PRIOR RULING ON RETIREMENT BENEFITS AVAILABLE TO PHYSICIANS UNDER CONTRACT TO A HEALTH PLAN IS EXPANDED.

Index Nos.: 0414.03-00

Refer Reply to: OP:E:EP:RQ:2:5

On March 5, 1984, the Internal Revenue Service issued a private letter ruling to you regarding the organizations listed in Appendix A to this letter (including Health Plan C, but not including Medical Group A) holding that no employee of any organization that conducts Program X will be treated under section 414(n) of the Code as the employee of any other entity or entities that conduct the program. You have incorporated by reference the facts of your initial ruling request into your current request.

Health Plan C and Medical Group A now request a ruling that, under the facts described below, none of its employees will be treated under Code section 414(n) as the employee of any other organization that participates in Program X.

Because the facts that are set forth in our March 5, 1984, private letter ruling to you continue to be pertinent, we will outline separately those facts and the facts that pertain exclusively to your current ruling request.

I.Facts Set Forth in March 5, 1984, Private Letter Ruling

The organizations that conduct Program X (which was established in 1945) provide comprehensive prepaid health care service in nine separate geographic areas throughout the United States, called Regions. In each Region, individuals arrange to obtain health services through Program X by contracting with Health Plan or one of its six subsidiaries. Health Plan, in turn, contracts with Hospitals and groups of physicians (Medical Groups) to provide individual members with health care. Health Plan coverage is available to individuals primarily through groups, such as private and government employers, that make Health Plan an available medical care option. Thus, Program X is conducted by three separate types of organizations: Health Plan, Hospitals, and Medical Groups. Each organization is legally separate, and basic relationships are established by contract.

Each Health Plan is a federally-qualified health maintenance organization under the Health Maintenance Organization Act of 1973, 42 U.S.C. section300e, et seq., and is exempt from taxation under section 501(c)(3) of the Internal Revenue Code. Health Plan, as the sole corporate member of the other six health plans, controls each of them. Hospitals, which is exempt from taxation under section 501(c)(3) of the Code, is a nonprofit public benefit corporation situated in State A. Health Plans and Hospitals are under common control by virtue of having the same board of directors.

There are eight Medical Groups which contract with Health Plan throughout the country. They are separate and independent from each other, and from Hospitals and Health Plans. In each Region (except Region A where the physicians are employees of the Health Plan), Health Plan contracts with a Medical Group to provide the professional services required by the membership agreements. Each Health Plan-Medical Group contract is for a term of one year and is renewable upon mutual agreement. The income that each Medical Group receives from Health Plan is negotiated annually at arm's length and set by contract. Of the eight Medical Groups that contract with Health Plan, one is a partnership, one is a professional association, and six are professional corporations.

Both Medical Groups and Hospitals, as direct providers of health care services, are substantially relieved of major administrative responsibilities that are assumed by Health Plans through the following allocation of responsibilities: Health Plans are responsible for administrative and financial services; Medical Groups are responsible for physician services; and Hospitals are responsible for hospital services.

The medical centers, at which patient care is provided, are staffed by the regional Medical Group, and Medical Group physicians also are on the Hospitals' staffs. Support staff work at these medical centers to provide medical care and administrative duties. Individuals who perform administrative services to coordinate provision of health care services are employed by the regional Health Plan, which is primarily responsible for the overall administration and financial planning of providing medical care services. All hospital personnel are employed by Hospitals. Each Medical Group hires and is responsible for providing the professional services of physicians. In seven of Program X's nine Regions, personnel who support physicians in their non-hospital practice are employed by the regional Health Plan. In the 2 Regions in State A, these personnel are employed by the regional Medical Group.

Various qualified retirement plans are available to the employees that conduct Program X. In addition to collectively bargained plans for union employees and similar retirement benefits for non-union hourly employees, qualified retirement plans are provided to salaried non-physician employees and to physicians.

All the participating Regional organizations are covered by multiple non-integrated employer plans, described as follows:

Salaried non-physician employees of seven of these nine Regions are covered by a defined benefit plan and money purchase pension plan. The defined benefit plan is non-contributory, has a 10-year cliff vesting schedule, and a benefit formula that provides a lifetime monthly income beginning at age 65 of 1.5 percent of final average pay per year of credited service. Final average pay means full-time base pay for the 60 most highly compensated consecutive calendar months during the 10 years preceding retirement. The money purchase pension plan requires a mandatory two percent employee contribution with a five percent matching employer contribution based on salary. Employees are 100 percent vested in employer contributions after seven years.

Physicians of these same seven Regions are covered by a defined benefit plan, and either a money purchase pension plan or cash or deferred arrangement. The defined benefit plan is non-contributory, has a 10-year cliff vesting schedule, and a benefit formula of two percent of final average pay for each year of credited service up to 20 years, plus one percent of final average pay for each year of credited service in excess of 20 years. Final average pay is measured over 36 months.

Physicians in Region C are covered by a money purchase pension plan with a required 11 percent employer contribution. In six of the seven remaining Regions, physicians are covered by cash or deferred profit-sharing plans generally with a maximum 12 percent employer contribution.

The qualified retirement plans provided to salaried non-physician employees and to physicians in Regions A and B differ in the following respects:

In Region A, salaried non-physician employees are covered only under a non-integrated money purchase pension plan that requires a two percent employee contribution with a matching five percent employer contribution based on salary. The plan provides for 100 percent vesting of employer contributions after seven years. No qualified retirement plan has been established for physicians.

In Region B, salaried non-physician employees are covered only under the same money purchase pension plan that is provided to their counterparts in Region A. Physicians are covered only under a cash or deferred profit-sharing plan with an average employer contribution of 7.5 percent.

II.New Facts Submitted in the Current Ruling Request

At the time of the March 5, 1984, private letter ruling, physicians in Region A were employees of Health Plan, and Medical Group A had not been formed. Medical Group A subsequently was formed to provide physicians' services and now contracts with Health Plan on essentially the same basis as the other Medical Groups that contract with Health Plan.

Medical Group A now proposes to establish a cash or deferred profit-sharing plan with an average employer contribution of 7.5 percent. The salaried non-physicians in Health Plan C (Region A) will continue to participate in a non-integrated money purchase pension plan that requires a two percent employee contribution with a matching five percent employer contribution based on salary, and provides for 100 percent vesting of employer contributions after seven years. Thus, Region A and Region B will provide the same qualified retirement plan program.

Based on these facts, you have requested a ruling that no employee of Health Plan C and Medical Group A will be treated under section 414(n) of the Code as the employee of any other entity or entities that conduct Program X.

Section 414(n) of the Code was enacted by the Tax Equity and Fiscal Responsibility Act of 1982. It provides generally that, for purposes of certain of the tax law requirements pertaining to qualified retirement plans, an individual (leased employee) who performs services for another person (recipient) may be treated as the recipient's employee where the services are performed pursuant to an agreement between the recipient and a third party (leasing organization) who is otherwise treated as the individual's employer. The employee leasing rules of section 414(n) do not apply unless the services rendered are of a type historically performed by employees in the business field by the recipient.

S.Rep. No. 97 - 530, 97th Cong., 2d Sess. 632 - 633 (1982) provides that

[t]he employee leasing rules do not apply where services in a particular business field historically have been performed by one person for another. For example, some prepaid health care service programs organized on a group practice basis involve two or three components: the health plan, a separate medical group that provides or arranges physicians' services to the health plan members, and often a related hospital. The hospital and the medical group each may employ its own staff (nurses, technicians, etc.), but both sets of employees may be jointly managed. Alternatively, the staff that supports the medical group may be employed by the health plan. These forms of operation are well established in the group practice prepaid health care field. The conferees intend that the "historically performed" exception is to apply in these cases (whether the form of operation is currently in effect or put into effect for existing components of an established group practice prepaid health care service program or for the components of a new program) if the health plan, the hospital, and the medical group provide substantially similar, though not necessarily exactly equivalent retirement benefits through tax qualified plans to salaried non-union employees and partners.

Accordingly, based on the facts presented, we conclude that no employee of Health Plan C and Medical Group A will be treated under section 414(n) of the Code as the employee of any other entity or entities that conduct the Program.

Sincerely yours,