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August 15, 2023

IRS denies tax-exempt status to organization providing pharmacy benefits

  • The IRS denied tax exempt-status to a pharmacy benefit manager (PBM) that proposed to acquire the assets and business of a taxable PBM and continue its services for a lower fee.
  • The IRS concluded that the organization was not operating exclusively to promote social welfare.
  • Organizations seeking tax exemption as IRC Section 501(c)(4) social welfare organizations generally will not qualify for exemption if they operate like for-profit organizations and/or primarily for the benefit of an insider or insiders.

In PLR 202331004, the IRS determined that an organization that claimed it was an alternative to a traditional pharmacy benefit manager (PBM) did not qualify for tax-exempt status under IRC Section 501(c)(4) because it carried on a pharmacy administration business that competed with taxable PBMs, even though its purpose was, in part, to provide access to health benefits to uninsured and underinsured individuals. The IRS concluded that the organization did not operate exclusively for the promotion of social welfare and therefore did not qualify as tax-exempt under IRC Section 501(c)(4).


The organization applied for tax-exempt status based on its stated intention to (1) offer pharmacy and medical health benefit coverage to the general public, governmental entities, and employer groups; (2) address the pharmacy, medical and related health benefit needs of the uninsured and underinsured; and (3) engage in activities that relate to social welfare.

According to the organization, it will acquire the assets of an affiliated for-profit organization owned by the organization's founder at fair market value, including the for-profit organization's office, furniture, intellectual property, client contracts and third-party manufacturer contracts. The new organization will then continue servicing the predecessor organization's clients. The IRS said the new organization's "projected expenses indicate significant continued financial arrangements" with the predecessor organization, noting that the financial statements project that the organization "will incur significant future expenses payable to [the] predecessor, most significantly allocated personnel costs, but also over a million in administrative fees per year."

The organization said it would, among other things:

  • Use a proprietary cost index and network of pharmacies nationwide to set the cost of prescriptions to eliminate hidden spreads and pass along rebates to individual and group subscribers
  • Provide discounted pharmaceutical products and services and focus on "reaching the uninsured and underinsured" by offering pharmacy benefits through retail pharmacy networks offering services to uninsured or underinsured individuals, state and local government-sponsored programs for the uninsured, certain non-profit hospitals and other similar programs
  • Offer pharmacy and other health benefit coverage through a "proprietary network" of pharmacies with which the organization has contracted and which offer negotiated discounts to enrollees in the network, with the claims being administered at these negotiated rates by the organization

Law and analysis

In its denial letter, the IRS stated that an entity seeking to qualify for tax-exempt status as an IRC Section 501(c)(4) organization must operate exclusively for the promotion of social welfare. To be operated exclusively for the promotion of social welfare, the organization must be primarily engaged in promoting the common good and general welfare of its community. The IRS concluded that the organization did not establish that it operated exclusively for social welfare purposes within the meaning of IRC Section 501(c)(4).

The IRS said the organization appeared to carry on a business like a traditional PBM, but with the goal of offering services for less money and in a socially conscious manner, which does not constitute an organization that operates exclusively for the purpose of promoting social welfare.

In support of its conclusion, the IRS noted that the organization:

  • Is paid for pharmacy benefit administrative and claims processing services under the terms of various contractual arrangements that it will assume from the predecessor organization
  • Does not provide any health care services directly to uninsured or underinsured individuals
  • Receives service fees from for-profit companies and pharmaceutical companies when members purchase medications from them
  • Does not primarily provide services to indigent persons and Medicare and Medicaid enrollees, based on the organization's projected enrollments
  • Serves Medicare and Medicaid enrollees only incidentally
  • Failed to establish that it primarily engaged in social welfare activities or that its activities did not provide prohibited private inurement to its founder, from whom the organization would purchase a taxable PBM business and to whom it would continue to pay license and administrative fees

The IRS concluded that the organization's "non-exempt activities are more than insubstantial," and thus the organization is not exempt from federal income tax under IRC Section 501(c)(4).


Health care-related organizations seeking exemption under IRC Section 501(c)(4) must ensure they are established to operate exclusively for the promotion of social welfare, and that social welfare is not merely an incidental component of their activities. As highlighted in this PLR, an organization may aim to provide some type of public or community benefit, but will likely have its exemption denied or revoked after review if it operates like a for-profit organization and/or provides private inurement to an insider. This ruling also has implications for non-provider organizations such as ACOs, HMOs, and other health plans, which need to establish that they are primarily operated to serve medically underserved persons in their communities, rather than to compete with for-profit competitors for similar members/ subscribers, to qualify for 501(c)(4) status.

Please contact your Ernst & Young LLP Tax Professional with any questions.


Contact Information
For additional information concerning this Alert, please contact:
Exempt Organization Tax Services
   • Steve Clarke (
   • Melanie McPeak (
   • Austin L Bailey (
   • Morgan L Moran (
   • Matt Case (
   • Cal Hoke (

Published by NTD’s Tax Technical Knowledge Services group; Andrea Ben-Yosef, legal editor