February 10, 2012
The IRS issued temporary rules on the recognition of healthcare cooperatives under Section 501(c)(29) of the IRC. See Reg. 13507-11, T.D 9574,
Federal Register, Feb. 7, 2012, for more details. The IRS also issued a revenue procedure for the issuance of determination letters and rulings. See IRS Rev. Proc. 2012-11 scheduled for publication in Internal Revenue Bulletin 2012-7, Feb. 13, 2012. See
www.irs.gov. for more information.
The proposed and temporary rules provide that “qualified” nonprofit health insurers must apply for tax-exempt recognition with the IRS. The effective
date of exemption will be the later of the date of application or March 23, 2010, the date of the enactment of the Patient Protection and Affordable
As it has with other provisions of the act, the IRS looks to the rules that are being promulgated by the Centers for Medicare & Medicaid Services
(CMS). See Legal Update dated March 15, 2011, “IRS Issues First Guidance on Exempt Health Insurance Entities.”
Once the Consumer Operated and Oriented Plan (CO-OP) qualifies under the
CMS plan and CMS acts, then the CO-OP can apply for IRS tax exemption
under Section 501(c)(29).
CMS issued final rules in December 2011 for eligibility to be part of
the CMS program. These rules provided guidelines for the compensation of
the board of directors, financial solvency requirements and loan
Revenue Procedure 2012-11
The IRS has provided additional rules in a revenue procedure for
applications for tax exemption, including rules precluding private
inurement of earnings to shareholders or individuals. Under these rules,
private inurement will not result from the lowering of premiums, the
improvement of benefits or the improvement of the quality of healthcare.
There will also be proscriptions on substantial legislative activities
and a prohibition on political activities.
The revenue procedure will require a copy of the notice of award issued
by CMS together with the executed loan agreement accompanying the
CO-OP’s application for exemption.
The letter application must contain the following information:
- The insurer’s employer identification number (EIN);
- A statement of receipts and expenditures and a balance sheet for the
current year and the three preceding years (or the years the issuer was
in existence, if fewer than four years);
- A proposed budget for two full accounting periods if the issuer has
not begun operations or has been in business for less than one
- A copy of the organizing or enabling document filed and certified by
- A copy of the organizing or enabling document that meets the
requirements of a “conformed copy” if not required to be filed with the
- A current copy of the issuer’s bylaws if applicable, or other
similar governing document; and
- A copy of both the Notice of Award issued by the Centers for
Medicare & Medicaid Services and the fully executed loan agreement with
Why Is This Important To You?
These healthcare exchanges may be attractive to small-group markets like
trade associations, social welfare organizations, medical providers and
physician clinics because they will provide insurance products
competitive to other providers like Blue Cross and Blue Shield plans.
Because these regulations were issued as temporary and proposed, the IRS
and Treasury are asking for any written or electronic comments or
requests for a public hearing to be received by April 9, 2012. The
submissions should be submitted to CC:PA:LPD:PR (REG-135071-11), Room
5203, Internal Revenue Service, P.O. Box 7604, Ben Franklin Station,
Washington, DC 20044.
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