Benefit Plans for 501(c)(6) Organizations May Be Disallowed

  • Regulations
  • 10/24/2022
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Key insights

  • Tax-exempt status for certain business leagues may be in question after a recent analysis by the IRS Office of Chief Counsel.
  • With this change, a 501(c)(6) organization should not provide pension and health benefits to its members unless these benefits are specifically related to the service line it is improving.
  • Organizations may be subject to unrelated business taxable income if the nature of its activity is a business, regularly carried on, and unrelated to its exempt purpose.

Need help determining the status of your 501(c)(6) organization?

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Pension and health benefits for certain business leagues have come under review with the IRS, and that could mean a change in tax-exempt status for some organizations. Review details of a new IRS memo to help clarify your organization’s status and uncover potential tax obligations.

Background

The Office of Chief Counsel of the IRS recently addressed a 2012 Private Letter Ruling (PLR) that determined a 501(c)(6) business league could provide pension and health benefits. Upon further analysis, the Office of Chief Counsel disagreed with the determination and issued a memo regarding tax-exempt status and unrelated business taxable income for 501(c)(6) organizations.

When is a business league exempt?

Internal Revenue Code Section 501(c)(6) provides exemption to “business leagues, chambers of commerce, real estate boards, boards of trade, and professional football leagues, which are not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder.”

A business league is an association of people with common business interest who promote that interest without engaging in business ordinarily carried on for profit. Additionally, business leagues need to improve business conditions for one or more services rather than for the individual.

Further defining tax-exempt purpose

The Office of Chief Counsel ultimately disagreed with the 2012 PLR for the following reasons:

  • The business league was providing pension and health benefits to its members; however, it failed to state the specific line of service it was seeking to promote — thus allowing the business league to claim pension and health benefits were improving the business conditions for any service line.
  • In ABA Retirement Funds v. United States, the court found that retirement plans for lawyers do not constitute a business league because it is not furthering the law industry, but rather provides a service. The court ultimately ruled this retirement plan was a for-profit business.
  • In MIB, Inc. v. Commissioner, the court found that providing particular services, such as information data banks, to members does not improve business conditions for a service line, but rather benefits the individual.

Activity determines unrelated business taxable income

According to the IRS website, “unrelated business taxable income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption.” For purposes of this memo, a trade or business includes any activity that produces income through the sale of goods or services.

The Office of Chief Counsel found the following related to unrelated business taxable income:

  • Revenue Ruling 66-151 holds that management of health and welfare plans is a business that does not substantially relate to a 501(c)(6) organization and that the activity is regularly carried on.
  • A business league providing administrative services to its members is performing an activity not related to its exempt purpose. In other words, this activity is not improving business conditions of a service line.

What it means for you

For 501(c)(6) organizations that provide pension and health benefits, your tax-exempt status may be in question due to:

  • Lack of information on the service line you are improving
  • Uncertainty around whether your organization is improving the service line or providing a for-profit service
  • Lack of clarity about whether your organization is providing a particular service to members

These are questions you’ll need to be able to answer. Furthermore, 501(c)(6) organizations may be subject to unrelated business taxable income if the nature of the activity is a business, regularly carried on, and unrelated to its exempt purpose.

How we can help

Proactive planning and discussion is key to preventing unwanted scrutiny from the IRS. CLA’s tax professionals can analyze your business activities to help you make informed decisions, evaluate your options, and identify new opportunities.

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