New Proposed Regulations under Section 501(r) for Tax-Exempt Hospitals
By Drew Cheney, Tax Principal
On April 3, 2013, the Internal Revenue Service (IRS) issued its second set of Proposed Regulations under Internal Revenue Code Section 501(r), which was enacted as part of the Patient Protection and Affordable Care Act of 2010. The purpose of this article is to provide a brief summary of some of the key provisions of this round of proposed regulations.
Among its tsunami of provisions, the Affordable Care Act included Code Section 501(r), imposing certain requirements on hospitals to qualify as tax-exempt charities under Code Section 501(c)(3). In brief, the hospital must:
- Conduct a community health needs assessment (CHNA), and adopt a related implementation strategy, at least once every three years, effective for its first taxable year beginning after March 23, 2012;
- Adopt and widely publicize a financial assistance policy (FAP);
- With respect to individuals who are eligible under the FAP, charge no more for medically necessary care than the amount generally billed to individuals who have insurance for such care; and
- Refrain from engaging in “extraordinary collection efforts” against an individual before determining if the individual is eligible for assistance under the FAP.
On July 11, 2011, the IRS issued Notice 2011-52 to provide interim guidance on the CHNA requirements. In June 2012, it issued its first set of proposed regulations which contained extensive provisions regarding the second, third, and fourth items listed above, but did not significantly address the CHNA requirements.
Highlights of April 2013 Proposed Regulations
The proposed regulations contain various requirements with respect to CHNAs, some of which are summarized below.
- To conduct a CHNA, a hospital must complete all of the following five steps:
- define the community it serves;
- assess the health needs of that community;
- in assessing the community’s health needs, take into account input from persons who represent the broad interests of its community, including those with special knowledge of or expertise in public health;
- document the CHNA in a written report that is adopted by an authorized body of the hospital facility; and
- make the CHNA report widely available to the public.
The proposed regulations go into detail regarding each of these five steps.
- For each significant health need identified by the CHNA, the hospital must, as part of its implementation strategy, either (1) describe how the facility plans to address the need or (2) identify the need as one the facility does not intend to address and explain why the facility does not intend to address the need.
- In general, the implementation strategy must be adopted by the hospital’s governing body by the end of the year in which the CHNA is conducted. However, for the hospital’s first tax year beginning after March 23, 2012, the implementation strategy may be adopted on or before the 15th day of the fifth month after year end. Thus, for example, in the case of a hospital with a September 30 year end that is developing its first CHNA, the CHNA must be completed by September 30, 2013 and the related implementation strategy must be adopted by February 15, 2014.
- A $50,000 penalty for failure to comply with the CHNA requirements applies to each tax year in which while the hospital remains out of compliance.
The proposed regulations also contain provisions that address the penalties for failing to comply with Section 501(r). Some of these provisions are summarized below.
- The most severe penalty is revocation of the 501(c)(3) status of the hospital facility in question, as of the first day of the taxable year in which the failure occurs. In determining whether to revoke a hospital’s Section 501(c)(3) status, the IRS will consider all the facts and circumstances surrounding the failure, including, among other factors: whether the organization has previously failed to meet the requirements of Section 501(r); the size, scope, nature and significance of the failure; the reasons for the failure(s); whether the organization had established and followed practices and procedures to help comply with Section 501(r); whether the organization has implemented safeguards designed to prevent similar failures from occurring in the future; and whether the organization corrected the failure reasonably promptly after discovery.
- The next most severe penalty applies in the case of an organization that operates more than one hospital facility and has a hospital facility that does not comply with Section 501(r). In this case, the net income from the facility will be subject to income tax, in most cases at the corporate tax rate.
- Significantly, omissions and errors will not be penalized if (1) the omission or error was minor, inadvertent, and due to reasonable cause and (2) the omission or error is corrected as promptly after discovery as is reasonable given the nature of the omission or error.
- The IRS will develop future guidance for excusing certain failures that are neither willful nor egregious if the hospital corrects the errors and makes disclosures in accordance with the guidance.
The above description represents a brief overview of the latest round of proposed regulations, and it is not all-inclusive. If you have any questions regarding these proposed regulations in particular or about Section 501(r) in general, please contact Drew Cheney.
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