January 30, 2023

Volume XIII, Number 30

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January 30, 2023

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IRS Issues Revenue Procedure on CO-OP Application for Tax-Exempt Status - Healthcare Alert

On Feb. 15, 2012, the Internal Revenue Service (IRS) released procedures (Revenue Procedure) by which qualified nonprofit health insurance issuers (QNHIIs, herein referred to as CO-OPs) may seek exemption from Federal income tax under Section 501(c)(29) of the Internal Revenue Code (Code).

  • The IRS has released procedures by which qualified nonprofit health insurance issuers (aka: CO-OPs) may seek exemption from Federal income tax

  • The Consumer Operated and Oriented Plan (CO-OP) Program was implemented by CMS on Dec. 8, 2012

  • The aim of the new program is to create a "new competitive presence in the insurance marketplace"

Section 1322 of the Patient Protection and Affordable Care Act provides for the Consumer Operated and Oriented Plan (CO-OP) Program, which was implemented by Centers for Medicare and Medicaid Services (CMS) Final Rule on December 8, 2012. The aim of the CO-OP Program is to foster the formation of new consumer-governed, private, nonprofit health insurance issuers that will create “a new competitive presence in the insurance marketplace.” According to the Final Rule, CMS will provide loans and repayable grants (collectively, Funding) to selected CO-OPs, which will help cover start-up costs and meet any state mandated solvency requirements.

The Revenue Procedure sets forth the application requirements for recognition as a Section 501(c)(29) tax-exempt organization, a Section 501(a) tax-exempt classification that was added to the Code by the CO-OP Program. A CO-OP seeking recognition of exemption under Section 501(c)(29) must submit a letter application with Form 8718 (Letter Application), rather than Form 1023.

The Revenue Procedure requires that the Letter Application include: (1) the CO-OP’s Employer Identification Number (EIN); (2) specified financial records; (3) a detailed narrative of CO-OP past and proposed activities and actual and anticipated receipts and contemplated expenditures; (4) a state certified copy of the CO-OP’s organizational document; (5) CO-OP By-Laws, or any similar governing documents; (6) formal documentation both that the CO-OP has been awarded Funding and that the CO-OP has entered into a loan agreement with CMS; and (7) several representations regarding the CO-OP’s nonprofit nature.

The CO-OP may apply for tax exemption as a 501(c)(29) organization any time within the 15 months following the CO-OP both being awarded Funding and entering into a loan agreement with CMS. Once the IRS issues the determination approving a CO-OP as a 501(c)(29), the benefits of being a tax-exempt organization will retroactively apply to either the date of CO-OP formation or March 23, 2010 (the PPACA date of enactment), whichever is later.

For more background on CO-OPs, see the Dec. 8, 2011, July 25, 2011 and Aug. 3, 2011 Barnes & Thornburg LLP Healthcare Department Alerts: “Final Rule for CO-OPs —“A New Competitive Presence” in the Insurance Marketplace,” “Regulations Issued for Funding of Regional Insurance Program Under PPACA” and “Healthcare Alert - U.S. Announces Process for $3.8B in CO-OP Funds.” Additional information about provider-sponsored CO-OPs and a simplified guide to understanding the program can be found by clicking here.

© 2023 BARNES & THORNBURG LLPNational Law Review, Volume II, Number 50
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About this Author

Mark E. Rust Barnes Thornburg Law firm Chicago Corporate Finance and Healthcare Law Attorney
Partner

Mark Rust is Managing Partner of the Chicago office of Barnes & Thornburg, LLP, and Chair of the firm’s national Healthcare Department. Mr. Rust concentrates his practice in transactional, regulatory and medical-legal issues affecting healthcare entities and provider organizations. For nearly 30 years he has written about or practiced in healthcare law, writing in a wide variety of publications from theJournal of the American Bar Association to USA Today. He is listed as a notable healthcare lawyer in Chambers USA, Top Healthcare Lawyers of Illinois,Superlawyers...

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