Lancaster Law Blog : Lancaster PA Lawyer & Attorney : Russell Krafft & Gruber Law Firm : Pennsylvania : Lancaster's Legal Link

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Allowing a nonprofit organization to be tax exempt provides an incredible advantage by leaving the organization with more resources to accomplish its mission, especially with charitable organizations. However, the tax-exempt status can be taken away if the organization breaks the rules. Thus, it is important for the directors, officers and employees of tax-exempt organizations to know about those rules and how they interact.

One such rule is known as the "prohibition on private inurement", which states that an organization is not operated exclusively for tax-exempt purposes if its net earnings inure, in whole or in part, to the benefit of private individuals. Okay, that is admittedly dry and probably raises more questions than it answers, but the prohibition is basically meant to prevent money or other assets of the organization from going to an individual that is not in one of the charitable classes the organization is meant to benefit (otherwise known as the "public beneficiaries"). The obvious examples are directors who grossly overpay themselves or divert funds for their private use. Inurement also occurs when a private individual benefits from any transaction with the organization that does not reflect fair market value and current economic conditions.

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We have had a number of inquiries and comments on our blog post regarding Act 4, the amendment to Pennsylvania's insurance company law relating to health insurance coverage for adult children up through and including age 29. Prior to Act 4, if an employer offered dependent coverage, insurance companies were only required to provide coverage to children on their parents' insurance until the age of 19. The Pennsylvania Insurance Department estimates that almost 40% of those who were uninsured in Pennsylvania are between the ages of 19 and 29. 

A key phrase of Act 4 provides that the insurer's obligation to provide coverage to a child of an insured employee beyond a specified age, up through and including the age of 29, is "at the option of the policyholder", meaning the employer.   Also, coverage would be provided at the insured employee's expense. Employees may wonder why an employer would not choose to provide this coverage and what the value is of legislation mandating insurers to offer coverage while giving employers the ability to opt out. In addition, if an employer is self-insured, Act 4 does not make any change in what coverage must be offered because it applies only to insurers.

While insurers may appreciate the opportunity to provide coverage to the group of young adults who are underserved, employers are not likely to be as supportive. It has been projected that the mandate would increase employees' contributions to their group health insurance, since insurance laws require additional costs to be spread among all employees, and not just those with adult children. This may result in overall health insurance premiums rising for employers and all employees. In addition, this effect could result in more employers becoming self insured to avoid legal mandates such as extended adult child coverage or Pennsylvania mini COBRA application requiring COBRA coverage for employers employing fewer than 20 employees.

You can visit the Pennsylvania Insurance Department's website for additional information regarding Act 4.