IRS Issues First Guidance on Exempt Health Insurance Entities

March 15, 2011

Details of the IRS-issued guidance on the tax-exemption requirements for qualified nonprofit health insurance issuers (qualified issuers) described in Internal Revenue Code Section 501(c)(29) (Notice 2011-23) on March 10, 2011, include the following.

Qualified Nonprofit Health Insurance Issuers

A qualified nonprofit health insurance issuer is an organization: (1) that is organized as a nonprofit, member corporation under state law; (2) where substantially all of its activities consist of the issuance of qualified health plans in the individual and small group markets in each state in which it is licensed to issue such plans; and (3) that meets additional requirements set forth in subsections (c)(2).

Affordable Care Act Excludes Certain Issuers

Organizations or their related entity, or a predecessor of either that was a health insurance issuer as of July 16, 2009; or the organization is sponsored by a state or local government, any political subdivision thereof, of any instrumentality of such government or political subdivision.

Requirements to be a Qualified Issuer

  • Governance requirements.
  • Must use any profits that it makes to lower premiums, improve benefits, or for other programs intended to improve the quality of healthcare delivered to members.
  • Must meet all state law requirements that other issuers of qualified health plans are required to meet in any state where the issuer offers a qualified health plan
  • Qualified issuer may not offer a health plan in a state until that state has in effect (or the Secretary of HHS has implemented for the state) the market reforms required by a part of a title XXVII of the Public Health Service Act, as amended by the Affordable Care Act.
  • Qualified issuer that receives a grant or loan under the co-op program must enter into an agreement with HHS, which requires it to meet (and continue to meet) both the requirements under § 1322 to be treated as a qualified issuer, and all requirements of the loan or grant agreement. Such an agreement must include a requirement that no portion of the funds made available by any loan or grant under the co-op program may be used for carrying on propaganda, or otherwise attempting, to influence legislation, or for marketing.

Section 501(c)(29) Requirements for Tax-Exempt Status

An organization is tax-exempt under Section 501(c)(29) if:

  • It received a loan or grant under the co-op program and is compliant with PPACA requirements and any loan or grant agreement with HHS.
  • It gives notice to Treasury that it plans to apply for exempt status recognition as an organization under Section 501(c)(29).
  • None of the organization’s earnings “inure to the benefit of any private shareholder or individual.”
  • It does not attempt to influence legislation.
  • It does not participate in political campaigns for or against any candidates for public office.

Revenue Procedure

The IRS said it plans to issue a revenue procedure on how and when qualified issuers can apply for recognition of exempt status. The procedure also will address the effective date of a qualified issuer’s tax-exempt status. The service said it will not accept applications before guidance is published.

Request for Comments

The Treasury Department and the IRS requested comments on or before May 27, 2011, regarding the above provisions, including, in particular, the need, if any, for guidance regarding such provisions. Comments are specifically requested regarding:

  1. Any special factors the IRS should consider when establishing procedures for applying for recognition of tax-exempt status under §501(c)(29).
  2. The proposed effective date of qualified issuer’s tax exemption, as described in section 7 of this notice.
  3. Any special consideration regarding the application to qualified issuers of the prohibition on private inurement in 501(c)(29)(B)(iv), the taxation of excess benefit transactions under §4958, and the taxation of unrelated business taxable income under §511.

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