Today the Department of Treasury and the Internal Revenue Service (IRS) published final regulations specifying how Consumer Operated and Oriented Plans (CO-OPs) may obtain tax exempt status under Internal Revenue Code Section 501(c)(29) as “Qualified Nonprofit Health Insurance Issuers” (QNHIIs). The IRS had previously issued guidance in Rev. Proc. 2012-11, which the IRS intends to reissue with a 2015 designation.
Created by ACA Section 1322, the CO-OP program is intended to facilitate the creation of member-governed nonprofit health insurance issuers to serve the individual and small group markets. Under the program, the Centers for Medicare & Medicaid Services (CMS) provide loans and repayable grants (collectively a “loan” or “loans”) to organizations that apply to become QNHIIs. The loans are designed to cover start-up costs and seed capital to satisfy state solvency requirements for health insurance issuers. Congress cut most of the funding set aside for the CO-OP program under the fiscal cliff deal (also known as the “American Taxpayer Relief Act of 2012”) in 2013.
The IRS will recognize a QNHII that has received a loan from CMS under the CO-OP program as tax exempt so long as the QNHII remains in compliance with ACA Section 1322 and the terms of the loan agreement with CMS. If CMS determines that the QNHII no longer qualifies as a QNHII, then it will lose its tax-exempt status. The QNHII also must:
- Give notice to the IRS that it is applying for recognition of I.R.C. Section 501(c)(29) status;
- Not permit any of its net earnings to inure to the benefit of a private shareholder or individual (other than by lowering premiums, improving benefits, or otherwise improving the quality of health care for its members);
- Not substantially engage in attempts to influence legislation; and
- Not participate or intervene in campaigns for public office.
Notably, the final rules specify that if a QHNII’s prior actions satisfy the tax exemption requirements, then it may retroactively obtain recognition of its tax-exempt status for the period prior to its application for recognition. Such status may be retroactive back to the QHNII’s date of formation (or March 23, 2010, if later).