May 24, 2023
IRS determines that healthcare sharing organization is not tax-exempt
In PLR 202318021, the IRS determined that a healthcare sharing organization did not qualify as a tax-exempt organization under IRC Section 501(c)(3) because it offered benefits to any member who paid a fee and, thus, its operations were not exclusively charitable, but were conducted in a commercial manner.
The organization applied for tax-exempt status based on its stated intention to provide healthcare services to members who cannot afford healthcare services at an open market price. The organization indicated that its activities include (1) aggregating health services vendors onto one platform and facilitating member-to-member healthcare sharing; (2) educating members on the healthcare system and how to access high-quality care at an affordable price; and (3) helping members navigate the healthcare system and negotiate large medical bills.
Membership is open to anyone who pays a monthly fee and agrees to "live a healthy lifestyle, share each other's burdens, maintain a healthy diet, exercise regularly, and refrain from the use of tobacco and illicit drugs." The monthly fee is based on vendor prices and fees charged by similar healthcare sharing service providers in the market, with older members typically paying more than younger members. The organization offers three membership programs with different fees and benefits. When a member receives medical care, the member submits the medical bill to the organization, which determines the "Medical Responsibility Amount" (similar to a deductible) that the member will be responsible for paying and the amount the organization will pay. Most of the organization's revenue comes from membership fees.
The organization initially requested tax exemption described in IRC Sections 509(a)(1) and 170(b)(1)(A)(i) as a church, but later agreed to let the IRS choose its classification.
Law and analysis
To qualify for tax-exempt status as an organization described in IRC Section 501(c)(3), an entity must be organized and operated exclusively for exempt purposes. The IRS concluded that the organization failed the operational test because it primarily served private interests, not public interests, by conferring benefits primarily to members that pay a fee for access to benefits, discount services and reimbursement of medical expenses.
In support of its conclusion, the IRS determined that the organization:
The IRS contrasted this case with Bethel Conservative Mennonite Church v. Commissioner, 746 F.2d 388 (7th Cir. 1984), in which a federal appellate court found that a healthcare sharing program that provided benefits to all church members, regardless of whether they contributed to the program, was operated primarily for tax-exempt charitable and religious purposes, and did not use a fee-based subscription model like that of the healthcare sharing organization.
A healthcare organization seeking tax exemption under IRC Section 501(c)(3) must make certain that it primarily benefits a charitable class, not private interests, and that any of its non-exempt or commercial activities that benefit private interests are incidental to the charitable benefit it provides to its community. This ruling underscores that providing health care or health plan services alone is not sufficient to qualify for tax exemption. Rather, an organization that arranges medical services — such as an HMO, PPO, other health plan, or healthcare sharing organization — should distinguish itself from commercial counterparts by serving predominantly Medicaid beneficiaries and/or other low-income and medically underserved patients, to qualify for IRC Section 501(c)(3) tax exemption. In this ruling, the class of subscribers served by the healthcare sharing organization was too broad and not sufficiently limited to a charitable class.
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Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor