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The Case for Corporations to Leverage Donor-Advised Funds

Year over year, companies are increasing their focus on corporate social responsibility (CSR) and the impact they have on communities. Corporate charitable giving is perhaps the most visible effort that companies undertake, and the amount being donated has increased steadily, topping $21 billion in 2020.

Alongside this rise in corporate giving has been an increase in the number of companies offering to match employee donations to charity - up from 53% in 2014 to 71% in 2020.

These employee donation programs are often archaic and burdensome, and it’s estimated that $5 to $7 billion in eligible donations go unmatched by employers each year. 

Donor-advised funds (DAFs), tax-advantaged giving vehicles that have been around for decades, offer a compelling solution for both companies and their employees. As will be outlined below, DAFs have historically only been available to high-net-worth individuals, but Groundswell has built a platform that turns donor-advised funds into an affordable and easy-to-administer solution for corporate and employee giving. 

Groundswell believes that in the near future, companies providing donor-advised funds as a component of their total compensation approach will be as commonplace as 401(k)s, which were introduced in the United States in 1978.

Initially only utilized by the highest earners within companies who understood the intricacies of the tax benefits, 401(k)s have now become the ubiquitous tax-savings vehicle in the United States, with over 100 million accounts. 

In much the same way, Groundswell drives the adoption and utilization of donor-advised funds as America’s preferred charitable giving vehicle.

What is a donor-advised fund?

Donor-advised funds are charitable giving vehicles that allow individuals, families, and businesses to make a tax-deductible contribution to a fund, which can then be distributed to qualified charities over time. DAFs were first introduced in the United States in the 1930s, but their popularity has grown significantly in recent years.

Historically, DAFs have been primarily used by wealthy individuals and families. This is because DAFs often require a significant minimum donation to establish and maintain the fund, which can be a barrier to entry for many individuals with less disposable income.

For example, according to a report by the National Philanthropic Trust, the average size of a donor-advised fund in 2019 was $413,000, and the average initial contribution was $166,000.

Overall, the growth of donor-advised funds over the past decade reflects a shift in how affluent individuals and families approach charitable giving. DAFs offer a flexible, efficient, and tax-effective way to support a variety of causes over time, and their popularity is likely to continue to grow in the coming years.

Groundswell was created to ensure that average-income Americans are not left behind in this trend.

What is the difference between a DAF and a private foundation?

There are several key differences between a donor-advised fund (DAF) and a foundation:

  • Legal structure: A foundation is a separate legal entity, typically established as a nonprofit organization under state law, while a DAF is a fund held and managed by a sponsoring organization, such as a community foundation or financial institution.
  • Establishment: Establishing a foundation requires significant time, effort, and expense, including legal and accounting fees, filing paperwork with the IRS, and ongoing compliance and reporting requirements. In contrast, establishing a DAF is typically quicker and easier, with lower establishment costs.
  • Tax benefits: Both foundations and DAFs offer tax benefits for donors, including income tax deductions for contributions to the fund or foundation, as well as tax-free growth of assets held within the fund or foundation. 
  • Costs: Foundations generally have higher establishment and ongoing administrative costs, including legal and accounting fees, staff salaries, and overhead expenses, compared to DAFs, which are typically less expensive to establish and manage.

Overall, both DAFs and foundations offer donors the ability to support charitable causes and receive tax benefits for their contributions.

Historically, establishing a foundation has only made sense for the most wealthy individuals, families, and corporations due to the increased cost and compliance associated with their operation. Comparatively, donor-advised funds have offered high-income individuals and families, as well as profitable corporations, with a moderately cost-effective solution with nearly all of the same advantages as a foundation.

Groundswell ensures DAFs are no longer the enclave of the wealthy

According to a survey by U.S. Trust, 72% of high-net-worth individuals use DAFs as a key component of their overall charitable giving strategy. (Source: U.S. Trust Insights on Wealth and Worth 2018)

Over the past decade, DAFs have exploded in popularity. According to the National Philanthropic Trust's 2020 Donor-Advised Fund Report, the total number of donor-advised funds in the United States grew by 55% between 2010 and 2019, from 204,704 to 318,000. The total amount in donor-advised funds increased by 237% over the same period, from $38.8 billion to $131.1 billion.

But here’s the rub: DAFs are primarily used by wealthy individuals and families. According to the National Philanthropic Trust's 2020 Donor-Advised Fund Report, 60% of DAF assets are held in funds with balances of $1 million or more. Historically, the average donor in the United States is as likely to have a DAF as they are a member of their town’s exclusive country club.

Donor-advised funds have been reserved for the ultra-rich primarily because they’ve only been offered by the gated community of wealth advisors and financial institutions - average people need not apply.

Groundswell’s mission to democratize philanthropy has led it to create the world’s most modern and accessible donor-advised fund.  Whereas a donor today needs $20,000 to open a DAF at Morgan Stanley, the minimum contribution on Groundswell is $1.

Groundswell makes DAFs an employee benefit

To further Groundswell’s mission to democratize philanthropy, the company has built a Software-as-a-Service platform that enables companies to provide their employees with individual donor-advised funds. 

Groundswell’s easy-to-administer platform invites eligible employees to download the Groundswell app from the iOS or Android store.  Subsequent account creation takes less than sixty seconds.  At that point, the employee is the owner of their own tax-advantaged donor-advised fund. 

Additionally, the Groundswell administrator platform allows companies to effortlessly create custom corporate gifting and matching programs.  These programs deposit charitable dollars into employee accounts according to the program rules established by administrators.  The funds are not taxable income to the employee, and once put into the employee’s account, the employee can send the funds to charity however they wish.

Advantages of providing employees with donor-advised funds

Financial wellbeing

As inflation and wage stagnation have eaten away at household incomes, many companies and HR teams have focused on the concept of financial well-being. 

Financial well-being is a trend in HR that focuses on promoting the financial health and security of employees. This trend recognizes that financial stress can have a negative impact on employees' job performance, physical health, and mental well-being and that employers have a role to play in helping employees manage their finances and reduce financial stress.

Financial wellbeing programs typically include a range of resources and tools to help employees improve their financial literacy, such as educational seminars, online resources, and one-on-one financial counseling. Some employers may also offer financial incentives, such as matching contributions to retirement accounts or bonuses for achieving certain financial goals.

The trend toward financial well-being in HR has been driven in part by the growing recognition that financial stress is a major source of employee anxiety and distraction. Studies have shown that financial stress can lead to absenteeism, lower productivity, and higher healthcare costs for employers. By investing in financial well-being programs, employers can help reduce financial stress among their employees, improve job satisfaction and retention, and enhance overall business performance.

Considering that in 2020 70% of American households gave to charity, it’s safe to assume that charitable giving is an important part of the financial wellness of employees’ lives. This holds true across the wage spectrum. Low-income households give a higher percentage of their income to charity than high-income households. According to a 2018 study by the Urban Institute, households with incomes below $25,000 gave an average of 7.6% of their income to charity, while households with incomes of $200,000 or more gave an average of 4.2% of their income to charity.  Perhaps obviously, despite giving a higher percentage of their income, low-income households donate smaller dollar amounts to charity. In 2020, households with incomes below $50,000 gave an average of $1,336 to charity, compared to an average of $6,082 for households with incomes of $200,000 or more (Source: Giving USA 2021).

Knowing that your employees are giving to charity creates a compelling argument to provide for them a donor-advised fund along with charitable gifts and matches that effectively subsidize their annual giving. 

Tax advantages

There are three primary tax advantages that donor-advised funds can provide to your employees: minimizing taxable income in the current year while maintaining the ability to distribute funds in future years, the ability to donate appreciated stock assets, and the simplicity of a single year-end charitable giving receipt for tax reporting.

First, because the DAF is a qualifying tax-exempt vehicle, contributions to them are immediately tax deductible.  This means that an employee - for instance, a high-earning sales executive receiving a large commission check - can work with a tax planner to make a large contribution to her donor-advised fund, minimize her current year tax liability, and then work strategically to distribute those funds over a longer time horizon.

Second, donor-advised funds like Groundswell unlocks the ability for employees to donate appreciated stock assets - a significant philanthropy hack utilized by wealth donors for decades. 

When you donate appreciated stock to a charity, you can claim a deduction for the full market value of the stock at the time of the donation. Moreover, by donating the stock instead of selling it and then donating the proceeds, you can avoid paying capital gains taxes on the appreciation.

Here's an example: Let's say you purchased 100 shares of XYZ stock for $5,000 several years ago, and the stock is now worth $10,000. If you were to sell the stock, you would realize a capital gain of $5,000, and you would owe taxes on that gain. Assuming a capital gains tax rate of 20%, you would owe $1,000 in taxes.  At the conclusion of this sale, you would only have $9,000 to donate to charity.

Instead of selling the stock, you could donate the shares to a donor-advised fund. If you do that, you can claim a charitable deduction for the full market value of the stock, which is $10,000. You can then use the funds in the donor-advised fund to make grants to charities over time. Because you donated the stock instead of selling it, you can avoid paying the $1,000 in capital gains taxes that you would have owed if you had sold the shares.

Lastly, because an employee’s donor-advised fund is a tax-exempt vehicle that centralizes all of its users' philanthropy, the employee receives only a single tax receipt for reporting purposes at the end of the year, regardless of how many contributions were made or charities were supported.

Lower fees

Online and recurring monthly giving to charity have been growing trends in recent years. Here are some statistics to illustrate the trend:

  • Online giving continues to grow year over year, with a 10.6% increase in online donations in 2020 compared to the previous year. (Source: Giving USA 2021)
  • Recurring giving has become increasingly popular, with a 20.4% increase in the number of recurring donors in 2020. (Source: Blackbaud Institute)
  • Donors who give online tend to give more than those who give through other channels. According to a 2019 report by Classy, the average online donation amount was $93, compared to $65 for offline donations.

Younger donors are more likely to give online and to prefer recurring giving. A 2019 report by the Nonprofit Tech for Good found that 60% of Millennials prefer to give online, and 54% prefer to give monthly.

These are all positive trends.  However, with the ease of online giving comes a cost: credit card transaction fees.  Typical online donation fees are 3% plus $0.30. Oftentimes, online giving platforms ask the donor to cover these fees in order to provide the full donation amount to the charity.  That means that an employee donating $100 online is paying $3.30 to do so.  If that employee has his gift set up to occur monthly, he is going to pay nearly $40 in fees. 

Groundswell’s revolutionary platform has reduced the cost of these transactions and has passed those cost savings to users.  Groundswell’s distribution fees are 1% - offering significant annual savings to employees.

Privacy leads to inclusion

Employee donor-advised funds also offer something essential to an inclusive and equitable employee giving program: privacy

In traditional corporate donation matching programs, employees must submit evidence of their donation to an administrator, often in human resources. For decades this arrangement was never questioned. How else would a company know where to send the match? However, in an increasingly polarized world and workplace, employees are increasingly hesitant to disclose what charitable organizations they support for fear of ridicule, or worse, retribution. 

For the first time ever, donor-advised funds offer an alternative. Because the DAF is a charitable account, with the funds contributed to it only eligible to be sent to charity, employees can contribute to their DAF and request that their match be made directly into their account. Since the employee has received their match prior to sending the money to the causes they care about, they can distribute the funds how, where, and when they like with complete privacy.

In this manner, Groundswell’s platform has completely reimagined what corporate matching looks like. The result is a more private, inclusive, and equitable program - all made possible by donor-advised funds. 

A true benefit that stays with the employee

Because the DAF is an individual account registered in the employee's name - like a 401k plan or health savings account (HSA) - the employee is able to take their account with them if they were to leave the company. 

This makes leveraging a DAF for employee giving the first step toward truly making philanthropy an employee benefit. Previous models of employee matching were nothing more than process automation tools. But providing a portable DAF is giving an employee something of lifetime financial value. 

What do companies gain by leveraging donor-advised funds

Reduced risk

Within traditional matching programs, a company receives a request from an employee to send a donation match to a charity they’ve supported. The company, upon confirming the details of the charity, sends payment directly to the charity from the company’s account.  This action thereby directly associates the company with the charity - a potentially risky association in a hyper-polarized world. 

However, leveraging employee DAFs provides companies with an alternative. By structuring a corporate matching program through employee DAFs, companies can eliminate their association with recipient charities.  Because the company’s funds are only ever going to the DAF’s fiscal sponsor - in Groundswell’s case this would be the Groundswell Charitable Foundation - there is no financial link between the company and the charity. The charity receives disbursements from the Groundswell Charitable Foundation, at the recommendation of the employee (whose employment status or employer is not disclosed).  

The result is a matching program that is optimized for inclusion, not exclusion.

Reduced risk leads to increased inclusion

Not surprisingly, many companies have been fearful of directly associating with specific charities and have thus resorted to various forms of restricting the range of nonprofits eligible for corporate matches. This restriction has basically taken two forms.  

The first form happens when a company creates a list of charities it has proactively screened and approved.  These lists tend to have between five and 25 charities listed, with most of them national in scope. The problem with this list is that for most people, philanthropy is deeply personal and often local, and it's unlikely that a large, national organization fulfills its philanthropic aims. 

The second form happens when companies attempt to place specific charities or issue areas on a “deny list” that excludes them from eligibility. Not surprisingly, this approach is a slippery slope. Each nonprofit or issue area that is restricted effectively amounts to a statement by the company that the issue at hand is not worthy of support - a statement that can be marginalizing for employees who want to support that nonprofit. 

One segment of eligible charities that are often excluded is religion. This is unfortunate for employees because giving to houses of worship accounted for $131 billion of the $324 billion in individual giving in 2020. According to a 2016 study by the Nonprofit Research Collaborative, 70% of low-income households gave to religious organizations, compared to 48% of high-income households.  While choosing not to directly support a religion may seem like a logical thing for a corporation to do, it fails to acknowledge that for many employees their house of worship is also their source of other social support, such as counseling, food security, or education. 

Groundswell believes that inclusion begins with inclusion - specifically, companies should strive to match contributions to any eligible 501c3 that is not a documented hate group. Our matching solution - which uses donor-advised funds as an intermediary - provides companies with the opportunity to do so. 

Reduced administrative burden

Like individuals, companies can also utilize donor-advised funds for their philanthropic giving. Due to their minimal legal, compliance, and administrative requirements, DAFs are often the most logical and cost-effective solution for companies looking to create a charitable vehicle for their corporate social responsibility. 

As part of its platform, Groundswell offers companies a corporate DAF at no extra cost. This corporate giving account is fully tax-advantaged and has the ability to create corporate grants that are sent directly to charity.

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