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3 Financial Factors for Fraternities and Sororities to Watch this Fall

    

At OmegaFi, we are closely watching three external factors likely to have an impact on fraternity and sorority financial operations in the months ahead. OmegaFi recommends advisors and headquarters staff reexamine financial policies and increase the level of financial coaching and oversight of chapters, alumni/ae associations and house corporations in order to manage (1) the IRS’ proposed changes to the group exemption rules, (2) inflation and (3) the rising risk of theft and fraud in a recession.

External Factor #1: IRS Changes to the Group Exemption Rules

Two years ago, the IRS announced changes they wanted to make that significantly impact the way fraternity and sorority headquarters govern their chapters and manage their group exemption with the agency in IRS Notice 2020-36.

Under the proposed new rules, headquarters will be required to, among other things, ensure its chapters and affiliates file their 990 and provide “general supervision”. According to the IRS’s proposed rule, “general supervision” means the inter/national headquarters “annually obtains, reviews, and retains information on” its chapter’s and affiliate’s “finances, activities, and compliance with annual filing requirements.”

OmegaFi recognizes many inter/national headquarters want to avoid “financial supervision” because it may have ramifications in other operational and legal areas. However, the IRS seems to be requiring some financial supervision. At a minimum, we recommend your headquarters review year-end financial statements to make sure chapters file their 990 correctly.

In addition, headquarters should obtain a copy of their chapters’ IRS Form 990 and monitor compliance using a dashboard like the one provided by File990.org. Better yet, outsource some of this work to third parties to make sure the 990 is completed for every chapter and other entity under your group exemption.

Of the nearly 4,000 fraternity and sorority chapters working with OmegaFi, only 21% are in compliance with the IRS 990 requirements. An additional 21% have lost their exempt status completely, 18% have some sort of error associated with their account at the IRS that needs to be addressed, and 41% are past due on their filings.

While the IRS changes listed above are “proposed” rules and some of them will not fully apply to grandfathered “preexisting” chapters, it is inevitable that something is about to change as it relates to group exemption expectations. Allowing chapters, alumni/ae associations and other entities listed under your group exemption to manage their financial affairs entirely on their own without any supervision by the inter/national headquarters comes with significantly more risk under these new IRS proposed rules.

External Factor #2: Inflation and the Impact on Budgets

The term “inflation” continues to permeate the news cycle, and it’s likely to continue for some time. Its ramifications are already trickling down to almost every consumer, including today’s college student.

Chapters need to prepare for their activities to cost more. Renting a bus, hiring a security guard, providing meals, buying supplies – these activities are all likely to cost more than they have previously.

OmegaFi published an entire paper on this subject. We continue to recommend inter/national headquarters staff and chapter advisors prepare collegiate chapters for the economic reality facing their budgets and consider at least a 10% dues increase to meet and operate in the current inflationary environment chapters will face in the coming academic year.

External Factor #3: A Recession and Increased Risk and Claims of Fraud and Theft

With an economic recession potentially on its way, fraternal organizations need to increase their oversight to prevent theft and fraud. In recessionary environments, insurance claims about fraud and crime increase according to the Association of Certified Fraud Examiners. Look at your own claims history with your insurer, and ask for their feedback about the issue and consider the claims examples offered by MJ Insurance on their website.

Whether the economy is in a recession or not, OmegaFi recommends fraternities and sororities take several precautions to reduce the risk of fraud and theft.

First, do not allow members or parents to pay their fraternity/sorority bill with cash or via Venmo. Reconcile bank accounts each month by someone other than the person who writes checks. Prohibit cash withdrawals and scrutinize who has access to debit cards able to make cash withdrawals from a chapter bank account. Do not allow officers or advisors to issue a “credit” to a particular member, thereby reducing the member’s dues in exchange for a chapter expense the member incurred. Rather, OmegaFi recommends requiring the member to pay the full dues amount. Then, the chapter should reimburse the member for the money spent on recruitment supplies by cutting a check to the member. Finally, at least two individuals should review the list of all vendors receiving payments from the organization. Make sure each vendor is legitimate. Many fraud situations occur because the thief has established fake vendors to collect payments from the chapter or house corporation.

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