On April 8, 2016, the IRS released a private letter ruling denying tax-exempt status under Code section 501(c)(3) to an accountable care organization (“ACO”) that was not participating in the Medicare Shared Savings Program (“MSSP”).  PLR 201615022 (the “2016 PLR”) is the IRS’s first public written guidance on the tax-exempt status of ACO activities since 2011.

Since the MSSP became operational in 2012, it has been supported by a multi-agency effort to provide participants’ assurance that the application of existing laws and regulations governing tax-exempt status and permissible practices under the fraud and abuse laws would not be used against them. Recently, there has been increasing debate about whether the protected status that federal agencies have provided MSSP participants should also apply to ACOs in the private sector.  In fact, the Centers for Medicare & Medicaid Services and the Department of Health & Human Services’ Office of the Inspector General addressed this issue in their joint issuance of the final rule discussing the waivers of fraud and abuse laws for MSSP ACO arrangements in October 2015.  Now, with the 2016 PLR, the IRS has added its own views on the outer limits of protections for tax-exempt entities that create ACOs outside the MSSP.


Continue Reading IRS Denies Tax-Exempt Status to Non-MSSP ACO

On February 23, the Department of Treasury and the Internal Revenue Service (collectively, the “Agencies”) issued Notice 2015-16, the first piece of guidance on the Affordable Care Act’s “Cadillac Tax.” The Cadillac Tax is a 40 percent excise tax that is imposed on high-cost health plans under Section 4980I of the Internal Revenue Code (Code), which provision was added to the Code by the Affordable Care Act (ACA).

Very generally, the Cadillac Tax applies to taxable years beginning after December 31, 2017 (i.e., the 2018 plan year for calendar-year plans), and provides that a 40 percent excise tax will be imposed on “applicable employer-sponsored coverage” in excess of statutory thresholds (in 2018, $10,200 for self-only coverage, and $27,500 for “other than self only” coverage (e.g., family coverage)). Notably, the excise tax applies only to the “excess benefit,” i.e., the amount by which the cost of the applicable employer-sponsored coverage exceeds the statutory thresholds. Furthermore, this excise tax is to be calculated on a monthly basis, so that it applies only in the months in which there is an “excess benefit.” The cost of the applicable coverage is to be determined under rules similar to those used to calculate COBRA premiums.

Under Section 4980I, the employer is responsible for calculating the total amount of the excise tax and the excess benefit, while the actual liability for the excise tax rests with the insurer (in the case of an insured plan), the employer (in the case of a Health Savings Account (HSA)), or the “person that administers the plan” (in the case of other types of coverage). Hence, in the case of self-funded coverage that does not involve an HSA, it is unclear who (i.e., the plan sponsor, the third-party administrator, etc.) will be responsible for this liability (and note that Notice 2015-16 does not provide any guidance or clarity on this last point).


Continue Reading IRS Provides First Guidance on ACA’s ‘Cadillac Tax’

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.


Continue Reading IRS Publishes Final Rule on CO-OP Insurer 501(c)(29) Tax Exempt Status

The last several weeks of 2014 brought with them a flurry of guidance from the Departments of Health and Human Services (“HHS”), Labor (“DOL”) and Treasury (collectively, the “Departments”) regarding group-health plan employee benefits issues, including issues under the Affordable Care Act (“ACA”), the Employee Retirement Income Security Act (“ERISA”) and the Mental Health Parity and Addiction Equity Act (“MHPAEA”). As we start into 2015, care should be taken not to overlook these important pieces of guidance that came in at years’ end:

1. No More “Skinny Plans”

On November 4, the Internal Revenue Service (“IRS”), in collaboration with HHS, issued guidance (Notice 2014-69) aimed at shutting the door on the use of so-called “skinny plans,” i.e., plans that provide “minimum value” within the meaning of the ACA, and which cover preventive services, but which exclude substantial hospitalization and/or physician services. (Some consultants have argued that such plans technically satisfied the ACA’s “minimum value” standard). The intent of such “skinny plans” is usually not to provide group health coverage, but to allow employers to partially or fully avoid application of any penalties under the ACA’s “pay or play” provisions (and a consequence of such actions is that employees covered under such “skinny plans” are generally ineligible for premium tax credits on ACA exchanges).

The IRS Notice unequivocally states that “plans that fail to provide substantial coverage for in-patient hospitalization services or physician services (or for both) . . . do not provide minimum value.” The Notice goes on to state that HHS and Treasury will amend the applicable regulations to incorporate this reading. The Notice gives limited grandfathering relief, protecting “skinny plans” adopted (through a binding written commitment) before November 4, 2014, but only as to plan years beginning on or before March 1, 2015 (regardless of such grandfathered coverage, employees offered affordable coverage under one of these plans can turn down such coverage and still be eligible for a premium tax credit on the exchanges). However, employers offering a “skinny plan” under this grandfathering provision must not state or imply that the plan precludes the employee from receiving a premium tax credit, and they must timely correct any disclosures to that effect that have previously been made.

2. Premium Reimbursement Plans

On November 6, the Departments issued additional FAQs (Part XXII) on ACA Implementation, specifically addressing premium reimbursement arrangements. The Departments clarified that an employer may not offer employees cash to reimburse the purchase of an individual market health policy, regardless of whether the cash is paid as taxable compensation or not. Any such reimbursement plan or arrangement would be considered by the Departments to be a “group health plan” within the meaning of ERISA and the Public Health Service Act (“PHSA”), and hence would be subject to the market reform provisions of the ACA. In keeping with prior guidance on integration of employer health care arrangements with individual coverage, the Departments stated that such a premium reimbursement plan fails to comply with the ACA’s market reforms because it could not be integrated with an individual market policy (and the reimbursement plan could not, on its own, satisfy the market reforms).


Continue Reading HHS, Labor, and Treasury Issue Flurry of Rulemakings and Guidance on Employee Benefits to Close 2014 with a Bang

On June 25, the Internal Revenue Service, Centers for Medicare & Medicaid Services, and Employee Benefits Security Administration, published final regulations clarifying the maximum allowed length of a reasonable and bona fide employment-based orientation period. Specifically, the regulations permit employers to impose a one-month orientation period on employees’ enrollment in their group health plans in addition to the 90-day waiting period.

The new regulations provide relief from the Affordable Care Act’s (ACA) prohibition on employers imposing a waiting period longer than 90 days for all individuals that are eligible to participate in the plan, for all plan years beginning on or after January 1, 2014. The ACA’s waiting period requirement states that coverage must be available to otherwise eligible employees by the 91st calendar day (including weekends and holidays) following plan eligibility. A “waiting period” is defined as the period that must pass before coverage for an otherwise eligible employee or dependent is able to enroll in the employer’s group health plan. And, an employee or dependent is “otherwise eligible” for plan participation if they have met all the employer’s eligibility conditions.

The 30-day orientation period allows employers to define their plan entry date for new employees as the first day of the month following 90 days of employment, so long as their administrative waiting period is not over 30 days, giving employers 90 days to enroll employees plus up to 30 days for orientation purposes.


Continue Reading 90-Day Waiting Period for Employee Enrollment in Group Health Plans: One-Month Orientation Period Permitted

On January 27, 2014, the Internal Revenue Service (IRS) issued proposed regulations (“Proposed Regulations”, available here) clarifying the penalties imposed on nonexempt persons who fail to maintain minimum essential coverage as required by Internal Revenue Code (Code) Section 5000A. Very generally, Code Section 5000A requires nonexempt persons to either (1) maintain minimum essential coverage, or (2) make a shared responsibility payment. The Proposed Regulations:

  1. explain which government-sponsored programs do not qualify as “government-sponsored minimum essential coverage”;
  2. clarify that “minimum essential coverage” excludes health plans and programs that consist solely of “excepted benefits”;
  3. clarify—for purposes of the “lack of affordable coverage” exemption—the required contribution for individuals eligible to enroll in an eligible employer-sponsored plan that provides employer contributions to health reimbursement arrangements (HRAs) or wellness program incentives;
  4. expand the definition of hardship exemptions that may be claimed on a federal income tax return and provide additional guidance; and
  5. clarify the computation of the monthly “shared responsibility payment” penalty amount.

Comments with respect to the Proposed Regulations are due by April 28, 2014, and a public hearing is scheduled for May 21, 2014.


Continue Reading IRS Promulgates Clarifying Regulations Regarding Abstainer Penalties Under the ACA

The Treasury Department and the Internal Revenue Service released a final regulation providing guidance to Blue Cross and Blue Shield (and other qualifying healthcare organizations) on computing and applying the medical loss ratio (MLR) under Code Section 833(c)(5), which is effective as of January 7, 2013 and applies to tax years beginning after December 31, 2013. Under Code Section 833(c)(5), qualifying organizations (including Blue Cross and Blue Shield organizations) are provided with favorable income tax treatment, including: (1) treatment as stock insurance companies, (2) a special deduction under Code Section 833(b), and (3) the computation of unearned premium reserves based on 100 percent of unearned premiums under Code Section 832(b)(4). However, the Patient Protection and Affordable Care Act (ACA) added a provision to the Code, requiring that a qualifying organization must  have a medical loss ratio (MLR) of at least 85 percent to get favorable income tax treatment under Code Section 833(c)(5). For purposes of Code Section 833, an organization’s MLR is its percentage of total premium revenue expended on reimbursement for clinical services provided to enrollees under its policies during such taxable year (as reported under Section 2718 of the Public Health Service Act (PHSA)).
Continue Reading Treasury Dept. and IRS Release Guidance to Qualifying Healthcare Organizations Computing and Applying MLR

In the wake of United States v. Windsor, the case in which the Supreme Court held the Defense of Marriage’s (DOMA) prohibition on federal recognition of same-sex marriages unconstitutional, the Internal Revenue Service issued Internal Revenue Ruling 2013-17. The Ruling held that same-sex individuals who were married under state law would be considered