The Internal Revenue Service has issued a notice laying out its views on how participation in an accountable care organization could affect a non-profit hospital's tax-exempt status, and the agency is asking for comments on the topic.
The IRS said a tax-exempt organization’s participation in an ACO might not be seen as "inurement or impermissible private benefit" in the following circumstances:
1. The terms of the organization’s participation, including its portion of shared savings payments, are set forth in advance "in a written agreement negotiated at arm’s length."
2. The ACO is recognized by CMS.
3. The organization's share of economic benefits is proportional to its contributions to the ACO.
4. The organization's ownership interest in the ACO is "proportional and equal in value" to its capital contributions to the ACO.
5. All "returns of capital, allocations and distributions" are made in proportion to the organization's ownership interests.
6. The organization's share of the ACO's losses does not exceed its share of the ACO's economic benefits.
7. All contracts and transactions the organization has with the ACO and its participants are at fair market value.
The IRS added that the organization's share of ACO payments would not be subject to unrelated business income tax if the paid activities were "substantially related" to the organization’s charitable purposes.
It added that other payments made through the ACO, such as payments from private health insurers, are unlikely to lessen the organization's tax burdens. "For example, negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity," the IRS stated.
However, an ACO receiving Medicaid shared savings payments may "further the charitable purpose of relieving the poor and distressed or the underprivileged," it said.
The IRS requested further comments on how a tax-exempt organization's participation in activities through an ACO might further its tax-exempt purpose.
Read IRS Notice 2011-20 on ACOs.
The IRS said a tax-exempt organization’s participation in an ACO might not be seen as "inurement or impermissible private benefit" in the following circumstances:
1. The terms of the organization’s participation, including its portion of shared savings payments, are set forth in advance "in a written agreement negotiated at arm’s length."
2. The ACO is recognized by CMS.
3. The organization's share of economic benefits is proportional to its contributions to the ACO.
4. The organization's ownership interest in the ACO is "proportional and equal in value" to its capital contributions to the ACO.
5. All "returns of capital, allocations and distributions" are made in proportion to the organization's ownership interests.
6. The organization's share of the ACO's losses does not exceed its share of the ACO's economic benefits.
7. All contracts and transactions the organization has with the ACO and its participants are at fair market value.
The IRS added that the organization's share of ACO payments would not be subject to unrelated business income tax if the paid activities were "substantially related" to the organization’s charitable purposes.
It added that other payments made through the ACO, such as payments from private health insurers, are unlikely to lessen the organization's tax burdens. "For example, negotiating with private health insurers on behalf of unrelated parties generally is not a charitable activity," the IRS stated.
However, an ACO receiving Medicaid shared savings payments may "further the charitable purpose of relieving the poor and distressed or the underprivileged," it said.
The IRS requested further comments on how a tax-exempt organization's participation in activities through an ACO might further its tax-exempt purpose.
Read IRS Notice 2011-20 on ACOs.