June 26, 2026 – Part 2

Don’t delete this email! It is not a duplicate of the policy update you received earlier this morning! Because there were so many significant policy developments affecting nonprofits over the past two weeks, we are sending two updates today. You should have received one earlier this morning with details on the state budget and two Center-initiated bills that state legislators approved last week. This second update begins with a reminder that there is still (a little) time to submit public comments on the proposed changes to the OMB Uniform Guidance. We share the good news that two federal courts have stopped the implementation of a problematic new rule limiting access to the Public Service Loan Forgiveness program and provide details on several bills affecting nonprofits that moved through the NC General Assembly last week. If that isn’t enough, we also provide insights on new federal developments on Medicaid work requirements, the Johnson Amendment, and potential new threats to the tax exemption of nonprofit schools.

In May, 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: 

The proposed rule would make several other significant changes to federal grant requirements that include: 

OMB plans to publish a final version of the UGR this summer or early fall so that it will take effect on October 1, 2026 (the first day of the new federal fiscal year). The proposed UGR changes are open to public comment through July 13. If your nonprofit would like to submit comments, you can do so through the Federal Register. So far, more than 99,000 organizations and individuals have submitted public comments.

Venable law firm has a helpful summary of the major proposed revisions to the OMB Uniform Guidance and how they could impact nonprofits with federal grants.  

The Center is preparing public comments on the proposal that we will submit next Monday. Let us know TODAY if your nonprofit has federal grants or subawards and there are provisions that would be particularly harmful or beneficial for your organization. Thank you if you have already shared your input! 

Last week, two federal courts, one in Massachusetts and one in the District of Columbia, issued rulings vacating the U.S. Department of Education’s final rule on nonprofits’ eligibility to be employers in the Public Service Loan Forgiveness (PSLF) program. Both courts found that the Department of Education exceeded its statutory authority in issuing the rule.

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 would have excluded 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:

Under the final rule, which was scheduled to take effect last Wednesday, the Secretary of Education would have had 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. The final rule also would have required that nonprofits certify in their application to be a PSLF-eligible employer that they do not participate in activities that have a substantial illegal purpose, which could have effectively made many nonprofits ineligible employers for PSLF purposes even if they were not actually engaged in “substantial illegal purposes.”

For more information about the final rule, the Center’s concerns about it, and its potential impact on nonprofits, check out the Center’s analysis of the final rule.

On Wednesday, Governor Stein vetoed a bill (H.B. 437) that would establish a drug-free zone within 100 feet of any facility (including a nonprofit) that receives government funding to provide housing or temporary shelter for people experiencing homelessness. The House approved the bill last Wednesday, and the Senate had approved it two weeks ago.

Notably, a late change in the bill makes it inapplicable to nonprofits that primarily provide other types of services to people experiencing homelessness (i.e., services other than housing or temporary shelter). The bill would create a criminal penalty for nonprofits that operate facilities to provide housing or temporary shelter for people who are experiencing homelessness if they intentionally allow the manufacture, sale, or distribution of illegal drugs at their facilities (with a limited exception for small quantities of marijuana). If the bill becomes law, affected nonprofits providing housing or temporary shelter for people experiencing homelessness also would be required to post at least one permanent sign at their facilities identifying them as drug-free zones.

The final version of the bill also would prohibit local governments from allowing “unauthorized camping or sleeping” and instead would allow local governments to set up temporary locations for camping or sleeping by people experiencing homelessness. These temporary locations would need to be maintained by the local government on government-owned property and could only be maintained for less than a year.

Legislators could vote to override Governor Stein’s veto of the bill later this summer.

Last week, 24 states and the District of Columbia filed a lawsuit in a federal court in Massachusetts challenging the recently–published interim final rule from the Centers for Medicaid and Medicare Services (CMS) establishing the details of community engagement requirements for Medicaid participants. North Carolina is one of the states that is a plaintiff in the lawsuit, which alleges that CMS violated the federal Administrative Procedures Act and the Spending Clause of the U.S. Constitution in promulgating the rule.

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, which is scheduled to take effect on July 31, 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 now-challenged 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:

There is a good chance that the court will issue an initial ruling in the case prior to the July 31 effective date of the rule.

Two weeks ago, the Internal Revenue Service sent a proposed rule with “guidance on the application of the fundamental public policy against racial discrimination in schools” to the Office of Management and Budget (OMB) for review. The OMB review is typically the final step in the process before agencies issue proposed regulations. While the text of the proposed rule is not yet available to the public, the notice explains that “these proposed regulations would amend existing regulations under section 501(c)(3) to clarify that certain schools that discriminate on the basis of race are not operated exclusively for charitable purposes.”

The concept of a “fundamental public policy against racial discrimination” comes from the 1983 U.S. Supreme Court ruling in Bob Jones v. United States where the Court found that the IRS could revoke a nonprofit private college’s tax-exemption under Section 501(c)(3) because its policy of denying admission to individuals in interracial relationships violated a “fundamental public policy” of eradicating racism in education. Based on the Trump Administration’s interpretation that diversity, equity, and inclusion (DEI) programs and practices are “illegal discrimination”, it is quite likely that the forthcoming proposed regulations will provide that nonprofit private schools with race-based practices – including those with DEI policies and practices – are not eligible for tax-exemption under Section 501(c)(3) of the Internal Revenue Code.

Two weeks ago, the White House Religious Liberty Commission released its draft report on its findings and policy recommendations. The commission was established by a May 2025 Executive Order from President Trump (EO 14291).

Among other things, the commission’s 224-page report addresses the Johnson Amendment (the provision in Section 501(c)(3) of the Internal Revenue Code that prohibits charitable nonprofits and churches from engaging in partisan politics), religious discrimination in employment, and protecting houses of worship and other faith-based nonprofits from acts of violence.

The report recommends several policy proposals that would affect charitable nonprofits, including:

It is unclear what the Trump Administration’s next steps will be in implementing the commission’s recommendations.

Last Tuesday, the NC House of Representatives approved a bill (H.B. 958) that would make a variety of changes to state election laws. Among other things, the 37-page bill would prohibit citizens of other countries and businesses and nonprofits based in other countries from making a variety of election-related contributions, including contributions to referendum committees. Referendum committees are entities that advocate on state constitutional amendments and other ballot measures. They are often led or supported by charitable nonprofits.

The House removed some provisions from earlier versions of the bill, including ones that would:

Unlike other election legislation that has been proposed in the General Assembly this session, the bill does not require documentary proof of citizenship for voting or shorten the 17-day early voting period. The House passed the bill in a party-line vote. It now goes to the Senate for consideration. The Senate could vote on it – and possibly make changes to it – later this summer.

Last Tuesday, the NC House of Representatives unanimously approved a bill (H.B. 1200) that would exempt diapers, baby wipes, and feminine hygiene products from sales tax. While the bill does not directly affect nonprofits, it almost certainly would benefit many women and families who receive services from nonprofits. It is unclear whether the Senate will consider the bill.

Nonprofits that are registered as lobbyist principals (and their staff or contractors who were registered as lobbyists) must file their second quarterly reports of 2026 with the Secretary of State Lobbying Compliance Division by Wednesday, July 22. To help you understand the basics of state lobbying laws affecting nonprofits, check out the Center's summary of NC lobbying laws for nonprofits.

Nonprofit Policy Update is the weekly newsletter on state and federal policy issues affecting 501(c)(3) nonprofits. Learn more about the Center's public policy agenda.
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