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Publication 557

501(c)(27) - Qualified State-Sponsored Workers' Compensation Organizations(p59)


501(c)(27)(A) -- Pre-June 1, 1996, Organizations.(p59)

A state-sponsored workers' compensation reinsurance organization should apply by letter for recognition of exemption from federal income tax under section 501(c)(27).
To qualify for exemption, any membership organization must meet all the following requirements.
  1. It was established by a state before June 1, 1996, exclusively to reimburse its members for losses under workers' compensation acts.
  2. The state requires that the membership consist of all persons who issue insurance covering workers' compensation losses in the state and all persons and government entities who self-insure against those losses.
  3. It operates as a nonprofit organization by returning surplus income to its members or workers' compensation policyholders on a periodic basis and by reducing initial premiums in anticipation of investment income.

501(c)(27)(B) -- Organizations formed after December 31, 1997.(p59)

Any organization (including a mutual insurance company) can qualify for exemption if it meets all of the following requirements.
  1. It is created by state law and is organized and operated under state law exclusively to:
    1. Provide workmen's compensation insurance which is required by state law or state law must provide significant disincentives if employers fail to purchase such insurance, and
    2. Provide related coverage which is incidental to workmen's compensation insurance.
  2. It provides workmen's compensation insurance to any employer in the state (for employees in the state or temporarily assigned out-of-state) which seeks such insurance and meets other reasonable requirements relating to the insurance.
  3. The state makes a financial commitment to such organization either by extending its full faith and credit to the initial debt of the organization or by providing the initial operating capital of the organization.
  4. The assets of the organization revert to the state upon dissolution or the organization is not permitted to dissolve under state law.
  5. The majority of the board of directors or oversight body of such organization are appointed by the chief executive officer or other executive branch official of the state, by the state legislature, or by both.