IRS Provides More Guidance on Health Insurance Cooperatives

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 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 Care Act.

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.”

Qualified Organizations

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 requirement terms.

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 accounting period;
  • A copy of the organizing or enabling document filed and certified by state authorities;
  • A copy of the organizing or enabling document that meets the requirements of a “conformed copy” if not required to be filed with the state;
  • 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 CFS.

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.

McGuireWoods LLP Healthcare Group

McGuireWoods offers an experienced team of more than 50 lawyers well versed in serving the needs of the healthcare, pharmaceutical, life sciences and medical device sectors. We understand the daunting array of legal and business issues our clients face, and we pursue effective solutions to their daily challenges.

McGuireWoods LLP Nonprofit & Tax-Exempt Organizations Group

Our lawyers who focus specifically on nonprofit and tax-exempt organizations guide charities and other nonprofits in operating more efficiently and effectively — a threshold for survival in today’s economic and regulatory environment.