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IRS Issues Notice Regarding ACOs

April 1, 2011 | 3 Comments
Posted by Sharlene Hunt

As mentioned in our blog post yesterday, the IRS has published notice 2011-20 soliciting public input on whether existing guidance issued by the IRS is adequate for tax-exempt organizations planning to participate in the Medicare shared savings program through an accountable care organization (ACO).  If existing guidance is not sufficient, the IRS is seeking comments on what additional guidance is needed.  The IRS is also soliciting comments regarding the tax implications for tax-exempt organizations using ACOs in arrangements with commercial health insurance plans that are unrelated to the Medicare shared savings program.  Public comments are to be submitted by May 31, 2011. 

In the notice, the IRS reviews existing IRS guidance that may apply to a tax-exempt organization’s participation in an ACO.  The IRS walks through the public benefit requirement, the private inurement requirement, and the rules regarding tax on unrelated business income.  The IRS also notes its position that the activities of a limited liability company treated as a partnership for federal income tax purposes are attributed to a tax-exempt owner to determine whether the tax-exempt entity is operated exclusively for exempt purposes.  Furthermore, the activities of the LLC may be considered an unrelated trade or business with respect to the tax-exempt organization.  To avoid unrelated business taxable income, the activities of the LLC must be “substantially related” to the member’s tax-exempt purposes, which in turn means it must “contribute importantly to the accomplishment of [exempt] purposes.” 

With respect to a tax-exempt organization’s participation in an ACO, the IRS has identified the primary issues as being (1) concerns over private inurement, since the ACO will most likely include individuals considered insiders by the IRS (i.e., members of a hospital’s medical staff), and (2) issues of the organization being operated for the benefit of private parties participating in the ACO.  However, due to the regulatory oversight of the Centers for Medicare and Medicaid Services under the Medicare shared savings program, the IRS indicates that it does not expect a tax-exempt organization’s participation in an ACO involved in the Medicare shared savings program to result in inurement or impermissible private benefit where certain factors, outlined in the notice, are met.  The IRS also indicates that in this setting, it would expect any payments received from the Medicare shared savings program to be substantially related to tax-exempt purposes, in this case, the charitable purpose of lessening the burdens of government. 

Since the IRS has indicated that its determination regarding these issues must be made on a case-by-case basis, based on all of the facts and circumstances, it seems likely that we will see a number of requests for private letter rulings in this area, unless the IRS issues additional guidance in response to this notice. 

To the extent an ACO participates in shared savings arrangements with commercial insurers, those activities will not likely lessen the burdens of government.  Thus the IRS is seeking comments as to how a tax-exempt organization’s participation in an ACO engaged in business with commercial insurers is engaged in an activity substantially related to a tax-exempt purpose.  Simply promoting health, although it is recognized as a charitable purpose, will not be sufficient to meet the requirements.  The IRS is also seeking comment with respect to non-Medicare shared savings program activities regarding participation in an LLC, and the attribution of activities of the LLC to the tax-exempt entity. 

The full text of the notice can be found here:


3 Responses to “IRS Issues Notice Regarding ACOs”

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