The Patient Protection and Affordable Care Act of 2010 (PPACA) provides for the creation of accountable care organizations (ACOs) to enter into a Medicare Shared Savings Program (MSSP) agreement with the Centers for Medicare & Medicaid Services. Participation in ACOs by an organization exempt from federal income taxation under Section 501(c)(3) of the Internal Revenue Code raises issues related to the organization’s tax-exempt status. (Please also see our September 2010 advisory "Health Care Reform: Accountable Care Organizations and Exempt-Organization Participants.")

The Internal Revenue Service recognizes these issues in Notice 2011-20 (released March 31, 2011). This Notice is the IRS’ first guidance on exempt organization participation in ACOs. In the Notice, the IRS solicits comments as to what additional guidance is needed, if any, for an exempt hospital or other health care organization to participate in an ACO in either MSSP or non-MSSP activities. On the same day that the Notice was released, CMS issued proposed regulations on the formation and operation of ACOs. (This advisory concludes with links to our series of advisories on the proposed regulations.)

Guidance on tax issues

Notice 2011-20 addresses three important tax issues for exempt hospital and other health care organizations participating in the MSSP through ACOs: private inurement, private benefit, and unrelated business income. The Notice, however, does not identify how these issues would apply to exempt organizations participating in ACOs for non-MSSP activities, such as shared savings arrangements with Medicaid.

Private inurement/private benefit

The net earnings of an organization exempt from federal income tax under Section 501(c)(3) cannot inure to the benefit of private shareholders or individuals who have a personal and private interest in the activities of the organization, i.e., “insiders.” Further, a Section 501(c)(3) organization must not be organized or operated for the benefit of private interests.