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SECURE 2.0 opportunities — Take advantage of 2024 and 2025 updates

newsletterPresident Biden signed the Setting Every Community Up for Retirement Enhancement (SECURE) 2.0 Act into law in late 2022, but much of the wide-reaching retirement legislation is being phased in over time. There are some significant changes in 2024 and 2025 that may help nonprofit employers recruit and retain employees. Here’s what you need to know.

New for 2024

Several changes took effect January 1, 2024, including:

Matching for student loan repayments. Younger employees can sometimes miss out on their employers’ matching contributions to retirement plans because of their student loan obligations. SECURE 2.0 allows employees to receive matching contributions to retirement accounts based on the qualified student loan payments that they have made.

Nonprofits can make matching contributions to a 403(b) plan, 401(k) plan or SIMPLE IRA if contributions based on student loan payments are available to all match-eligible employees.

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Is it time to hire a CFO?

newsletterLet’s face it: Most nonprofits are founded on a passionate belief in service. This doesn’t always include a passion for numbers. To fill this gap in financial expertise, nonprofits often hire chief financial officers (CFOs). But do all nonprofits — including small organizations — need one?

CFO defined

Generally, the CFO (or “director of finance”) is a senior-level position charged with oversight of an organization’s accounting and finances. This person works closely with the executive director, audit/finance committee and treasurer and serves as a business partner to program heads. In general, the CFO reports to the executive director and board of directors on the organization’s finances, analyzes investments and capital, develops budgets, and devises financial strategies.

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The benefits of cost allocation

newsletterCost allocation can be a cumbersome task for nonprofits, especially organizations with many activities. However, the process is critical for multiple reasons, and it’s worth reviewing your cost allocation practices regularly to ensure they’re working as intended.

Why make allocations?

Cost allocation often refers to how an organization’s costs are assigned to its programmatic, administrative and fundraising activities to determine the actual costs of those activities. While it’s obvious how some costs (usually direct costs) should be allocated, indirect costs (for example, management compensation, utilities, rent and other overhead) can prove more challenging.

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NEWSBYTES

What to know about Charity Navigator’s updated methodology

newsletterNonprofit evaluator Charity Navigator — which has rated nearly 210,000 organizations as of Fall 2023 — has made significant changes to how it calculates its scores. Its Accountability & Finance scores now are calculated based on defined nonprofit characteristics. Larger, donor-funded charities will undergo an in-depth evaluation, while organizations that are smaller or not funded by donors will be assessed with a more-focused set of metrics. Charity Navigator also is removing metrics such as administrative expense ratios, fundraising ratios and program expense growth metrics.

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Cyber protection — Why and how to “pen test” your systems

The global cost of cybercrime is expected to soar in coming years, and nonprofits are far from immune to the threat. The rising role of technology, especially in an age of increased remote work, leaves organizations of all kinds vulnerable to data-related crime.

You may take some comfort in the controls you’ve implemented, but will they actually work with future cyberintruders? Penetration (pen) testing can help you preempt intrusions and attacks by identifying weaknesses so you can proactively address them.

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Donor-advised funds are here to stay

Grants from donor-advised funds (DAFs) to charitable organizations totaled $52 billion in 2022 and contributions to DAFs reached $85 billion, an all-time high, according to the 2023 Donor-Advised Fund Report from the National Philanthropic Trust (NPT). Data for the NPT’s 2024 report is currently being collected.

Even with these astounding numbers, NPT data from 1,151 charities shows that DAFs actually grew at a slower pace than in previous years. Nevertheless, nonprofits should keep their eye on them. Here’s what your organization needs to know if it’s considering DAF funds.

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NEWSBYTES

Nonprofit leaders share AI concerns

Artificial intelligence (AI) seems to be everywhere these days, including in nonprofits. A recent survey by Stanford University’s Institute for Human-Centered Artificial Intelligence and Project Evident explores the current use of, interest in and opportunity for AI in the social and education sectors. The survey’s results show that AI already has a considerable presence there; nearly half of funders and nonprofit respondents said their organizations use some type of AI. And three out of four funders and nonprofits believe their organizations would benefit from using AI more.

The most common barrier to adoption is bias in AI systems, followed by challenges in envisioning how nonprofits can use the technology and a lack of internal expertise. In addition, nonprofits also are concerned about the cost.

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What you need to know about new overtime rules

clock manThe U.S. Department of Labor (DOL) released a new final rule in the spring of 2024 changing the salary threshold for determining whether employees are exempt from federal overtime pay requirements under the Fair Labor Standards Act (FLSA). Although the new rule took effect July 1, 2024, opponents have already filed litigation challenging it. Here’s what you need to know while the lawsuits play out.

Overtime test

The FLSA requires that employers pay nonexempt workers overtime pay at a rate of 1.5 times their regular pay rate for hours worked per week that exceed 40. Employees are exempt from the overtime requirement if they fulfill the following three tests:

  1. Salary basis. The employer pays the employee a predetermined and fixed salary that isn’t subject to reduction based on variations in the quality or quantity of their work.
  2. Salary level. The salary isn’t less than a specific or threshold amount.
  3. Duties. The employee primarily performs executive, administrative or professional duties.

The new rule raises the threshold for the salary level in two steps. Previously, most salaried workers who earned less than $684 per week or $35,568 per year became eligible for overtime. On July 1, 2024, the threshold rose to $844 per week or $43,888 per year. On January 1, 2025, it will climb further, to $1,128 per week or $58,656 per year.

Notably, the increases employ the same methodology that the previous rule used (which could make it more likely to withstand court challenges). But that rule also is the subject of a lawsuit.

Highly compensated employees

The new rule also increases the total compensation requirement for highly compensated employees (HCEs) who are subject to a looser duties test than employees who are paid less. Now, they’re required to “customarily and regularly” perform only one of the duties of an exempt executive, administrative or professional employee, versus primarily performing such duties.

The former rule applied to HCEs who performed office or non-manual work and earned total compensation (including bonuses, commissions and certain benefits) of at least $107,432 per year. The salary threshold rose to $132,964 per year on July 1, 2024, and will go up to $151,164 on January 1, 2025.

Under the final rule, all salary thresholds will be updated every three years, based on current earnings data from the most recent available four quarters of data from the Bureau of Labor Statistics. The DOL can, however, temporarily delay a scheduled update due to unforeseen economic or other conditions.

Nonprofits’ next steps

With the future of the new rule uncertain, your organization may want to err on the side of caution. If you haven’t already done so, review your employees’ salaries to identify those whose salaries exceed the previous level but fall below the new thresholds.

For those employees who are now exempt under the new thresholds, you could increase their salaries to retain their exempt status. Other options include reducing or eliminating overtime hours or paying overtime to these employees. You also can reduce an employee’s salary to offset new overtime pay. Budget adjustments, as well as training for newly nonexempt employees about timekeeping and limits on off-the-clock hours, might be necessary.

Bear in mind that salary alone doesn’t make employees exempt — they also must satisfy the applicable duties test. An employee whose salary exceeds the threshold but doesn’t primarily engage in applicable duties is eligible for overtime pay.

Stay tuned

Litigation over the DOL’s new rule may take time to play out and a court could block the rule while the lawsuits proceed. Your nonprofit should pay close attention and seek professional advice on how to stay on the right side of the law.

Does it apply to your nonprofit?

The U.S. Department of Labor (DOL) has indicated that not all nonprofits are subject to the new overtime rule because they aren’t all covered by the Fair Labor Standards Act (FLSA). For example, the law doesn’t necessarily apply to employers with an annual dollar volume of sales or business less than $500,000. Also, charitable, religious, educational and similar activities generally aren’t considered in the calculation unless they compete with businesses. Only activities performed for a business purpose are included.

But a nonprofit’s employees could still be covered by the FLSA under “individual coverage,” meaning they’re involved in interstate commerce. The DOL defines such involvement broadly. It includes employees who regularly make out-of-state phone calls, handle records of interstate transactions, and travel to other states for work or produce goods that will be sent out of state (including, for example, an administrative staffer typing letters). If your organization regularly interacts with out-of-state contacts, the new overtime rule likely applies to your organization.

Are the odds in your favor? What to know about raffles

Raffles are commonly used by nonprofit organizations as a way to raise funds. But that doesn’t mean that raffles are without challenges. IRS rules surrounding gaming apply, as do state and local laws. Not knowing the rules may come back to haunt your organization.

UBI ramifications

ticketsNonprofits must pay income tax on unrelated business income (UBI), defined as income from a trade or business, regularly carried on, that isn’t substantially related to the organization’s exempt purpose. The IRS considers raffles to be a form of gaming, which is a trade or business. Thus, your raffle income may be subject to UBI tax.

If you routinely hold raffles, it’s possible they could be considered “regularly carried on,” and raffles likely aren’t related to your exempt purpose. In addition, losses in another unrelated trade or business can’t be used to offset UBI generated by your raffle.

But, raffle income can be exempted from UBI tax if the raffle is conducted with “substantially all” volunteer labor. The term hasn’t been formally defined, but the IRS’s unofficial guideline is that 85% or more of the labor running the raffle should be from volunteers. Keep records to document your level of volunteer support.

IRS reporting

Your nonprofit must report when the winnings are $600 or more and at least 300 times the amount of the winner’s wager (the raffle ticket price). You can deduct the wager amount when determining if the $600 threshold is met. For example, let’s say you sell $5 tickets and your winner receives $2,500. Because the winnings ($2,495) are more than $600 and more than 300 times the amount of the $5 wager, you must report the winnings to the IRS.

You should file Form W-2G, “Certain Gambling Winnings,” and give a copy to the winner to show reportable winnings along with any related income tax withheld. The winner should provide you with their name, address and Social Security number on Form W-9 or Form 5754, to include with the filing.

Income tax withholding

Your organization will need to withhold federal income tax from any winnings and remit that amount to the IRS if the proceeds (the difference between the winnings and the amount of the wager) are more than $5,000. If winnings aren’t in cash (for example, a vacation package or motor boat), the proceeds are the difference between the fair market value (FMV) of the item won and the wager amount. If the value of a noncash prize isn’t obvious, obtain a valuation before the drawing.

You must withhold 24% in tax from the winnings. Note that the 24% rate applies to the total amount of the proceeds from the wager, not just the amount that exceeds $5,000. Say that you hold a raffle with $2 tickets and the winner receives $7,000. Because the proceeds ($6,998) exceed $5,000, you must withhold $1,680 ($6,998 × 24%).

For noncash prizes valued at more than $5,000, your organization has one of two options:

  1. The winner reimburses you the amount of withholding tax that you must pay to the IRS, or
  2. You pay the withholding tax on behalf of the winner, calculated at 31.58% of the FMV less the wager amount.

Taxes withheld from raffle winnings must be reported on Form 945, “Annual Return of Withheld Federal Income Tax.” Include the total amount of tax withheld that you reported on all the Forms W-2G filed for the year. File by January 31 following the close of the tax reporting year. If taxes withheld are under $2,500 in total, you may remit to the IRS when filing Form 945. If they’re greater than $2,500, you must remit them electronically on a monthly or semiweekly basis, depending on the total tax.

Finally, confirm that winners furnish a correct Social Security number to your organization. Otherwise, you will usually be required to withhold 24% of raffle prizes for federal income tax backup withholding.

A winning ticket

Everyone likes the idea of raffles, but be sure you know what tax reporting may be necessary before you feature one in a fundraiser. In addition to your federal tax ramifications, it’s important to follow all state and local tax obligations. Contact us to make sure your raffle meets all the requirements.