Public employee health pool's income excluded

Plain-English summary

Political subdivisions formed an entity to pool and administer health and disability coverage for their employees. Its assets could be used only for benefits, related administration, and reasonable expenses, and any assets remaining at dissolution would return to governmental entities or another section 115 entity. The IRS concluded that providing the benefits was an essential governmental function and that the entity's income accrued to political subdivisions. Its income was therefore excluded from gross income under section 115 for its initial and later tax years.

Ruling snapshot

• Question: Is the health-benefit pool's income excluded from gross income as income from an essential governmental function?
• Outcome: approved
• Key authorities: IRC § 115(1); Rev. Rul. 77-261; Rev. Rul. 90-74

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201652001 [Third Party Communication:
Release Date: 12/23/2016 Date of Communication: Month DD, YYYY]
Index Number: 115.00-00
Person To Contact:
---------------------------------- --------------------, ID No. ------------------
--------------------------------------------------- Telephone Number:
------------------------------------ ----------------------
Refer Reply To:
In Re: ---------------------------------------------------- CC:TEGE:EOEG:EO2
---------------------------------- PLR-108930-16
Date:
September 13, 2016

Legend

Taxpayer = -------------------------------------
Date = -------------------
State = ------------
Plans = ------------------------------------

Dear -------------------:

This letter responds to a letter from your authorized representative dated January 19,
2016, submitted on behalf of the Taxpayer, requesting a ruling that the Taxpayer’s
income is excludable from gross income under Internal Revenue Code (IRC) section
115 for its initial tax year ended June 30, ------, and all subsequent tax years. The
Taxpayer represents the facts as follows.

FACTS

The Taxpayer was established on Date, pursuant to the laws of the State as provided
by statute. The Taxpayer operates pursuant to its articles of association and by-laws.
The Taxpayer was established by various political subdivisions of State (the
participating employers) to hold assets to be used to provide self-funded, pooled self-
funded or purchased insurance programs for their employees as provided under the
Plans. The Taxpayer is managed by a nine-member board of trustees. Each board
member is elected by the participating employers. The board administers the Plans.
The Plans provide coverage for medical, pharmacy, dental, vision, mental health and
disability insurance for the employees of the participating employers.
PLR-108930-16 2

Each participating employer of The Taxpayer must be a political subdivision created by
and existing under the laws of State as provided by statute.

The Taxpayer states that it holds all contributions of participating employers, together
with any appreciation, to be managed and administered pursuant to the terms of the
articles of association and by-laws. The Taxpayer’s assets are applied for the purpose
of providing health benefits under the Plans, providing related administrative services,
and paying the reasonable expenses of administering the Plans. The Taxpayer states
that no part of the Taxpayer’s assets will inure to private interest, other than to pay the
reasonable expenses of administering the Plans. The Taxpayer states that they are
able to utilize the savings they are achieving on their health benefits and apply those
resources elsewhere within the State’s budget. No individual or entity has any rights
under the Plans or under the Taxpayer except as provided in the Plans and in the
articles of association and by-laws. Any attempt to assert additional rights will be void.

The Taxpayer and the Plans are always to be operated to comply with all requirements
under the IRC.

The Taxpayer may be dissolved by a two-thirds vote of the board. However, upon the
Taxpayer’s dissolution, all of its net assets will be distributed to the political subdivisions
of State (the participating employers) as set forth in the Taxpayer’s by-laws.
Accordingly, the Taxpayer’s income accrues to the political subdivisions. In no event
will the Taxpayer’s assets be distributed or revert to any entity that is not a state, a
political subdivision of a state, or an entity the income of which is excludable from its
gross income by application of IRC section 115.

LAW AND ANALYSIS

IRC section 115(1) provides that gross income does not include income derived from
any public utility or the exercise of any essential governmental function and accruing to
a state or any political subdivision thereof.

Rev. Rul. 77-261, 1977-2 C.B. 45, holds that income generated by an investment fund
that is established by a state to hold revenues in excess of the amounts needed to meet
current expenses is excludable from gross income under IRC section 115(1) because
such investment constitutes an essential governmental function. The ruling explains that
the statutory exclusion is intended to extend not to the income of a state or municipality
resulting from its own participation in activities, but rather to the income of an entity
engaged in the operation of a public utility or the performance of some governmental
function that accrues to either a state or political subdivision of a state. The ruling points
out that it may be assumed that Congress did not desire in any way to restrict a state’s
participation in enterprises that might be useful in carrying out projects that are
desirable from the standpoint of a state government and that are within the ambit of a
sovereign to conduct.
PLR-108930-16 3

Rev. Rul. 90-74, 1990-2 C.B. 34, holds that the income of an organization formed,
funded, and operated by political subdivisions to pool various risks (e.g., casualty, public
liability, workers’ compensation, and employees’ health) is excludable from gross
income under IRC section 115(1) because the organization is performing an essential
governmental function. The revenue ruling states that the income of such an
organization is excludable from gross income so long as private interests do not
participate in the organization or benefit more than incidentally from the organization.
The benefit to the employees of the insurance coverage obtained by the member
political subdivisions is deemed incidental to the public benefit.

Through the Taxpayer, political subdivisions of State are able to provide various health
benefits to their employees. Providing these health benefits constitutes the
performance of an essential government function within the meaning of IRC section
115(1). See Rev. Rul. 90-74 and Rev. Rul. 77-261.

Taxpayer’s income accrues to political subdivisions of State. No private interests will
participate in, or benefit from, the operation of the Taxpayer other than as providers of
goods or services. The benefit to the employees is incidental to the public benefit. See
Rev. Rul. 90-74.

In no event, including dissolution, will the Taxpayer’s assets be distributed or revert to
any entity that is not a state, a political subdivision of a state, or another entity the
income of which is excludable from its gross income by application of IRC section 115.

Based solely on the facts and representations submitted by the Taxpayer, we conclude
that because the income of the Taxpayer derives from the exercise of an essential
governmental function and accrues to a state or a political subdivision thereof, the
Taxpayer’s income is excludable from gross income under IRC section 115 for its initial
tax year ended June 30, ------, and all subsequent tax years.

No opinion is expressed concerning the federal tax consequences under any IRC
provision other than the one specifically cited above. Except as expressly provided
herein, no opinion is expressed or implied concerning the tax consequences of any
aspect of any transaction or item discussed or referenced in this letter. This ruling
concerns only the federal tax treatment of the Taxpayer’s income and may not be cited
or relied upon by any taxpayer, including the Taxpayer, the participating employers and
any recipients of benefits paid under the terms of the Plans, as to any matter relating to
the taxation of accident or health contributions or benefits.

This ruling is directed only to the taxpayer requesting it. IRC section 6110(k)(3)
provides that it may not be used or cited as precedent.
PLR-108930-16 4

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.
Alternatively, taxpayers filing their returns electronically may satisfy this requirement by
attaching a statement to their return that provides the date and control number of the
letter ruling.

The rulings contained in this letter are based upon information and representations
submitted by the Taxpayer and accompanied by a penalty of perjury statement
executed by an appropriate party. While this office has not verified any of the material
submitted in support of the request for rulings, it is subject to verification on
examination.

                                   Sincerely,



                                   Andrew F. Megosh, Jr.
                                   Senior Tax Law Specialist
                                   (Tax Exempt & Government Entities)

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