The Internal Revenue Service announced in a two-page field directive that it will propose regulations to clarify the tax-exempt status of not-for-profit HMOs -- an issue raised in a recent federal court ruling on a health plan owned by Intermountain Health Care, Salt Lake City. The regulations will define "commercial type" insurance and how section 501(m) of the IRS code, which relates to insurers' tax status, applies to tax-exempt 501(c)(3) and 501(c)(4) organizations, including HMOs. Until the regulations are final, the IRS said it will cease to use 501(m) to revoke HMOs' tax-exempt status, with few exceptions. In addition, the IRS will put on hold HMOs' applications for tax exemption, except for existing 501(c)(3) HMOs seeking to switch to a less-stringent (c)(4) exemption. Questions surfaced about HMOs' tax-exempt status after a federal appellate court ruled that Intermountain's IHC Health Plans was not a 501(c)(3) organization because it did not operate exclusively for charitable purposes. The IRS will publish a formal notice of its plan to propose regulations on May 27. It will accept comments on the contents of the regulations to be proposed until Aug. 25.
New regulations relating to healthcare tax-exemptions are rare, said tax attorney Gerald Griffith, of Honigman Miller Schwarz and Cohn, Detroit. Besides rules on intermediate sanctions and healthcare bond issues, it's been more than 15 years since the IRS has successfully carried out a healthcare-specific regulation project, Griffith said. Although the directive brings good news in that it promises clearer guidance, the interim could be frustrating for HMOs, he said. Because of the IRS hold on applications, HMOs will wait 18 months or longer for an exemption hearing, Griffith said. And until regulations are issued, "unless you're an existing tax-exempt HMO, you won't know how much of your income is subject to tax because of the uncertain definition of commercial-type insurance and the scope of the exceptions," he said. -- by Mark Taylor