Tax News & Views: Health Care Edition

May 2016 | Vol. 12 No. 25

Tax News & Views: Health Care Edition is a timely news summary bulletin authored by the Health Care Industry Group, Deloitte Tax LLP. The newsletter contains highlights from the latest tax developments in health care on Capitol Hill, at the White House, at the Internal Revenue Service, at the Treasury Department and in the courts. It is a valuable resource for tax and other professionals involved in the tax-exempt health care providers and health plans sectors, helping them remain current on tax developments that stand to have an impact on their businesses.

IRS denies exempt status to ACO

In LTR 201615022, the Internal Revenue Service (IRS) denied exemption under Internal Revenue Code Section 501(c)(3) to an accountable care organization (ACO). The IRS held that the ACO was not operated exclusively for exempt purposes within the meaning of Section 501(c)(3). The IRS also held that the ACO was not operated primarily for a public purpose, but rather operated for the benefit of private interests.


The ACO was organized as a nonprofit corporation to “promote and support, directly or indirectly, the interests and purposes” of a health care system. The health care system is a nonprofit health care corporation recognized as tax exempt under Section 501(c)(3) and classified as a public charity under Section 509(a)(1).

The ACO was formed by the system to serve as the legal and operational vehicle for achieving clinical care integration, coordination, and accountability among both employed and independent physicians practicing throughout the health care system affiliated facilities. The
ACO applied for exemption requesting a determination as a supporting organization under Section 509(a)(3).

The ACO does not participate in the Medicare Shared Savings Program (MSSP). The ACO does not engage in the direct delivery of medical care or provide health services to the general public. The ACO formed a clinically integrated network of health care providers by entering into participation agreements with providers who meet eligibility and performance standards. The network participants include physicians employed by the health care system, as well as those from independent practice groups who are members of the medical staff at the health care system affiliated facilities. The network participants also include physicians practicing at nonaffiliated hospitals. Approximately half of the participating physicians are in independent practices or affiliated with unrelated hospitals or health systems.

The ACO acts as a representative for all participating providers in the negotiation and execution of certain agreements with third-party payers. These agreements link rewards and penalties for participants to their achievement of certain performance measures in order to incentivize changes in participant behavior with regard to reducing the cost of health care, improving quality of care, and improving population health.

IRS denial of exempt status

In its decision, the IRS states that in order to qualify for exemption under Section 501(c)(3), an organization must be organized and operated exclusively for one or more charitable purposes. Exempt charitable purposes include, among others, relief of the poor and distressed and the lessening of the burdens of government. In order for an activity to be considered “lessening the burden of government,” the government must consider the activity to be its burden. In Notice 2011-20, congress established the MSSP to be conducted through ACOs to promote quality improvements and cost savings in health care. Participation in the MSSP by an ACO will generally further the charitable purpose of lessening the burdens of government. However, the law does not provide any indication that the government considers non-MSSP related ACO activities to be its burden.

The IRS notes that the ACO does not participate in the MSSP. The IRS also notes that the ACO is not engaged primarily in assisting the Medicare or Medicaid population, which could further the charitable purpose of relieving the poor and distressed. Rather, a substantial activity of the ACO is the negotiation of payer agreements on behalf of the health care provider participants, approximately half of which are not employed by the related health care system. The IRS states that negotiating with private health insurers on behalf of unrelated health care providers is not a charitable activity. The IRS references Notice 2011-20 which states, “negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity, regardless of whether the agreement negotiated is a program aimed at achieving cost savings in health care delivery.” Such negotiation of payer agreements on behalf of the nonaffiliated physicians only indirectly benefits the community as a whole. These activities are primarily beneficial to the unrelated physicians, hospitals, and other health care providers. The presence of this substantial nonexempt activity destroys exemption under Section 501(c)(3). Therefore, the IRS concluded that the ACO does not qualify for exemption.


IRS issues 2015 Data Book

The IRS recently released the 2015 Data Book which is a report describing activities conducted by the IRS during fiscal year 2015 (October 1, 2014, through September 30, 2015.) It provides information on returns filed and taxes collected, enforcement, taxpayer assistance, the IRS
budget and workforce, and other selected activities. The Data Book also includes a section on tax-exempt activities and describes the number of tax-exempt organizations, the number of approvals of applications for tax-exempt status, and the volume of tax-exempt guidance and regulatory activity. Highlights from the Data Book include the following:

  • In FY15, there were more than $1.7 million organizations recognized by the IRS as exempt from taxation.
  • In FY15, the IRS closed 101,962 applications for tax-exempt status. Of those, the IRS approved tax-exempt status for 95,372 organizations. The majority of these applications were for organizations requesting tax-exempt status under Section 501(c)(3) as a religious, charitable, or similar organization.
  • The number of tax returns filed by tax-exempt organizations rose by 7.7% between FY14 and FY15.
  • The IRS processed 787,339 returns of tax-exempt organizations in calendar year 2014 and examined 6,392 tax exempt entity and related taxable returns in FY15.

Did you know?

IRS provides guidance on mid-year changes to safe harbor plans under 401(k) and 403(b)

The IRS recently released Notice 2016-16 which provides guidance on midyear changes to a safe harbor plan under Sections 409(k) and 401(m). The notice provides that a midyear change either to a safe harbor plan or to a plan’s safe harbor notice does not violate the safe harbor rules merely because it is a midyear change, provided that applicable notice and election opportunity conditions are satisfied and the midyear change is not a prohibited midyear change, as described in the notice. The guidance in the notice applies on similar terms to Section 403(b) plans that apply the Section 401(m) safe harbor rules pursuant to Section 403(b)(12).

IRS guidance on employer shared responsibility provisions

Two provisions of the Affordable Care Act apply only to applicable large employers (ALEs): the employer shared responsibility provisions and the employer information reporting provisions for offers of minimum essential coverage. Whether an employer is considered an ALE generally depends on the annual number of full-time employees. A new IRS web page provides additional guidance and examples for employers to use in determining their status as an ALE.

Additional Resources

Deloitte Center for Health Solutions

Deloitte Center for Health Solutions: The source for health care insights: The Deloitte Center for Health Solutions (DCHS) is the research division of Deloitte’s Life Sciences and Health Care practice. The goal of DCHS is to inform stakeholders across the health care system about emerging trends, challenges, and opportunities.

Health Care Current

This weekly series explores breaking news and developments in the US health care industry, examines key issues facing life sciences and health care companies and provides updates and insights on policy, regulatory and legislative changes.

2016 Health Care Providers Industry Outlook;  Interview with Mitchell Morris, MD

Mitch Morris, M.D., vice chairman and US/Global Health Care Providers leader, Deloitte Consulting LLP, weighs in on the evolution of value based care, aggressive industry consolidation and the role of the consumer.

This edition

  • IRS denies exempt status to ACO
  • IRS issues 2015 Data Book

Did you know?

  • IRS provides guidance on mid-year changes to safe harbor plans under 401(k) and 403(b)
  • IRS guidance on employer shared responsibility provisions

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