Highlights of the Second Round of IRS Proposed Section 501(r) Regulations
As you are likely aware, Section 501(c)(3) organizations that operate one or more hospital facilities must now comply with the hospital tax-exemption requirements under Section 501(r) of the Internal Revenue Code. These requirements generally include:
(1) community health needs assessment/implementation strategy requirements, (2) financial assistance/emergency care policy requirements, (3) limitations on charges, and (4) billing/collection requirements.
On April 5, 2013, the IRS published additional proposed regulations that specifically address the community health needs assessment/implementation strategy (“CHNA”) requirements and some details regarding application of Section 501(r), which were not addressed in the initial proposed Section 501(r) regulations published on June 26, 2012. Although these are only proposed regulations, taxpayers may rely on them until after final or temporary regulations are issued.1 The following is an overview of some of the new guidance/insights from the proposed regulations and accompanying commentary.
1) Requirements do not apply to hospital facilities operated through certain joint ventures. If the tax-exempt partner does not have sufficient control over the LLC/partnership/joint venture to ensure that the hospital facility furthers an exempt 501(c)(3) purpose and, as a result, treats the operation thereof as an unrelated trade or business, then the Section 501(r) requirements do not apply to such hospital facility. Another exception is available where the tax-exempt partner commenced participation in the venture prior to enactment of Section 501(r), has consistently operated primarily for educational or scientific purposes and does not have significant ownership, status or control with respect to the joint venture sufficient to ensure Section 501(r) compliance.
2) IRS will consider multiple factors in deciding whether to revoke Section 501(c)(3) status for Section 501(r) noncompliance. These factors will include the following, without limitation:
- Whether organization previously failed to meet Section 501(r) requirements and whether same type of failure previously occurred
- Size, scope, nature and significance of failure(s)
- For organizations with multiple hospital facilities, number, size and significance of facilities that complied with and did not comply with Section 501(r)
- Reason for the failure(s)
- Procedures to achieve compliance established prior to failure(s)
- Whether procedures had been routinely followed and failure(s) occurred through an oversight or mistake
- Whether organization implemented safeguards to prevent future failure(s)
- Whether organization promptly corrected failure(s) after discovery
- Whether organization took corrective measures before discovery by Commissioner
3) Certain minor errors will not result in noncompliance. A hospital facility is excused if it omits required information from a CHNA, financial assistance or emergency care policy or report or commits an error with respect to the CHNA or billing/collection implementation and operational requirements so long as the error/omission is minor, inadvertent, and due to reasonable cause. The hospital facility must also promptly correct it after discovery, as is reasonable given the nature of the error/omission.
4) Certain larger errors that are properly disclosed and corrected will not result in the loss of the facility’s or the organization’s exempt status. A hospital facility’s noncompliance with the CHNA, financial assistance, emergency care, charge limitation and/or billing/collection requirements will be excused so long as such failure is neither willful nor egregious. To be excused the hospital facility must correct the failure and disclose the details to the IRS under forthcoming rules/guidance. The noncomplying hospital facility may still be subject to excise taxes for not complying with CHNA requirements.
5) Income from noncomplying hospital facility in a multi-hospital organization will be taxable. The income from a hospital facility that is in unexcused noncompliance under Section 501(r) will become taxable to the hospital organization (similar to unrelated business income taxation rules). Deductions may be made for expenses, depreciation and other items (or portion thereof) primarily related to operation of such noncompliant facility but such taxable income (loss) cannot be aggregated with the gross income (loss) from any of the organization’s other noncompliant hospital facilities or any other unrelated trade or business income.
6) One hospital facility’s noncompliance will not necessarily affect tax-exempt status of bonds. An organization operating multiple hospital facilities, one or more of which is noncompliant and subject to tax as described above, might otherwise retain its Section 501(c)(3) status, in which case, the noncompliant/non-exempt status of one or more of its facilities will not affect the tax-exempt status of the organization’s bonds.
7) Under the CHNA process, there is some flexibility in determining “community served” by the hospital with some limitations. The hospital facility may determine its community served by taking into account all relevant factors (e.g., geographic area served, target populations, principal functions/specialties, etc.) but may not exclude medically underserved, low-income, or minority populations who are part of the hospital’s patient populations or otherwise should be included based on the method used to define the community.
8) CHNA may prioritize needs based on a variety of factors. The hospital facility is required to prioritize the needs identified in the CHNA, and may consider, among other things, the burden, scope, severity or urgency of the need; the estimated feasibility/effectiveness of possible interventions; the health disparities associated with the need; or the importance the community places on addressing the need.
9) Hospitals required to consider input from specific sources in CHNA process, including governmental organizations and public comments. In conducting the CHNA process, hospitals must take into account input from: at least one state, local, tribal or regional public health department; members/representatives of medically underserved, low-income or minority populations in the community served; and public comments received with respect to the hospital’s most recent CHNA and implementation strategy. The CHNA must specifically document the details of such input including identifying the names of organizations providing input (but not individuals).
10) CHNA collaborations are permissible. Although, except as described below, each hospital facility must conduct, develop and adopt its own CHNA, the hospital may collaborate with other hospitals and organizations (e.g., nonprofit, for-profit, governmental, etc.) in the process and substantial portions of CHNA documents may overlap or otherwise be substantively identical.
11) Joint CHNAs are permitted under certain circumstances. Multiple hospital facilities may conduct and adopt a joint CHNA report produced for all of the collaborating hospital facilities so long as all of the hospital facilities define their community to be the same and conduct a joint CHNA process clearly identifying the participating hospital facilities.
12) Joint implementation strategies are permitted under certain circumstances. Multiple hospital facilities may develop and adopt a joint implementation strategy that describes how the collaborating hospital facilities plan to address each significant health need identified in the CHNA (or explains which needs will not be addressed). Any joint implementation strategy must, among other things, clearly identify the participating hospital facilities and their respective roles, responsibilities and actions in carrying out the implementation strategy.
13) CHNAs and implementation strategies must be made widely available on the internet and in hard copy. A CHNA report is only considered to be made “widely available” if the report is made available on a web site and a paper copy is made available for public inspection without charge. Reports must continue to be made available in this manner until at least two subsequent CHNA reports are issued by the hospital facility.
14) Implementation strategies must explain why certain identified needs are not addressed. Reasons why a hospital facility might intend not to address an identified health need could include, among other things, resource constraints, the need being addressed by others in the community, relative lack of expertise or competencies to address the need, low priority assigned to the need and/or lack of identified effective methods/strategies to address the need.
15) A grace period is generally available for hospital facilities conducting their first CHNA and adopting an implementation strategy. A hospital facility conducting a CHNA in its first tax year beginning after March 23, 2012 (i.e., the first tax year during which the CHNA requirements apply) will not need to adopt an implementation strategy until the 15th day of the 5th calendar month following the end of such tax year.
16) New hospital facilities have up to three tax years to come into compliance. Hospital facilities that are newly acquired, newly subject to Section 501(r) (e.g., recently obtained tax-exempt status) or newly placed into service have until the end of the second tax year beginning after the date of such event to satisfy the CHNA/implementation strategy requirements under Section 501(r) (i.e., the other Section 501(r) requirements apply right away).
For More Information
The IRS has solicited specific comments on the proposed regulations. Please note that comments must be received by July 5, 2013. If you have any questions, please contact Charles M. Honart at 610.205.6017 or Daniel J. Hennessey at 610.205.6011.
This News Alert has been prepared for informational purposes only and should not be construed as, and does not constitute, legal advice on any specific matter. For more information, please see the disclaimer.
1 Please note that, after October 5, 2013, taxpayers may no longer rely on the previously issued CHNA guidance under IRS Notice 2011-52. This is because such interim guidance states that it can only be relied upon until six months after the date further guidance is issued.