On Feb. 13, 2012, the Internal Revenue Service (IRS) released procedures (Revenue Procedure) by which qualified nonprofit health insurance issuers (QNHIIs, herein referred to as CO-OPs) may seek exemption from Federal income tax under Section 501(c)(29) of the Internal Revenue Code (Code).

Section 1322 of the Patient Protection and Affordable Care Act provides for the Consumer Operated and Oriented Plan (CO-OP) Program, which was implemented by Centers for Medicare and Medicaid Services (CMS) Final Rule on December 8, 2012. The aim of the CO-OP Program is to foster the formation of new consumer-governed, private, nonprofit health insurance issuers that will create "a new competitive presence in the insurance marketplace." According to the Final Rule, CMS will provide loans and repayable grants (collectively, Funding) to selected CO-OPs, which will help cover start-up costs and meet any state mandated solvency requirements.

The Revenue Procedure sets forth the application requirements for recognition as a Section 501(c)(29) tax-exempt organization, a Section 501(a) tax-exempt classification that was added to the Code by the CO-OP Program. A CO-OP seeking recognition of exemption under Section 501(c)(29) must submit a letter application with Form 8718 (Letter Application), rather than Form 1023.

The Revenue Procedure requires that the Letter Application include: (1) the CO-OP's Employer Identification Number (EIN); (2) specified financial records; (3) a detailed narrative of CO-OP past and proposed activities and actual and anticipated receipts and contemplated expenditures; (4) a state certified copy of the CO-OP's organizational document; (5) CO-OP By-Laws, or any similar governing documents; (6) formal documentation both that the CO-OP has been awarded Funding and that the CO-OP has entered into a loan agreement with CMS; and (7) several representations regarding the CO-OP's nonprofit nature.

The CO-OP may apply for tax exemption as a 501(c)(29) organization any time within the 15 months following the CO-OP both being awarded Funding and entering into a loan agreement with CMS. Once the IRS issues the determination approving a CO-OP as a 501(c)(29), the benefits of being a tax-exempt organization will retroactively apply to either the date of CO-OP formation or March 23, 2010 (the PPACA date of enactment), whichever is later.

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