[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