[Federal Register Volume 77, Number 25 (Tuesday, February 7, 2012)]
[Rules and Regulations]
[Pages 6005-6007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2012-2338]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9574]
RIN 1545-BK64


Application for Recognition as a 501(c)(29) Organization

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Temporary regulations.

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SUMMARY: This document contains temporary 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. 
The text of the temporary regulations also serves as the text of the 
proposed regulations set forth in the notice of proposed rulemaking on 
this subject in the Proposed Rules section in this issue of the Federal 
Register.

DATES: Effective Date: These regulations are effective on February 7, 
2012.
    Applicability Date: For date of applicability, see Sec.  
1.501(c)(29)-1T(c).

FOR FURTHER INFORMATION CONTACT: Amy Franklin or Martin Sch[auml]ffer, 
(202) 622-6070 (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 (Affordable Care Act), Public Law 111-148 (March 
23, 2010).
    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 will provide 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. A Funding Opportunity Announcement for the CO-
OP program (CFDA Number 93.545), published by CMS on July 28, 2011 (and 
amended on September 16, 2011), provides that for each loan the 
appropriate CMS official will issue a Notice of Award and Loan 
Agreement to the QNHII. In addition, the Chief Executive Officer of the 
QNHII, or an officer 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.

[[Page 6006]]

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 of 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 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.
    The IRS issued Notice 2011-23, 2011-13 IRB 588 (March 10, 2011) 
(see Sec.  601.601(d)(2)(ii)(b) of this chapter), which addresses the 
requirements for tax exemption for QNHIIs described in section 
501(c)(29). The Notice provides guidance on the annual filing 
requirement for QNHIIs that intend to apply for recognition of exempt 
status under section 501(c)(29). The Notice also states that the 
Treasury Department and the IRS intend to recognize a QNHII 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 organization's purposes and activities have been consistent 
with the requirements for exemption since that date. In addition, the 
Notice states that the IRS intends to issue a revenue procedure 
explaining how and when a QNHII may apply for recognition of exempt 
status as an organization described in section 501(c)(29).
    Under the authority provided by these temporary regulations, the 
Treasury Department and the IRS are issuing a revenue procedure 
regarding the application for recognition of exemption as an 
organization described in section 501(c)(29). The revenue procedure 
will provide that a substantially completed application for recognition 
of exemption under section 501(c)(29) must include a copy of both the 
Notice of Award issued by CMS and the fully executed Loan Agreement 
with CMS.

Explanation of Provisions

    Section 501(c)(29)(B)(i) provides that a QNHII which has received a 
loan through the CO-OP program 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 temporary 
regulations provide that the Commissioner has the authority to 
prescribe the application procedures that a QNHII seeking such 
recognition must follow. These temporary 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 the QNHII's prior purposes and activities were 
consistent with the requirements for exempt status under section 
501(c)(29).

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 also has been determined that section 
553(b) of the Administrative Procedure Act (5 U.S.C. chapter 5) does 
not apply. For the applicability of the Regulatory Flexibility Act (5 
U.S.C. chapter 6), refer to the Special Analyses section of the 
preamble to the cross-referenced notice of proposed rulemaking 
published in the Proposed Rules section of this issue of the Federal 
Register. Pursuant to section 7805(f) of the Code, this regulation has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comments regarding its impact on small businesses.

Drafting Information

    The principal authors of these regulations are Amy Franklin and 
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)-1T also issued under 26 U.S.C. 
501(c)(29)(B)(i). * * *


0
Par. 2. Section 1.501(c)(29)-1T is added to read as follows:


Sec.  1.501(c)(29)-1T  CO-OP Health Insurance Issuers (temporary).

    (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

[[Page 6007]]

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 effective on February 7, 2012.
    (d) Expiration date. The applicability of this section expires on 
February 6, 2015.

 Steven T. Miller
Deputy Commissioner for Services and Enforcement.
    Approved: January 26, 2012.
Emily S. McMahon,
Acting Assistant Secretary of the Treasury.
[FR Doc. 2012-2338 Filed 2-6-12; 8:45 am]
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