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Regulation and Compliance > Federal Regulation > IRS

IRS: HHS sets CO-OP solvency rules

By Allison Bell

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The Internal Revenue Service (IRS) says the U.S. Department of Health and Human Services (HHS) is in charge of verifying whether the organizers of a Consumer Operated and Oriented Plan (CO-OP) health insurer have the means to pay claims.

The IRS, and arm of the U.S. Treasury Department, has declined to include a requirement that CO-OP insurer organizers affirm that the insurer will meet state solvency and state licensing standards when the organizers ask the IRS to recognize the insurer as a 501(c)(29) organization.

See also: Regulators to liquidate Iowa PPACA plan

The IRS talks about that decision in the preamble to the final regulations governing the 501(c)(29) organization recognition process. The final regulations — which replace temporary regulations issued in February 2012 — are set to appear in the Federal Register Thursday.

The IRS can issue temporary regulations, or regulations developed without going through the usual public comment process, when emergencies or urgent statutory deadlines lead to pressure for fast action. Temporary IRS regulations are supposed to expire after three years.

The drafters of the Patient Protection and Affordable Care Act created the CO-OP program in an effort to create a new, nonprofit, member-owned class of health insurers that would sell coverage through the PPACA public exchange system and increase the level of competition in the commercial health insurance market. PPACA authorized HHS to provide billions of dollars in CO-OP startup loans. Congress abruptly cut the amount of CO-OP funding HHS could provide in a bill that was signed into law in January 2013.

PPACA refers to a CO-OP as a “qualified nonprofit health insurance issuer” (QNHII). Organizers of a QNHII can apply for tax-exempt status under Internal Revenue Code (IRC) Section 501(c)(29).

The new final regulations deal with the process CO-OP insurer organizers must go through to get 501(c)(29) status for the insurer.

See also: How to Be a 501(c)(29) Entity

CO-OP insurer organizers must use a process established by the IRS to say they are setting up a CO-OP insurer, but the IRS can make approval of Section 501(c)(29) status apply retroactively, according to the text of the new IRS final regulations.

One commenter suggested, in a response to draft final regulations based on the temporary regulations, that CO-OP insurer organizers seeking 501(c)(29) status should have to tell the IRS that the insurer “meets all applicable statement requirements for a qualified health insurer, including solvency and licensing standards.”

Another commenter said the IRS should say in the regulations that all state and federal laws and regulations that now apply to 501(c) nonprofit organizations, “including those related to transparency, reporting and the treatment of assets upon dissolution,” applies to CO-OP insurers.

Section 501(c)(29)(A) already requires CO-OP insurer organizers seeking tax-exempt status to show that the insurer has received CO-OP funding from HHS, IRS officials say in the preamble to the final regulations.

The Centers for Medicare & Medicaid Services (CMS), an arm of HHS, is in charge of deciding whether a new CO-OP insurer is a QNHII and whether an existing CO-OP insurer no longer meets QHNII standards, IRS officials say.

Different rules govern different types of tax-exempt organizations, the CO-OP law sets specific rules for CO-OP insurer organizers, and CMS is in charge of administering the CO-OP insurer qualification requirements, IRS officials say.

“Those requirements are outside the jurisdiction of the Treasury Department,” IRS officials say.

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