Fraternal benefit organizations are tax-exempt under section 501(c)(8) of the Internal Revenue Code, provided they operate under a lodge system and primarily exist to provide for the payment of life, sickness, accident, or other benefits to their members or members’ dependents, while also engaging in fraternal, charitable, and community-oriented activities. These groups often blend social fellowship with mission-driven service, such as volunteering, fundraising for local causes, operating scholarship programs, or providing disaster relief.

Among these, some fraternals such as Thrivent Financial, Knights of Columbus, and Modern Woodmen of America, function as nonprofit insurers, offering life insurance, annuities, and other financial products to their members. While they must reinvest earnings into member benefits and charitable purposes rather than distribute profits to shareholders, their insurance operations can be substantial, resembling those of commercial insurers. Premiums fund member benefits and community programs, while investment income from reserves supports both payouts and fraternal mission work. This dual role means they operate at the intersection of financial services and nonprofit community service, making their tax-exempt status both valuable and, at times, controversial.

Non-Profit Status Intersects With For-Profit Behavior

For over a century, fraternal benefit societies have enjoyed federal income tax exemptions, but growing concerns over fairness, competitive balance, and government revenue needs are prompting renewed debate in Congress. Critics argue that large fraternals now operate like commercial insurers, distorting markets and stockpiling reserves while benefiting from a tax break their for-profit rivals don’t get.

When speaking to The Financial Times this month, Laurie Styron of CharityWatch warned that fraternal investment portfolios increasingly resemble those of commercial asset managers, raising the risk of “mission drift.” While investment income may fund member benefits, fraternal portfolios increasingly mirror those of commercial asset managers, including private equity and hedge funds raising questions about whether their primary purpose remains fraternal.

As quoted in The Financial Times, she said:

“‘Enforcement is always tougher when it requires case-by-case judgment calls, especially when those calls affect monied interests,’…The IRS, she noted, uses a principles-based rather than rules-based approach to assess charitable benefit.”

“Styron of CharityWatch said that the hybrid nature of fraternal insurers — as tax-exempt entities and state-licensed insurers — complicates oversight. No single regulator assesses the combined impact of these overlapping legal frameworks, which differ in purpose, governance and enforcement standards.”

“She questioned whether such a regulatory regime would be adopted today.”

“‘In fact, from a gut-check perspective, I wonder if we’d allow fraternal organizations of this size, operating in this way, to be considered nonprofits at all,‘ she said.”

Defenders of Fraternals

Defenders counter that fraternals still fulfill their community-based missions, pointing to millions of volunteer hours, hundreds of millions in charitable contributions, and their tiny share of the life insurance market. According to the American Fraternal Alliance, an industry group representing fraternal benefit societies, its member organizations account for only 2% of the total life insurance and annuity policies in the United States. This figure underscores the relatively small market share held by fraternal insurers compared to the broader insurance industry. Industry advocates also stress that their social impact far exceeds the value of the tax exemption, citing billions in annual community value.

Congress Debates The Issue

Still, lawmakers may explore ending the exemption for the most profitable fraternals, motivated in part by the opportunity to generate additional tax revenue. While bipartisan support for the status quo remains strong, the growing federal deficit and the sector’s higher-than-average profit margins could make the exemption harder to defend in the future.

In the 119th Congress, lawmakers introduced bipartisan concurrent resolutions reaffirming support for the tax-exempt status of fraternal benefit societies under Section 501(c)(8). In the House, H.Con.Res. 4, sponsored by Rep. Darin LaHood, was introduced on January 28, 2025, and referred to the House Ways and Means Committee. In the Senate, S.Con.Res. 6 was introduced on January 24, 2025, and referred to the Senate Finance Committee.

Both resolutions state the sense of Congress that fraternal benefit societies have historically provided tangible community benefits and should retain their current tax treatment. So far, neither resolution has advanced out of committee, and no hearings, markups, or floor votes have been scheduled. At present, there is no official timeline for Congress to reconvene discussions or take further action on the matter.

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