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ACO or ongoing ACO operations, other payments made outside of an ACO, distribution of shared savings from private payers, beneficiary inducements, waivers for a two-sided vs. one-sided risk model, and the duration and timing of waivers.
VII. TAX IMPLICATIONS OF ACOS
On March 31, 2011, the IRS published Notice 2011-20, I.R.B. 2011-16, regarding the application of the Internal Revenue Code (the “Code”) to tax-exempt organizations participating in the Program and soliciting comments as to whether existing guidance on Section 501(c)(3) organizations is sufficient for those tax-exempt organizations planning to participate in an ACO. The IRS is accepting public comments until May 31, 2011.
Current Law Regarding 501(c)(3) Organizations
Organizations that are primarily engaged in activities with a charitable purpose are exempt from federal income tax under Section 501(c)(3) of the Code. Such organizations may include hospitals or other health care providers that may participate in an ACO. In order to qualify for the tax exemption under existing law, no part of a Section 501(c)(3)’s organization’s net earnings or assets may inure to the benefit of an individual or shareholder. If an organization that otherwise qualifies as tax- exempt has some earnings that are not substantially related to the charitable purpose of the organization, those earnings may be subject to unrelated business income tax under Section 511 of the Code.
B. Program Participation by 501(c)(3) Organizations
In Notice 2011-20, the IRS has published, for comment, proposed guidelines for Section 501(c)(3) organizations that wish to participate in an ACO. If the following five guidelines are satisfied, the IRS “expects” that it will not consider a tax-exempt organization’s participation in an ACO to result in impermissible private inurement: (1) The terms of sharing payments or penalties must be set out in writing in advance and negotiated at arms’ length; (2) The ACO in which the organization is participating must have been accepted by CMS and not terminated; (3) The economic benefit the organization reaps from the ACO must be equal to its economic contribution; (4) The organization’s share of the ACO’s losses must not be greater than its share of the earnings; (5) All contracts the ACO enters into must be at fair market value. The IRS has also proposed that, since shared savings payments under the Program are “substantially related to the performance of the charitable purpose” of hospitals or other 501(c)(3) organizations participating in the ACO, such payments will not be subject to unrelated business income tax.
C. Other ACO Activities
The ACOs to which tax-exempt organizations belong may engage in activities that create earnings for the ACO other than Program participation. These include negotiating with private payers for shared savings payments, negotiating with state Medicaid programs, or other non-Program activities. The IRS seeks public comment on how such activities might substantially relate to organizations’ charitable purposes and what safeguards should be put in place to further those purposes. Public comments may be submitted by mail or by email at email@example.com, with “Notice 2011-20” in the subject line.