[Federal Register Volume 80, Number 19 (Thursday, January 29, 2015)]
[Rules and Regulations]
[Pages 4791-4793]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-01677]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[TD 9709]
RIN 1545-BK64
Application for Recognition as a 501(c)(29) Organization
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Final regulations and removal of temporary regulations.
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SUMMARY: This document contains final regulations authorizing the IRS
to prescribe the procedures by which certain entities may apply to the
IRS for recognition of exemption from Federal income tax. These
regulations affect qualified nonprofit health insurance issuers
participating in the Consumer Operated and Oriented Plan program
established by the Centers for Medicare and Medicaid Services that seek
exemption from federal income tax under the Internal Revenue Code.
DATES: Effective date: These regulations are effective on January 29,
2015.
Applicability date: For date of applicability, see Sec.
1.501(c)(29)-1(c).
FOR FURTHER INFORMATION CONTACT: Martin Sch[auml]ffer, (202) 317-5800
(not a toll-free number).
SUPPLEMENTARY INFORMATION:
Background
Section 501(c)(29) of the Internal Revenue Code (Code) provides
requirements for tax exemption under section 501(a) for qualified
nonprofit health insurance issuers (QNHIIs). Section 501(c)(29) was
added to the Code by section 1322(h)(1) of the Patient Protection and
Affordable Care Act, Public Law 111-148 (March 23, 2010) (Affordable
Care Act).
Section 1322 of the Affordable Care Act directs the Centers for
Medicare and Medicaid Services (CMS) to establish the Consumer Operated
and Oriented Plan (CO-OP) program. The purpose of the CO-OP program is
to foster the creation of member-governed QNHIIs that will operate with
a strong consumer focus and offer qualified health plans in the
individual and small group markets. CMS provides loans and repayable
grants (collectively, loans) to organizations applying to become QNHIIs
to help cover start-up costs and meet any solvency requirements in
States in which the organization is licensed to issue qualified health
plans. For each loan, CMS issues a Notice of Award and Loan Agreement
to the QNHII. The appropriate officer of the QNHII or of the QNHII's
board of directors must sign and return the loan agreement to CMS. On
December 13, 2011, CMS issued final regulations implementing the CO-OP
program at 76 FR 77392.
The CMS final regulations define a QNHII as an entity that, within
specified time frames, satisfies or can reasonably be expected to
satisfy the standards in section 1322(c) of the Affordable Care Act and
in the CMS final regulations. The entity will constitute a QNHII until
such time as CMS determines the entity does not satisfy or cannot
reasonably be expected to satisfy these standards. Section 1322(c) of
the Affordable Care Act imposes a number of requirements, including
that a QNHII be organized as a nonprofit member corporation under State
law and that substantially all its activities 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.
Section 501(c)(29)(A) of the Code provides that a QNHII (within the
meaning of section 1322(c) of the Affordable Care Act) which has
received a loan or grant under the CO-OP program may be recognized as
exempt from taxation under section 501(a), but only for periods for
which the organization is in compliance with the requirements of
section 1322 of the Affordable Care Act and any loan or grant agreement
with the Secretary of Health and Human Services. Section 501(c)(29)(B)
provides that a QNHII will not qualify for tax-exemption unless it
meets four additional requirements. First, the QNHII must give notice
to the Secretary of the Treasury, in such manner as the Secretary may
by regulations prescribe, that it is applying for recognition of
exemption as an organization described in section 501(c)(29). Second,
no part of the QNHII's net earnings may inure to the benefit of any
private shareholder or individual, except to the extent permitted by
section 1322(c)(4) of the Affordable Care Act (which requires that any
profits be used to lower premiums, to improve benefits, or for other
programs intended to improve the quality of health care delivered to
the organization's members). Third, no substantial part of the QNHII's
activities
[[Page 4792]]
may consist of carrying on propaganda, or otherwise attempting, to
influence legislation. Finally, the QNHII may not participate in or
intervene in (including the publishing or distributing of statements)
any political campaign on behalf of (or in opposition to) any candidate
for public office. As required by section 1322(b)(2)(C)(iii) of the
Affordable Care Act, CMS must notify the IRS of any determination of a
failure to comply with the CO-OP program standards, including any loan
agreement, that may affect a QNHII's tax-exempt status under section
501(c)(29) of the Code.
Section 6033 requires a QNHII to file an annual information return.
Section 6033(m), added to the Code by section 1322(h)(2) of the
Affordable Care Act, further requires a QNHII to provide additional
information on the amount of reserves required by each state in which
the QNHII is licensed to issue qualified health plans and the amount of
reserves on hand. These requirements are met by filing a Form 990 for
each tax year in which the QNHII claims tax-exempt status, including
tax years prior to receipt of a determination letter from the IRS
recognizing its tax-exempt status. See Notice 2011-23, Sec. 8, 2011-13
IRB 588, as well as Instructions for Form 990-EZ, ``Short Form Return
of Organization Exempt from Income Tax.''
On February 7, 2012, temporary regulations (TD 9574) authorizing
the IRS to prescribe the procedures by which certain entities may apply
to the IRS for recognition of exemption from Federal income tax were
published in the Federal Register (77 FR 6005). On the same date, and
under the authority of the temporary regulations, the IRS issued Rev.
Proc. 2012-11, 2012-7 IRB 368, providing instructions on how an
organization should apply for recognition of exemption as an
organization described in section 501(c)(29). The IRS intends to
reissue Rev. Proc. 2012-11 (with a 2015 designation) under the
authority of the final regulations.
A notice of proposed rulemaking (REG-135071-11) cross-referencing
the temporary regulations was also published in the Federal Register on
February 7, 2012 (77 FR 6027). No public hearing was requested or held.
Two comments responding to the notice of proposed rulemaking were
received and are available at www.regulations.gov (Docket Number IRS-
2012-0007). After consideration of the two comments, the proposed
regulations are adopted without revision, and the corresponding
temporary regulations are removed.
Summary of Comments and Explanation of Provisions
Section 501(c)(29)(B)(i) of the Code provides that a QNHII which
has received a loan through the CO-OP program established under the
Affordable Care Act by the Centers for Medicare and Medicaid Services
may be recognized as exempt from taxation under section 501(a) only if,
among other things, the QNHII gives notice to the IRS, in such manner
as the Secretary may by regulations prescribe, that it is applying for
recognition as an organization described in section 501(c)(29). These
final regulations provide that the Commissioner has the authority to
prescribe the application procedures that a QNHII seeking such
recognition must follow. These final regulations expressly authorize
the Commissioner to recognize a QNHII as exempt effective as of a date
prior to the date of its application, provided that the application is
submitted in the manner and within the time prescribed by the
Commissioner and that the QNHII's prior purposes and activities were
consistent with the requirements for exempt status under section
501(c)(29).
Neither of the comments received addressed the proposed rule
authorizing the IRS to prescribe the procedures by which certain
entities may apply for recognition of exemption from Federal income tax
as organizations described in section 501(c)(29). One commenter
suggested that the final rule clarify that the failure of a QNHII to
meet the requirements of state insurance laws may be grounds for the
denial or revocation of the entity's tax-exempt status. In addition,
the commenter suggested that the application for a section 501(c)(29)
determination letter, as described in Rev. Proc. 2012-11, should
include an affirmation by the entity seeking an exemption that it meets
all applicable state requirements for a qualified health insurer,
including solvency and licensing standards.
The final regulations do not incorporate these suggestions. Section
501(c)(29)(A) provides for recognition of a QNHII that has received a
loan or grant under the CO-OP program for periods for which the
organization is in compliance with the requirements of the Affordable
Care Act and of any CO-OP program loan or grant. An entity that CMS has
determined qualifies as a QNHII remains a QNHII until CMS determines
that it does not satisfy or cannot reasonably be expected to satisfy
the standards in section 1322(c) of the Affordable Care Act and the CMS
final regulations. CMS must notify the IRS if a QNHII fails to comply
with the CO-OP program standards, including any loan agreement. If CMS
determines that an organization no longer qualifies as a QNHII, it will
lose its tax-exempt status under section 501(c)(29) of the Code.
Because the commenter's suggestions relate to an organization's
qualification as a QNHII, rather than to the requirements for a QNHII
to be recognized as tax-exempt, these suggestions were not adopted.
Another commenter recommended that the final rule make it clear
that all state and federal laws and regulations that currently apply to
501(c) organizations--including those related to transparency,
reporting, and the treatment of assets upon dissolution--apply also to
organizations recognized under section 501(c)(29), noting particularly
the requirement to file a Form 990, ``Return of Organization Exempt
From Income Tax,'' and related documents on an annual basis. The
commenter further recommended that the final rule specifically address
aspects of the Affordable Care Act that are not within the jurisdiction
of the Treasury Department.
The final regulations do not incorporate these suggestions. With
respect to the Code, different requirements apply to different types of
organizations described in section 501(c). Section 501(c)(29)(B) sets
forth the conditions that a QNHII must satisfy for exemption from
Federal income tax. Section 6033 and the regulations thereunder
generally requires all organizations exempt from taxation under section
501(a), including QNHIIs exempt under section 501(c)(29), to file Form
990, unless an organization qualifies for an exception from the filing
requirement. With respect to section 1322 of Affordable Care Act, CMS
issued final regulations in December 2011 implementing the CO-OP
program and providing the basic standards that an organization must
meet to be a QNHII and participate in the program. Those requirements
are outside the jurisdiction of the Treasury Department. For these
reasons no additional regulatory guidance is needed.
Special Analyses
It has been determined that this Treasury decision is not a
significant regulatory action as defined in Executive Order 12866, as
supplemented by Executive Order 13563. Therefore, a regulatory
assessment is not required. It has been determined, also, that section
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does
not apply, and because no collection of information is imposed on small
entities, the
[[Page 4793]]
provisions of the Regulatory Flexibility Act (5 U.S.C. chapter 6) do
not apply. Pursuant to section 7805(f) of the Code, the NPRM preceding
this regulation was submitted to the Chief Counsel for Advocacy of the
Small Business Administration for comment on its impact on small
business.
Drafting Information
The principal author of these regulations is Martin Sch[auml]ffer
of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt
and Government Entities), although other persons in the IRS and the
Treasury Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Amendments to the Regulations
Accordingly, 26 CFR part 1 is amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding an
entry in numerical order to read in part as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.501(c)(29)-1 also issued under 26 U.S.C.
501(c)(29)(B)(i). * * *
0
Par. 2. Section 1.501(c)(29)-1 is added to read as follows:
Sec. 1.501(c)(29)-1 CO-OP Health Insurance Issuers.
(a) Organizations must notify the Commissioner that they are
applying for recognition of section 501(c)(29) status. An organization
will not be treated as described in section 501(c)(29) unless the
organization has given notice to the Commissioner that it is applying
for recognition as an organization described in section 501(c)(29) in
the manner prescribed by the Commissioner in published guidance.
(b) Effective date of recognition of section 501(c)(29) status. An
organization may be recognized as an organization described in section
501(c)(29) as of a date prior to the date of the notice required by
paragraph (a) of this section if the notice is given in the manner and
within the time prescribed by the Commissioner and the organization's
purposes and activities prior to giving such notice were consistent
with the requirements for exempt status under section 501(c)(29).
However, an organization may not be recognized as an organization
described in section 501(c)(29) before the later of its formation or
March 23, 2010.
(c) Effective/applicability date. Paragraphs (a) and (b) of this
section are applicable beginning February 7, 2012.
Sec. 1.501(c)(29)-1T [Removed]
0
Par. 3. Section 1.501(c)(29)-1T is removed.
John Dalrymple,
Deputy Commissioner for Services and Enforcement.
Approved: January 22, 2015.
Mark J. Mazur,
Assistant Secretary of the Treasury.
[FR Doc. 2015-01677 Filed 1-26-15; 4:15 pm]
BILLING CODE 4830-01-P