Monday, November 20, 2023
Private Letter Ruling 202346033 (Nov. 17, 2023) might make for a good take home exam project. You could ask students to redesign the cost-sharing organization so that it qualifies for 501(c)(3) status. I am not sure it can be done, actually. Not without a wink and a nod. The Service correctly concluded that a religiously affiliated Health Care Cost-Sharing Plan was not exempt mostly because of private benefit. The Plan comprises paying members of a church, apparently, but the ruling does not much analyze the organization as though it were an integral part (legally and functionally, I mean) of member's spiritual beliefs. Anyway, here are the interesting facts:
You state in your application that you are a sharing program based on the biblical principle to give to those in need. Subscribers to the program will share health care costs with other members as they have a need. You state that the vast majority of those participating in the program are uninsured as well and you would seek exemption for members from the shared responsibility payment under the Affordable Care Act.
Your program is not insurance but [members of a religious denomination] helping one another pay health care bills and fees. Those enrolled are still responsible for paying health care debts and costs. You cannot guarantee payment to those enrolled, but as resources provide you will share with each other until no longer able to do so.
To become a member, an individual must consent to the membership agreement and statement of faith. You must also agree to pay on time monthly so that all can share equally. You must confirm yearly that you are meeting the requirements above.
Basic Plan subscribers pay per month and share health care costs. The monthly fee is g dollars for adults under the age of D and h dollars for those over D. Married couples pay j dollars per month; a family plan for up to F members is k dollars; and a family plan for over F members is l dollars. The maximum shared for a maternity membership is M dollars Membership rates were decided on after comparing similar organizations and are based on what you project to be operating costs. You plan to give at least q percent of monthly revenue from enrollment directly for cost sharing. An initial amount of n dollars is not shareable, but beyond that, costs will be shared. The goal is to share the bill within [redacted data] days for quick payment. There are no networks like insurance. If the sharing needs exceed company revenue, it will be prorated and shared evenly across the outstanding need. You currently don't have a program for providing charity care but are open to adding this in the future.
Program members will submit the health care cost information online. The bills will be reviewed by your board or staff and subsequently funds will be dispensed from the sharing account. Payment will be made directly to the patient with a need. The same process of claims reimbursement is applied to every member.
You also currently don't have a website, but plan to have one soon. You target the general public via online advertising. You will also have local radio spots.
You expect to raise p dollars in public donations prior to launch. You will then have a month-long enrollment period before you go live with cost sharing. You expect subscription costs to be over r percent of your company revenue with donations accounting for the rest.
There is some muddled reasoning in the ruling about the organization not serving a charitable class because membership is open to everyone. But then the ruling makes a pretty well supported conclusion that the organization operates for private benefit. It should be able to operate as a (c)(4) but then donations would not be deductible.
Here is a solution just off the top of my head. Share costs for all members whether they pay or not, but limit membership to people who have been church members for a sufficient time. The better to judge commitment and credit-worthiness without an explicit dues requirement. Once someone is admitted, preach fire and brimstone down on those who do not "voluntarily" contribute. Give those who do not "voluntarily" contribute the side-eye and in other manners shun them to the hot place. They must contribute voluntarily, if at all, of course. Or just don't make a big fuss about it -- don't apply for recognition, and run the organization from within the Church anyway. The Church Audit Procedures might reasonably and legitimately hold the Service off indefinitely and donors -- that must be why the organization applied -- could still get deductions.
I know it sounds silly and as if I am making fun of church folk by suggesting they do something nefarious. But isn't this really how so called "sophisticated" tax planning gets accomplished. Identify the legal hurdle and then figure out a way to render a nefarious solution less nefarious. Look, there are white laws in tax law and tax planning all the time. Deemed distributions, nonrecognitions, and phantom income all over the place. Substantial economic effect and stuff. "Sophisticated" tax planning relies on white lies in pretty much every case. I always tell my students to look for the white lies, preferably in the statute or regulations, but sometimes we make up our own in the transaction documents. Here, we just need to mandate voluntary payments in a way that passes the straight face test.
darryll k. jones