While many North Carolinians have been focused on the Stanley Cup Final this week (Go Canes!), the state legislature and various federal agencies have been busy working on policy issues affecting nonprofits. This week’s update highlights a new federal rule on work requirements under Medicaid expansion and how that may impact nonprofits and the people they serve. We also share more details about the U.S. Office of Management and Budget proposal to rewrite the rules for nonprofits that receive federal grants, a new law enabling North Carolinians to claim a tax-credit for their contributions to certain scholarship-granting nonprofits, and two federal lawsuits that could affect student debt for many nonprofit employees.
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Federal Government Issues Final Rule on Medicaid Work Requirements |
On Wednesday, the federal Centers for Medicaid and Medicare Services (CMS) published an interim final rule on the Federal Register establishing the details of community engagement requirements for Medicaid participants. The One Big Beautiful Bill Act (OBBBA) that President Trump signed into law on July 4, 2025 required many people aged 19-64 who receive health coverage through Medicaid expansion to meet work or community engagement requirements (typically by working or volunteering for at least 80 hours per month or by attending school at least half-time), starting on January 1, 2027. The new CMS rule provides guidance for states on the details of how these work and community engagement requirements will be implemented.
The OBBBA Medicaid work requirement provision included an exemption for individuals who are “medically frail.” The new CMS rule significantly limits the definition of “medically frail” by adding a requirement that the underlying medical condition must prevent Medicaid recipients from satisfying the work or community engagement requirements. This regulatory change could mean that many more people will lose their health coverage under Medicaid expansion because they are unable to meet the work or community engagement requirements.
The new CMS rule also provides more clarity on how individuals receiving health coverage through Medicaid expansion can count their time spent volunteering with 501(c)(3) nonprofits as some or all of their hours for their community engagement requirements. Notably, the rule explains that nonprofits must: |
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Provide oversight of the volunteer activities of Medicaid expansion recipients; and
- Have processes in place to track the community service completed by Medicaid expansion recipients, including the type of community service activities they performed, the dates and hours they worked, and a point of contact who can confirm the hours of community service completed.
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Nonprofits that use volunteers who receive health coverage through Medicaid expansion should make sure they have these tracking systems in place and that they are prepared to provide necessary information to the NC Department of Health and Human Services.
The interim final rule takes effect on July 31, and CMS is accepting public comments on the rule until the effective date. |
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OMB Proposes Major Changes to Federal Grant Rules |
Last Friday, the U.S. Office of Management and Budget (OMB) published on the Federal Register its proposed changes to the OMB Uniform Guidance, the rules that govern federal grants to nonprofits. OMB is proposing to change the name of the document from the Uniform Guidance to the Uniform Grants Regulation (UGR).
Notably, the proposed UGR maintains three important provisions from the 2024 revision of the OMB Uniform Guidance for which the Center and our nonprofit partners have advocated: |
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Ensuring that nonprofits may receive a de minimis indirect cost rate of 15% of their modified total direct costs on their federal grants;
- Setting the threshold for a single audit at $1 million in federal grants received; and
- Ensuring that federal agencies’ notices of funding opportunities (NOFOs) are clearly worded.
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The proposed rule would make several other significant changes to federal grant requirements. These would include: |
- Requiring political appointees to perform a “pre-issuance review” of many grant awards to ensure that grants are being used for purposes consistent with Administration priorities.
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Expressly providing that federal grant funds must not be used for: (a) diversity, equity, and inclusion (DEI) or diversity, equity, inclusion, and accessibility (DEIA) policies, principles, or practices; (b) gender ideology (meaning “theories or ideologies that deny the biological reality of sex or the sex binary in humans, or endorse or advocate for the notion that sex is a chosen or mutable characteristic); and (c) “the so-called ‘transition’ of a child under 19 years of age from one sex to another.” The proposed rule includes a lengthy justification for the legality of this new provision, presumably anticipating that it will be challenged in court.
- Ensuring that federal grants do not discriminate against (or in favor of) faith-based nonprofits.
- Providing that federal grants may not be used to promote or support “disparate impact liability.”
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Encouraging federal agencies to award multi-year grants instead of requiring nonprofits to reapply for federal grants every year. This change could create greater certainty or cost savings for many nonprofits.
- Requiring federal grantees and sub-grantees to provide assurances that none of their employees worked for a federal granting agency in the previous two years.
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Allowing federal agencies to consider the risk level of grantees based on their “history of questionable practices” which includes plagiarism, use of discredited studies, and engaging in activities that violate federal civil rights or religious liberty laws (presumably including the activities mentioned in the first bullet point above).
- Limiting the ability of federal agencies to require additional audits on nonprofit grantees.
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Increasing the authority of federal agencies to terminate or temporarily suspend federal grants for violations of the OMB UGR.
- Eliminating the use of fixed amount grant awards.
- Providing more leeway on how grantees establish their internal controls while also expressly requiring grantees to use the federal E-Verify system and to have cybersecurity measures in place to protect confidential business information.
- Limiting the ability of nonprofits to use federal grant funds for fundraising activities or to attend conferences unless these activities are approved by the federal granting agency.
- Expanding the prohibition on the use of federal grant funds for lobbying activities to restrict the use of federal grants for nonpartisan voter registration activities and for public messaging on public policy issues.
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Limiting the use of federal funds for membership in country clubs or in organizations whose primary purposes are Iobbying.
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NC Senate Overrides Veto of Bill Authorizing North Carolina to Opt In to New Tax Credit for Contributions to Scholarship Granting Nonprofits |
On Wednesday, the NC Senate voted to override Governor Josh Stein’s veto of a bill (H.B. 87) that would enable North Carolinians to receive a federal tax credit of up to $1,700 per year for contributions to 501(c)(3) nonprofits that qualify as “scholarship granting organizations” as part of a new law that was part of the One Big Beautiful Bill Act. The NC House of Representatives voted to override the veto two weeks ago, so the new federal tax credit will take effect for contributions made to North Carolina “scholarship granting organizations” beginning in 2027. The federal law requires states to opt in to the provision in order for the tax credit to be available to taxpayers in their states (which is why the NC General Assembly passed the bill).
The federal law provides rules for how nonprofits would qualify as “scholarship granting organizations.” Among other things, scholarship granting organizations would need to: |
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Be 501(c)(3) public charities;
- Provide 10 or more scholarships to students attending more than one school;
- Spend at least 90% of their income on scholarships for eligible students;
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Have systems in place to prevent the co-mingling of contributions that are eligible for a tax credit from other revenue sources and to verify the household income and family size of students eligible for scholarships; and
- Be included on the list of eligible scholarship granting organizations provided by the state each year.
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The state legislation identifies the NC State Educational Assistance Authority (NCSEAA) as the state entity that will identify scholarship granting organizations in North Carolina and provide a list of these to the U.S. Treasury Department every year. That means that North Carolina nonprofits planning to be scholarship granting organizations will need to submit applications to NCSEAA to be eligible to receive contributions that qualify for the new federal tax credit.
The Center has heard a number of questions from nonprofits, elected officials, and others about this new federal tax credit. Here are answers to three of the most common questions we have heard: |
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Why does it matter that donations to scholarship granting organizations are eligible for tax credits instead of tax deductions? As noted above, taxpayers will be able to receive a tax credit of up to $1,700 per year for their contributions to scholarship granting organizations. This means that their federal income tax will be reduced on a dollar-for-dollar basis (up to $1,700 per year) for their contributions to scholarship granting organizations. A tax-deductible contribution to another 501(c)(3) nonprofit merely reduces a taxpayer’s taxable income, which means that the amount of their federal income tax will only be reduced by a percentage (the effective tax rate that they pay) of their total contributions. Translation: This new tax credit creates a larger tax incentive to give to scholarship granting organizations than to give to other 501(c)(3) nonprofits.
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Doesn’t North Carolina already have the Opportunity Scholarship program to provide vouchers to help pay for private school tuition? Yes, but unlike the Opportunity Scholarship program, which only covers tuition and required fees at certain private K-12 schools, scholarship granting organizations can provide scholarships that cover a wider range of education-related expenses (including tutoring, certain technology expenses, school uniform costs, and transportation fees) for students attending public or private K-12 schools.
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Can a scholarship granting organization be abused to allow parents to receive a tax credit for a contribution that ultimately goes to a scholarship for their own children? No. The new federal law prohibits “self-dealing” by scholarship granting organizations, prohibiting these nonprofits from awarding scholarships to their donors and other “disqualified persons.” The U.S. Treasury Department is expected to issue proposed regulations in the not-too-distant future with more guidance on self-dealing by scholarship granting organizations, presumably including penalties for organizations and/or their donors or other insiders who attempt to abuse scholarships for their own financial benefit.
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NC House Approves Bill that Could Expand GovOps Authority over Nonprofits with State Funding |
On Tuesday, the NC House of Representatives approved a bill (H.B. 1126) that could expand the authority of the Joint Legislative Oversight Commission on Governmental Operations (GovOps) to investigate nonprofits with state funding. The GovOps provision was included as an amendment to a bill that otherwise was making changes requested by the State Treasurer.
As background, in 2023, the state legislature greatly expanded the authority of GovOps to investigate nonprofits with state funding and to compel these nonprofits to provide GovOps with documents and to testify at GovOps meetings. The new amended provision would specify that GovOps can access any information or data of nonprofits with state funding. GovOps already has authority to access “any document or system of record” of these nonprofits. It also enables GovOps to compel contractors, subcontractors, vendors, grantees, attorneys, and other representatives of state-funded nonprofits to testify before GovOps. Currently, GovOps can compel officers and employees of state-funded nonprofits to testify.
Both the amendment and the bill passed the House in mostly party-line votes on Tuesday. The bill now goes to the Senate for consideration. |
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Reminder: Nonprofits Can Advocate For or Against Constitutional Amendments |
The NC General Assembly has placed three state constitutional amendments on the November 2026 ballot: |
- An amendment that would lower the constitutional cap on state income tax rates from 7% to 3.5%. The Center is concerned that this constitutional amendment would be harmful to nonprofits.
- An amendment that would require the NC General Assembly to establish limits on how much counties and municipalities may increase property tax levies. If the constitutional amendment were to pass, legislators would then work on the details of these levy limits next year.
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An amendment that would require all voters to provide photo ID when voting. North Carolina currently has a voter ID statute, so the amendment would have little practical impact on elections.
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Each amendment would be added to the state constitution if a majority of voters approves it in this fall’s election. In addition, legislators are still considering several other state constitutional amendments, including: |
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A Senate bill (S.1082) that would add a “right to work” to the state constitution, prohibiting requirements that workers join labor unions or labor organizations.
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A Senate bill (S.1081) that would protect the right to engage in farming and forestry in the state constitution.
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A House bill (H.B. 443) that would amend the state constitution to add a provision that if the Governor has to fill a vacancy in a Council of State position, the Governor must appoint someone from the same political party as the person who vacated the position.
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A House bill (H.B. 144) that would amend the state constitution to make the members of the NC Board of Education elected rather than appointed by the Governor.
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As the Center has explained in a blog post, charitable nonprofits can take positions on state constitutional amendments and other ballot measures. Efforts by 501(c)(3) nonprofits to advocate for citizens to vote for or against constitutional amendments is treated as direct lobbying for federal tax purposes, which is a legal activity for charitable organizations. With at least three (and quite possibly more) constitutional amendments on the ballot this fall, nonprofits may want to consider whether it makes sense to take a position on these ballot measures. This summer, the Center plans to provide more information (most likely webinars and written guidance) on ways that nonprofits can engage on constitutional amendments.
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Federal Court Hears Oral Arguments in PSLF Litigation
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On Wednesday, a federal court in Massachusetts heard oral arguments in a case challenging the U.S. Department of Education’s final rule on nonprofits’ eligibility to be employers in the Public Service Loan Forgiveness (PSLF) program. Under PSLF, student loan borrowers who work in public service jobs – including positions with 501(c)(3) nonprofits – for 10 years while paying off their student loans are eligible to have the remainder of their federal student loans forgiven. PSLF has enabled many young professionals to afford careers in the nonprofit sector.
The final rule excludes employers – potentially including some 501(c)(3) nonprofits – from being eligible employers for PSLF if they are engaged in “substantial illegal purposes.” The final regulations define “substantial illegal purposes” to include: |
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Aiding or abetting violations of federal immigration laws;
- Supporting terrorism;
- Engaging in chemical or surgical castration or mutilation of children;
- Engaging in child trafficking;
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Engaging in a pattern of aiding and abetting illegal discrimination in violation of federal anti-discrimination laws (which could potentially be construed broadly to cover programs and employment practices that provide preferences based on race or proxies for race); and
- Engaging in a pattern of violating certain state laws, including trespassing, disorderly conduct, public nuisance, vandalism, or obstruction of highways.
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Under the final rule, which takes effect on July 1, 2026 and only applies to “illegal” activities of nonprofits taking place on or after that date, the Secretary of Education will have the authority to determine “by a preponderance of the evidence” that an otherwise eligible nonprofit has engaged in activities that have a substantial illegal purpose with only minimal due process for the nonprofit. Once a nonprofit has been deemed to have engaged in activities that have a substantial illegal purpose, it will remain an ineligible employer for PSLF for at least 10 years. The final rule also requires that nonprofits must certify in their application to be a PSLF-eligible employer that they do not participate in activities that have a substantial illegal purpose, which may be difficult and unclear for staff to determine if the organization provides services in certain mission areas or to particular populations.
This week’s court hearing focused on whether the plaintiffs had standing to bring the case and whether the Department of Education had the authority to issue the final rule. The plaintiffs have asked the court to issue a ruling before the July 1 effective date of the new rule.
For more information about the final rule, concerns about it, and its potential impact on nonprofits, check out the Center’s analysis of the final rule. |
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Lawsuit Challenges New Regulation that Would Limit Federal Student Aid for Degree Programs that Often Lead to Nonprofit Careers |
A lawsuit filed in a federal court in the District of Columbia this week seeks to stop the implementation of a new U.S. Department of Education regulation that would make several changes to federal student loan programs. One of these changes would limit the types of educational programs that are classified as “professional degrees” that are eligible for higher amounts of federal student loans. Several degree programs that are pipelines for significant numbers of nonprofit employees, including advanced degree programs in social work, public health, and nursing, would be excluded from the types of professional degree programs eligible for higher levels of student loans. Because positions with 501(c)(3) nonprofits are eligible for student loan forgiveness under the Public Service Loan Forgiveness (PSLF) program, nonprofit careers are often a good option for many graduates of professional degree programs. The rule could ultimately reduce the future pool of nonprofit employees with postgraduate degrees in fields like social work, public health, and nursing.
The rule is scheduled to take effect on July 1 unless the court pauses its implementation or Congress passes a law that more clearly defines what types of degree programs qualify as professional degrees for the purposes of federal student loans. A bipartisan bill in Congress (H.R. 6718) would fix this issue by defining “professional degree” to include a wider range of postgraduate programs than the proposed regulation, including degree programs in social work, public health, and nursing.
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New! Legal Compliance Checklist for NC Nonprofits
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Compliance matters, especially right now as nonprofits face increasing scrutiny. That’s one of the reasons the Center compiles and shares the annual Legal Compliance Checklist for North Carolina Nonprofits – and a new 2026 edition is available.
This comprehensive checklist outlines the rules and laws that apply to nonprofits’ governance, finances, advocacy, human resources, and fundraising – plus what’s changed and actions your organization may need to take. The 2026 edition has been reformatted to make it easier to navigate and expanded with updates on nonprofit corporate governance, federal tax laws, employment laws, federal and state grant requirements, intellectual property laws, and more.
Center members can access the checklist anytime as part of member benefits. Non-members can purchase the checklist for $50 (discounts for Center sustainers and associates). Access includes any updates throughout the year. |
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Nonprofit Policy Conversation in High Point on June 15 |
The Center has hosted a series of Nonprofit Policy Conversations this spring. Join us for the next scheduled policy conversation on Monday, June 15 from 10 a.m.-12 noon at Centennial Station Arts Center in High Point. The June 15 policy conversation is being presented in collaboration with Guilford Nonprofit Consortium, HandsOn NWNC, One Sector One Voice Triad, and High Point Arts Council (register now).
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