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The Internal Revenue Service (IRS) officially issued proposed regulations in early April addressing the requirement under Section 501(r)(3) of the Internal Revenue Code that tax-exempt hospitals conduct community health needs assessments. The proposed regulations also provide details on related reporting obligations and the consequences of noncompliance with community health needs assessments and other requirements of Section 501(r).
Although compliance still may be a challenge and penalties for noncompliance remain significant, tax-exempt hospital leaders and boards should be encouraged because the proposed regulations specify that a hospital will not automatically lose its exempt status or the exempt status of any bonds for minor and inadvertent errors made in complying with Section 501(r) requirements. (Mayer, “An Overview of Proposed Rule on Community Health Needs Assessments,” Health Lawyers Weekly, May 03, 2013 Vol. XI Issue 17)
The Affordable Care Act (ACA) added Section 501(r) to the IRS Code specifying additional requirements tax-exempt hospitals have to meet. Elizabeth Mills, Esq. (Proskauer) reviewed the ACA’s new community benefit requirements in iProtean’s foundational course Community Benefit and Tax-Exempt Status. She noted that these additional requirements do not replace the community benefit standard; they supplement it.
Section 501(r),for the first time, imposed certain requirements that hospitals had to meet to qualify for exemption under Section 501(c)(3). Section 501(r) generally requires a tax-exempt hospital to:
- Conduct a community health needs assessment at least once every three years for tax years beginning after March 23, 2012
- Establish written financial assistance and emergency medical care policies
- Limit charges for emergency and other medically necessary care provided to individuals who qualify for financial assistance
- Not employ extraordinary collection actions until the hospital has made reasonable efforts to determine whether an individual qualifies for financial assistance
The ACA also added a section that requires a tax-exempt hospital to report on its IRS Form 990 a description of how it is addressing the needs identified in the community health needs assessment, a description of any such needs that are not being addressed, and the reasons such needs are not being addressed. Another section imposes a $50,000 excise tax for any tax year in which a tax-exempt hospital fails to meet the community health needs assessment requirement of Section 501(r). (Mayer, “An Overview of Proposed Rule on Community Health Needs Assessments,” Health Lawyers Weekly, May 03, 2013 Vol. XI Issue 17)
The Proposed Regulations
According to the proposed regulations, if a hospital fails to report required information in a policy or report, or makes errors with respect to implementation or operational requirements, it will not be considered a failure to comply when:
- the omission or error is minor, inadvertent, and due to reasonable cause
- such omission or error is corrected within a reasonable amount of time after discovery
If a hospital fails to meet one or more requirements of Section 501(r) but continues to be exempt under 501(c)(3), the noncompliance itself will not cause the interest of bonds issued to the hospital to be taxable.
However, because the IRS has the authority to revoke a hospital’s tax-exempt status if the hospital fails to comply with one or more requirements of Section 501(r), if non-compliance becomes apparent, it will conduct a review of the relevant facts and circumstances surrounding that non-compliance. The review will include:
- The size, scope, nature, and significance of the failure
- Reasons for such failure
- Whether the failure is a repeat offense
- Whether the failure was corrected promptly
- Whether the hospital adjusted its procedures to avoid the failure in the future
- Whether the hospital took corrective action before being caught by the IRS
The proposed regulations also modify and clarify the IRS’s earlier guidance on implementing the community health needs assessment requirements.
To date, the proposed regulations have been received favorably because they provide hospitals with some flexibility and discretion when conducting community health needs assessments. Public comments must be received by July 5, 2013. The final regulations for all of Section 501(r) are expected to be issued later this year. (Mayer, “An Overview of Proposed Rule on Community Health Needs Assessments,” Health Lawyers Weekly, May 03, 2013 Vol. XI Issue 17)
iProtean subscribers, please note the new advanced Mission & Strategy course in your library, Affiliation & Consolidation Strategies, Part Two, featuring health experts Marian Jennings, Dan Grauman, Lisa Goldstein and Monte Dube. The experts discuss how to analyze alignment, regulation implications and the ratings impact of a consolidation.
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iProtean Symposium & Workshop
Mark the Date!! October 2 – 4, 2013 at The Lodge at Torrey Pines, La Jolla, CA. Faculty: Michael Irwin (Citigroup), Todd Sagin, M.D., J.D. (Sagin Healthcare Consulting), Dan Grauman (DGA Partners), Pam Knecht (ACCORD LIMITED), Barry Bader (Bader & Associates), Ed Kazemek (ACCORD LIMITED). For more information, click here.
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