Health care sharing ministries ruling leaves a critical question unanswered

An IRS ruling answers some questions about health care sharing ministries; but leaves unanswered a critical question about their status. In the ruling, the IRS determined that an organization did not qualify as an IRC §501(c)(3) exempt organization. It therefore would not fit the Internal Revenue Code definition of a health care sharing ministry.

Health Care Sharing Ministries

Health care sharing ministries are nonprofit groups in which members share each other's health care costs. Such groups have existed for many years. They became more popular after enactment of the Affordable Care Act because their members are exempt from the Act's minimum essential coverage requirement. Although the coverage requirement no longer applies at the federal level, several states still impose a penalty on residents without health insurance.

The Internal Revenue Code describes a health care sharing ministry as an organization:

• that is described in IRC §501(c)(3) and is exempt from taxation under IRC §501(a);
• whose members share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs;
• whose members retain membership even after they develop a medical condition;
• that has been in existence at all times since December 31, 1999 (or a predecessor has been in existence since 1999);
• whose members' medical expenses have been shared continuously and without interruption since at least December 31, 1999; 
• that conducts an annual audit performed by an independent CPA firm in accordance with generally accepted accounting principles

IRC §501(c)(3)

Under IRC §501(c)(3), an organization may be tax exempt if it is (1) organized, and (2) operated exclusively for religious, charitable, scientific, literary, or educational purposes; for the prevention of cruelty to children or animals; for testing consumer products for public safety; or to foster national or international amateur sports competition (the organizational and operational tests).

In addition, none of its net income may benefit a private shareholder or individual; and no substantial part of its activities may attempt to influence legislation, except for certain lobbying activities.

Organizational test

To qualify as an exempt organization under IRC §501(c)(3), an entity's articles of organization must:

• limit the organization's purposes to one or more exempt purposes; 
• state that it is being formed or organized for one or more of the exempt purposes mentioned in IRC §501(c)(3);
• not expressly permit the organization to carry on activities that do not further the organization's exempt purpose (except for insubstantial activities);
• not authorize it to influence legislation, intervene in an political campaign, or have objectives and engage in activities that will characterize it as an "action" organization; and 
• provide that its assets must be dedicated to an exempt purpose.

Operational test

An organization claiming exemption under IRC §501(c)(3) must be operated exclusively for its exempt purposes. An organization is regarded as operated "exclusively for" exempt purposes only if it engages primarily in activities that accomplish one or more of the exempt purposes. As with the organizational test, an organization is not regarded as exempt "if more than an insubstantial part of its activities is not in furtherance of an exempt purpose."

IRS decision

The IRS found that the organization (1) met the organizational test after amending the language of its documents, (2) failed the test for existence since 1999, and (3) failed the operational test.

Existence since 1999

The organization argued that most of the recognized health care sharing ministries do not fit this description literally, but instead, aligned themselves with a church or organization that had been in existence since 1999. The organization stated that it was pursuing a partnership with a church with over a century of history. However, the IRS did not find that partnering with another organization would cause it have been in existence at all times since December 31, 1999.

Operational test

Religious purposes. The IRS did not deny exempt status based religious purposes. It agreed that the organization could operate for religious purposes based on Judeo-Christian tradition to share medical expenses, even if not all members are Christian or even believe in God in the same manner. The U.S. Supreme Court has found (Welsh v. United States, 398 U.S. 333, and United States v. Seeger, 380. U.S. 163) that a court cannot not rule on the veracity of someone's belief, but only whether a person believes it to be true, and that a belief does not have to be in traditional form.

Exempt purposes. The IRS ruled that the organization operated for a substantial non-exempt purpose and therefore did not qualify as an IRC §501(c)(3) exempt organization. The IRS found the organization's operations similar to commercial insurance because it charges a set fee for individuals to be able to participate in the sharing of medical expenses.

The unanswered question

The IRS, in its ruling, mentioned, but did not address, the argument that every health care sharing ministry requires a set monthly fee or “share,” from its members to pay for other member's medical expenses. The unanswered question, then, is if a health care sharing ministry cannot operate by members paying a “fee,” does any health care sharing ministry qualify as an IRC §501(c)(3) exempt organization?