to donor-advised funds, supporting organizations, and private foundations do not qualify for the incentive.

Further analysis and information available at the Council on Foundation's web site.