The IRS issued its first guidance on the requirements for new qualified nonprofit health insurance issuers under IRC § 501(c)(29) and has requested comments on specific issues (Notice 2011-23). The notice clarifies that the IRS is not yet accepting applications for recognition of tax-exempt status under section 501(c)(29) and will not accept applications until it has issued further guidance. In addition, qualified nonprofit health insurance issuers cannot offer a health plan in a state until that state has in effect certain health insurance market reforms mandated by last year’s health care legislation.
The Patient Protection and Affordable Care Act (PPACA, PL 111-148) established a new category of tax-exempt organization, the qualified nonprofit health insurance issuer, and required the Department of Health and Human Services to set up a Consumer Operated and Oriented Plan (CO-OP) program to foster the creation of qualified nonprofit health insurance issuers to offer qualified health plans in individual and small group markets. The CO-OP program will make grants or loans to qualified nonprofit health insurance issuers.
Under the PPACA, a qualified nonprofit health insurance issuer is defined as an organization:
- That is organized as a nonprofit, member corporation under state law;
- Substantially all of the activities of which 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
- That meets various additional requirements.
A qualified nonprofit health insurance issuer that receives a loan or grant under the CO-OP program may apply to the IRS to be recognized as an organization described in section 501(c)(29) and exempt from taxation under section 501(a). An issuer will qualify for the tax exemption under section 501(c)(29) only as long as it complies with the requirements of the PPACA and the terms of its loan or grant under the CO-OP program. An issuer that loses its exempt status (or does not apply for exempt status) will be subject to federal income taxation, including (if it qualifies as an insurance company) the special insurance company tax rules in subchapter L of the Internal Revenue Code.
Notice 2011-23 lists a series of specific conditions issuers must meet to qualify for the tax exemption under section 501(c)(29):
- The organization must have received a grant or loan under the CO-OP program and be in compliance with the requirements of PPACA § 1322 and the terms of its loan or grant under the CO-OP program.
- The organization must have given notice to the secretary of the Treasury in the manner prescribed by (not yet issued) regulations that it is applying for recognition of its exempt status as an organization described in section 501(c)(29);
- No part of the organization’s net earnings can inure to the benefit of any private shareholder or individual, except as provided in narrow exceptions listed in PPACA § 1322(c)(4) (which requires the issuer’s profits to be used to lower premiums, improve benefits, or for other programs intended to improve the quality of health care delivered to the organization’s members).
- No substantial part of the organization’s activities can consist of attempting to influence legislation, and the organization cannot participate in, or intervene in, any political campaign.
Qualified nonprofit health insurance issuers will be required to file an annual information return and provide certain specified information, including the amount of reserves required by each state in which the organization is licensed to issue qualified health plans and the amount of reserves on hand.
The notice clarifies that qualified nonprofit health insurance issuers are subject to the IRC § 4958 excise tax on excess benefits transactions between an applicable tax-exempt organization and a disqualified person.
The notice says the IRS intends to issue further guidance describing how an organization may apply for recognition of exempt status as an organization described in section 501(c)(29). Until that guidance is published, the IRS will not accept applications.
The notice also states that the IRS intends to recognize a qualified nonprofit health insurance issuer that has received a loan or grant under the CO-OP program as exempt effective from the later of the date of its formation or March 23, 2010, provided that the issuer’s purposes and activities have been consistent with the requirements for exemption since that date.
The notice requires qualified nonprofit health insurance issuers claiming exempt status under section 501(c)(29) that have filed or intend to file an application for exemption to file Form 990, Return of Organization Exempt From Income Tax, for tax years that end before it receives a determination letter. The issuer must indicate on the return that it is filing the return in the belief that it is exempt under section 501(a), but the IRS has not yet recognized its exemption.
Request for Comments
The IRS is requesting comments on the provisions of Notice 2011-23 and in particular on the need, if any, for further guidance regarding the provisions.
The IRS is specifically requesting comments regarding:
- Any special factors the IRS should consider when establishing the procedures for applying for recognition of tax-exempt status under section 501(c)(29);
- The proposed effective date of a qualified nonprofit health insurance issuer’s tax exemption; and
- Any special considerations regarding the prohibition on private inurement in section 501(c)(29)(B)(ii); the limitation on lobbying activities in section 501(c)(29)(B)(iii); the prohibition on political activities in section 501(c)(29)(B)(iv); the taxation of excess benefit transactions under section 4958; and the taxation of unrelated business taxable income under section 511.
Comments should be submitted on or before May 27, 2011, to Notice.Comments@irscounsel.treas.gov, with “Notice 2011-23” in the subject line.
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