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March 18, 2022

IRS concludes an accountable care organization does not qualify for IRC Section 501(c)(4) status

The IRS has denied (202210023) an application for recognition of IRC Section 501(c)(4) status as a social welfare organization by an entity organized to operate an accountable care organization (ACO) that participates in the Medicare Shared Savings Program (MSSP).


Generally, an ACO is a group of hospitals, physicians and other healthcare providers that work together to coordinate care for health plan members.

The IRS's final denial letter, PLR 202210023, indicated that the entity operating the ACO had a sole member that was a health system recognized as a tax-exempt organization described in IRC Section 501(c)(3). A separate IRC Section 501(c)(3) healthcare organization provided professional and administrative services to the ACO.

The ACO was formed with an exempt purpose of improving the health and social welfare of the health system's vulnerable patient populations and the community as a whole "by developing, implementing and communicating coordinated care models that improve patient outcomes." The patients on whom the ACO focuses are those "with complex or chronic health conditions and who otherwise have challenges navigating the healthcare system effectively."

The ACO's revenue included contract payments from the MSSP and fees for managing care for certain for-profit insurance companies (non-MSSP insurers). However, in past consecutive tax years, the ACO's income from non-MSSP insurers exceeded the income it received from the MSSP.

IRS analysis

The IRS analogized the ACO's facts to those at issue in PLR 201615022 (see Tax Alert 2016-0740) and Geisinger Health Plan v. Commissioner, 30 F.3d 494 (3d Cir. 1994) aff'g 100 T.C. 394 (1993), both of which concluded that the taxpayer did not qualify for tax-exempt status as a charity under IRC Section 501(c)(3). The entity involved in PLR 201615022 negotiated with private insurers for an unrelated healthcare provider, which the IRS concluded was not a charitable endeavor. Further, the IRS noted that the ACO's activities benefited those for whom the ACO negotiated, rather than furthering social welfare. The health maintenance organization (HMO) in Geisinger sought IRC Section 501(c)(3) status as an integral part of an exempt parent. The Tax Court and Third Circuit Court of Appeals upheld the IRS's denial of the Geisinger HMO's 501(c)(3) exemption application, on the basis that the HMO's primary service — arranging for its subscribers to receive healthcare services from healthcare providers — was not charitable. Similarly, the IRS concluded that the entity operating the ACO in PLR 202210023 primarily benefited insurance companies that paid the ACO fees only when agreed cost and quality benchmarks were met. The IRS concluded that the ACO "primarily benefit[ed] patient populations who are subscribers to the insurance companies" the ACO served, adding that serving private interests does not further social welfare.

Considering the number of contracts the ACO had entered into, the number of patients it served under each contract and the revenue streams from these contracts, the IRS concluded that the ACO's primary activity was coordinating care of patient populations by acting as an intermediary between non-MSSP insurers and physicians, rather than to participate in the MSSP. The denial letter noted that an organization cannot qualify for IRC Section 501(c)(4) status if it conducts an activity that is essentially equivalent to activities conducted by for-profit entities, such as providing coordinated care services for a fee or conducting activities that benefit for-profit insurance companies. The IRS reiterated a point made in in PLR 201615022 and Notice 2011-20 (holding that an MSSP-only ACO furthers IRC Section 501(c)(3) charitable purposes) — that "negotiating with private health insurers on behalf of unrelated parties generally is not a charitable health activity."


Although IRS letters denying tax exemptions do not constitute legal binding precedent, this denial letter suggests that the IRS is likely to deny tax exemption applications of ACOs that are not primarily operated as part of the MSSP program or for Medicaid patients, whether those applications are for recognition of IRC Section 501(c)(3) or 501(c)(4) status. The IRS took the unusual approach of relying on denials of applications for IRC Section 501(c)(3) status (of health plans and ACOs) for its denial of this IRC Section 501(c)(4) exemption request, presumably due to the lack of guidance on whether and how an ACO can qualify for exemption under IRC Section 501(c)(4). In doing so, the IRS still has not established any standard for how an ACO can qualify for IRC Section 501(c)(4) status, other than by meeting the IRC Section 501(c)(3) MMSP-only standard described in Notice 2011-20. Because the IRS issued this final denial letter after an Appeals process, it likely devoted considerable time and technical resources to reaching its decision, suggesting that the IRS is unlikely to back away from this position for similar ACO applications in the near future.

Unlike most organizations claiming they qualify for exemption under IRC Section 501(c)(3), organizations that claim to qualify for exemption under IRC Section 501(c)(4) are not required to apply for IRS recognition of that exemption. Rather, an organization may self-declare IRC Section 501(c)(4) status. However, given the few IRS rulings on ACO exemption, and the ambiguity over IRC Section 501(c)(4) ACO qualification standards, it would be challenging for an ACO that contracts with non-MSSP insurers to take a position that it qualifies for exemption under either IRC Section 501(c)(3) or 501(c)(4) unless it obtains IRS recognition of exemption.

Likewise, it would be challenging for an exempt healthcare provider organization that operates an ACO as part of its broader healthcare activities (e.g., through a joint venture), and contracts with non-MSSP insurers and physicians through the ACO, to successfully argue that the ACO activity substantially furthers tax-exempt purposes. Such an organization should consider whether its involvement in an ACO could result in unrelated business taxable income or jeopardize its tax-exempt status and, if so, consider restructuring its ACO so that it operates (i) in a separate, taxable entity or (ii) primarily as part of the MSSP program or a similar program for Medicaid patients.


Contact Information
For additional information concerning this Alert, please contact:
Tax-Exempt Organization Services
   • Steve Clarke (
   • Melanie McPeak (
   • Morgan Moran (
   • Tiyesha Johnson (