n-11-23.pdf

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Request for Comments Regarding Application of § 501(c)(29) of the Internal
Revenue Code

Notice 2011-23
SECTION 1. PURPOSE
This Notice addresses the requirements for tax-exemption for qualified
nonprofit health insurance issuers described in new § 501(c)(29), added to the
Internal Revenue Code (Code) by § 1322(h) of the Patient Protection and
Affordable Care Act (Affordable Care Act), enacted March 23, 2010, Pub. L. No.
111-148. This Notice provides guidance on the annual filing requirement for
qualified nonprofit health insurance issuers that intend to apply for recognition of
exempt status under § 501(c)(29), as well as the effective date of exempt status
for certain applicants. The IRS intends to issue a revenue procedure on how and
when qualified nonprofit health insurance issuers described in § 501(c)(29) may
apply for recognition of exempt status. This Notice includes a request for public
comments.
SECTION 2. BACKGROUND
Section 1322 of the Affordable Care Act requires the Department of Health
and Human Services (HHS) to establish the Consumer Operated and Oriented
Plan program (CO-OP program). The purpose of the CO-OP program is to foster
the creation of qualified nonprofit health insurance issuers to offer qualified health
plans in individual and small group markets. The CO-OP program will make

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available to qualified nonprofit health insurance issuers loans to provide
assistance in meeting start-up costs and/or repayable grants to provide
assistance in meeting any state solvency requirements. HHS has published a
request for comments regarding the CO-OP program. See Planning and
Establishment of Consumer Operated and Oriented Plan Program; Request for
Comments Regarding Provisions of Consumer Operated and Oriented Plan
Program, 76 Fed. Reg. 5774 (Feb. 2, 2011).
Section 1322(h) of the Affordable Care Act added § 501(c)(29) to the Code.
Section 501(c)(29) sets out rules for tax-exemption under § 501(a) of the Code
for a qualified nonprofit health insurance issuer that has received a grant or loan
under the CO-OP program.
SECTION 3. QUALIFIED NONPROFIT HEALTH INSURANCE ISSUERS
Section 1322(c)(1) of the Affordable Care Act defines a qualified nonprofit
health insurance issuer (“Qualified Issuer”) as an organization (a) that is
organized as a nonprofit, member corporation under State law; (b) substantially
all of the activities of which 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; and (c) that meets additional requirements set forth in subsections
(c)(2) through (6).
Section 1322(c)(2) of the Affordable Care Act provides that an organization
shall not be treated as a Qualified Issuer if (a) the organization, a related entity,
or a predecessor of either was a health insurance issuer as of July 16, 2009; or
(b) the organization is sponsored by a State or local government, any political

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subdivision thereof, or any instrumentality of such government or political
subdivision. Section 1322(c)(3) requires a Qualified Issuer to satisfy certain
governance requirements. Section 1322(c)(4) requires a Qualified Issuer to use
any profits that it makes to lower premiums, to improve benefits, or for other
programs intended to improve the quality of health care delivered to its members.
Section 1322(c)(5) requires a Qualified Issuer to meet all state law requirements
that other issuers of qualified health plans are required to meet in any state
where the issuer offers a qualified health plan. Section 1322(c)(6) provides that
a Qualified Issuer may not offer a health plan in a state until that state has in
effect (or the Secretary of HHS has implemented for the state) the market
reforms required by part A of title XXVII of the Public Health Service Act, as
amended by the Affordable Care Act.
Section 1322(b)(2)(C) of the Affordable Care Act requires a Qualified Issuer
receiving a grant or loan under the CO-OP program to enter into an agreement
with HHS, which requires it to meet (and continue to meet) both the requirements
under § 1322 to be treated as a Qualified Issuer, and all requirements of the loan
or grant agreement. Such an agreement must include a requirement that no
portion of the funds made available by any loan or grant under the CO-OP
program may be used for carrying on propaganda, or otherwise attempting, to
influence legislation, or for marketing.
A Qualified Issuer that has received a loan or grant under the CO-OP program
may apply to the IRS to be recognized as an organization described in §
501(c)(29) of the Code and exempt from taxation under § 501(a) of the Code.

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The Qualified Issuer will qualify for exempt status under § 501(c)(29) only for
periods that it is in compliance with the requirements of § 1322 of the Affordable
Care Act and any loan or grant agreement with HHS. Under § 1322(b)(2)(C)(iii)
of the Affordable Care Act, HHS must notify the Secretary of the Treasury of any
determination under § 1322 of a failure that results in the termination of a
Qualified Issuer’s tax-exempt status under § 501(c)(29) of the Code.
If a Qualified Issuer that has received a loan or grant under the CO-OP
program does not apply for recognition of exempt status as an organization
described in § 501(c)(29) or loses exempt status, it may be subject to Federal
income taxation under appropriate provisions of the Code. If a taxable Qualified
Issuer qualifies as an insurance company for Federal income tax purposes, it will
be subject to the special tax rules of Subchapter L of the Code.
SECTION 4. CONDITIONS FOR TAX EXEMPTION
An organization is described in § 501(c)(29) of the Code only if :
1. The organization is a Qualified Issuer that has received a loan or grant
under the CO-OP program and is in compliance with all requirements of § 1322
and any loan or grant agreement with HHS.
2. The organization has given notice to the Secretary of the Treasury in the
manner prescribed by regulations that it is applying for recognition of its exempt
status as an organization described in § 501(c)(29);
3. No part of the organization’s net earnings inure to the benefit of any private
shareholder or individual, except as provided in § 1322(c)(4) of the Affordable
Care Act (which requires profits to be used to lower premiums, improve benefits,

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or for other programs intended to improve the quality of health care delivered to
the organization’s members);
4. No substantial part of the organization’s activities consist of carrying on
propaganda, or otherwise attempting, to influence legislation; and
5. The organization does 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.
SECTION 5. ADDITIONAL INFORMATION REPORTING REQUIRED
Section 6033 of the Code requires a tax-exempt organization described in §
501(c)(29) to file an annual information return. Section 1322(h)(2) of the
Affordable Care Act amended § 6033 of the Code to require an organization
described in § 501(c)(29) to provide certain additional information on its annual
information return. In addition to the general information required, it must report
the amount of reserves required by each State in which the organization is
licensed to issue qualified health plans, and the amount of reserves on hand.
SECTION 6. APPLICATION OF TAX ON EXCESS BENEFIT TRANSACTIONS
Section 4958 of the Code imposes an excise tax, payable by the disqualified
person, on each excess benefit transaction between an applicable tax-exempt
organization and a disqualified person. Section 4958 also imposes an excise tax
on organization managers who knowingly participated in an excess benefit
transaction, unless participation was not willful and was due to reasonable cause.
Section 1322(h)(3) of the Affordable Care Act amended § 4958(e)(1) to provide

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that an organization described in § 501(c)(29) is an “applicable tax-exempt
organization” subject to § 4958.
SECTION 7. APPLICATIONS FOR RECOGNITION OF EXEMPTION
The IRS intends to publish a revenue procedure describing how an
organization may apply for recognition of exempt status as an organization
described in § 501(c)(29). Until the revenue procedure is published, the IRS will
not accept applications. The revenue procedure will provide that a Qualified
Issuer may not submit its request for recognition of exemption under § 501(c)(29)
until it has entered into an agreement with HHS under § 1322(b)(2)(C) of the
Affordable Care Act.
The revenue procedure also will address the effective date of a Qualified
Issuer’s tax exemption. The Treasury Department and the IRS intend to
recognize a Qualified Issuer 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 Qualified Issuer's purposes and activities have been
consistent with the requirements for exemption since that date. To be
recognized as exempt from the date of its formation, a Qualified Issuer must
have complied with the conditions of exemption described in clauses (ii)-(iv) of §
501(c)(29)(B).
SECTION 8. ANNUAL FILING REQUIREMENT PRIOR TO RECOGNITION OF
EXEMPT STATUS
A Qualified Issuer claiming exempt status under § 501(c)(29) that has filed or
intends to file an application for exemption should file Form 990, Return of

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Organization Exempt from Income Tax, for taxable years that end before it
receives a determination letter. The Qualified Issuer must indicate on its return
that it is being filed in the belief that the Qualified Issuer is exempt under §
501(a), but the IRS has not yet recognized its exemption.
SECTION 9. EFFECTIVE DATE
The provisions of § 1322 of the Affordable Care Act, including the addition to
the Code of § 501(c)(29) and the amendments to §§ 6033 and 4958 of the Code
described above, are effective beginning on March 23, 2010, the date of
enactment of the Affordable Care Act.
SECTION 10. REQUEST FOR COMMENTS
The Treasury Department and the IRS request comments regarding the
provisions described above, including, in particular, the need, if any, for guidance
regarding such provisions. Comments are specifically requested regarding:
1. Any special factors the IRS should consider when establishing the
procedures for applying for recognition of tax-exempt status under § 501(c)(29);
2. The proposed effective date of a Qualified Issuer’s tax exemption, as
described in section 7 of this notice; and
3. Any special considerations regarding the application to Qualified Issuers of
the prohibition on private inurement in § 501(c)(29)(B)(ii), the limitation on
lobbying activities in § 501(c)(29)(B)(iii), the prohibition on political activities in
501(c)(29)(B)(iv), the taxation of excess benefit transactions under § 4958, and
the taxation of unrelated business taxable income under § 511.

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Comments should be submitted in writing on or before May 27, 2011. Please
include “Notice 2011-23” on the cover page. Comments should be sent to the
following address:
Internal Revenue Service
CC:PA:LPD:PR (Notice 2011-23)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Submissions may be hand delivered Monday through Friday between the hours
of 8 a.m. and 4 p.m. to:
Internal Revenue Service
Courier’s Desk
1111 Constitution Ave., N.W.
Washington, DC 20224
Attn: CC:PA:LPD:PR (Notice 2011-23)

Submissions may also be sent electronically to the following e-mail address:
Notice.Comments@irscounsel.treas.gov

Please include “Notice 2011-23” in the subject line.
All comments will be available for public inspection and copying.

SECTION 11. DRAFTING INFORMATION
The principal author of this notice is Justin Lowe of the Exempt Organizations,
Tax Exempt and Government Entities Division. For further information regarding
this notice, contact Mr. Lowe at (202) 283-9486 (not a toll-free call).