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Financial Planning > Tax Planning

Failed PPACA CO-OPs may face huge tax bills

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Organizers of a Consumer Operated and Oriented Plan (CO-OP) that fails could end up with tax headaches.

The staff of the Joint Committee on Taxation (JCT) prepared a report on failed CO-OPs’ tax problems for the Senate Finance Committee.

The Senate Finance Committee is bringing Andy Slavitt, the acting administrator of the Centers for Medicare & Medicaid Services (CMS), to Capitol Hill on Thursday for a hearing on CO-OP financial and oversight controls.

Drafters of the Patient Protection and Affordable Care Act (PPACA) created the CO-OP program in an effort to increase the level of competition in the private health insurance market, by providing $6 billion in federal loan funding and tax-exempt status for borrowers interested in setting up nonprofit, member-owned health insurers.

About half of the CO-OPs have already failed. Organizers have argued that the failures were due, at least in part, to congressional CO-OP loan pool funding cuts; tight CMS restrictions on how CO-OPs could use federal loan money; a PPACA risk-adjustment program formula that hurt smaller, newer plans; and a move by Congress to change the terms of the PPACA risk corridors program, which was supposed to cushion exchange plan issuers against exchange startup glitches, in a way that left the program with the ability to pay only about 13 percent of its obligations.

See also: What if you owe the PPACA 3R’s programs money?

All but one CO-OP lost money in 2014.

If any CO-OPs that fail end up recording profits, the organizers of those CO-OPs could face tax headaches, according to the JCT staff.

The CO-OP section of PPACA, Section 1322, created a new type of tax-exempt organization, the Internal Revenue Code (IRC) Section 501(c)(29) nonprofit health insurer.

If an entity fails to meet the CO-OP program eligibility requirements, it will lose its 501(c)(29) tax-exempt status and will be subject to the same tax laws that would apply to any other taxable insurer, the JCT staff says.

See also:

N.Y. broker group studying CO-OP failure effects

Michigan CO-OP describes agent comp payment restrictions


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