Take-Away: A bill has been filed in the Senate that would permit employees to fund accounts, thus reducing their taxable income, from which to make charitable gifts.

Background: Senator Ben Sasses of Nebraska introduced in November a bill to encourage philanthropy. [Senate Bill 3191.] That bill, called the Everyday Philanthropist Act, has been referred to the Senate Committee on Finance. In essence, the bill would, by an amendment to IRC 132(o), authorize the creation of a flexible giving account by an employee.

Bill Specifics: Some of the particulars of the Everyday Philanthropist Act bill follow:

  • A flexible giving account is a separate written plan adopted by an employer for the exclusive benefit of its employees;
  • An eligible employee can elect to receive a reduction in their compensation and have their employer deposit that reduction amount in a flexible giving account;
  • An employer can elect to exclude certain employees from participation much like a qualified retirement plan, e.g. those employees under the age of 21 years, those employees with less than one year of service with the employer, and nonresident alien employees who work outside the U.S.;
  • Before the reduction in compensation, the employee must designate one or more eligible entities, i.e. charities, to which distributions are to be made from the account; no reduction in compensation is permitted unless and until the designation of the recipient charities is made;
  • As soon as the reduction in compensation deposit is made, the employer is required to make the disbursement from the flexible giving account to the identified charities;
  • The employer must provide reasonable notification of the availability and terms of this compensation reduction election to all eligible employees;
  • The employer must maintain a flexible giving account on behalf of each eligible employee for whom an election is in effect;
  • The employer must furnish to each participating employee, on or before January 31 of each year, an accounting of the employee’s flexible giving account showing both deposits and disbursements during the prior calendar year;
  • The maximum amount of the participating employee’s reduction in compensation for a calendar year is $2,700;
  • The amount of any distribution from a participating employee’s flexible giving account is not includible in the participating employee’s taxable gross income for the calendar year;
  • The amount of any distribution from a flexible giving account is not permitted as a charitable income tax deduction by the participating employee [IRC 170(a)], but distributions will still be treated as charitable contributions made by the participating employee and thus the distributions will be subject to the participating employee’s adjusted gross income limitations under the Tax Code [IRC 170(b);]
  • An eligible charity is described in the Tax Code [IRC 170(c)], but excluding private foundations;
  • An eligible employee who can elect to make a reduction in compensation must neither be a highly compensated nor key employee, as those terms are defined in IRC 414(q) and IRC 416(i) [which are limitations used in the nondiscrimination ‘testing’ of employee benefit plans;] and
  • The effective date of the Act, if enacted, would apply to taxable years beginning after the date of the enactment.

Conclusion: The proposed Everyday Philanthropist Act bill is probably a response to two recent legislative changes. The first is the 2107 Tax Act, which effectively doubled each individual’s standard deduction amount, thus arguably removing much incentive by an individual to give to charity if the individual no longer itemizes their federal income taxes due to the much larger standard deduction amount. The second change was the surprisingly large use of the recent ‘above the line’ $300.00 charitable income tax deduction as a part of the CARES Act tax law changes to address the impact of pandemic on charities. It is hard to say if this bill will ever make its way out of the Senate Finance Committee, but it seems to be getting some bipartisan (ha!) support from many in Congress as a mild way to encourage philanthropy by employees who wish to support charities, albeit in a tax efficient manner.