New Guidance Issued on Hospital Tax-Exemption Requirements

The IRS and Treasury Department just released two notices (Notices 2014-2 and 2014-3) regarding the hospital tax-exemption requirements under Section 501(r) of the Internal Revenue Code (the “Code”). Those requirements involve required community health needs assessments and requirements pertaining to financial assistance, charges, billing and collection practices and treatment of emergency care patients.

The first notice reiterates that Section 501(c)(3) hospitals can continue to rely on the proposed 501(r) regulations (published on June 26, 2012 and April 5, 2013) while the final regulations are still pending. However, this notice also clarifies that “hospital organizations [are] not … required to comply with the 2012 and 2013 proposed regulations until such regulations are published as final or temporary regulations” though compliance with Section 501(r) of the Code is still required.

The second notice proposes a procedure whereby hospitals can correct and disclose certain instances of noncompliance with Section 501(r). As you may recall, under the 2013 proposed regulations, a hospital facility’s noncompliance is excused if it involves certain errors or omissions that are minor, inadvertent and due to reasonable cause so long as the hospital facility promptly corrects the errors/omissions after discovery. In addition, certain more significant errors/omissions that are neither willful nor egregious will not cause the hospital facility or organization to lose its tax-exempt status so long as the hospital facility promptly corrects the errors/omissions after discovery and discloses them to the IRS. Note that, in this latter situation, the noncomplying hospital facility may still be subject to excise taxes for not complying with the community health needs assessment requirement, if applicable.

Notice 2014-3 proposes detailed guidance and procedures related to the correction of 501(r) errors/omissions and disclosure of the same to the IRS.1 With respect to correction, the hospital facility must, to the extent feasible, reasonably and appropriately restore each affected person to the position they would have been in had the error/omission not occurred. The correction must be made as promptly after discovery, as is reasonable. As part of the correction, the hospital facility should also implement or modify its policies as needed to identify errors/omissions and prevent such error/omissions from occurring again.

The notice also gives specific examples of proper corrections. For example, if a hospital’s financial assistance policy is missing certain required elements, correction may involve adopting a revised policy that includes all of the required elements and making such revised policy widely available to the public (e.g., on the hospital’s website). Moreover, if a hospital encounters a processing error whereby patients eligible for financial assistance are overcharged, correction may involve providing a corrected bill, explanation and refund to each of the affected patients. Note that the foregoing examples assume that the errors are corrected as promptly after discovery as reasonable and that revised and/or new practices and procedures are put into place to minimize the likelihood of the error recurring.

With respect to IRS disclosure, an error/omission is considered disclosed if the hospital organization provides certain details on Schedule H of its Form 990 for the tax year in which the error/omission is discovered. The Form 990 disclosure must include a detailed description of the following:

  • The error/omission (e.g., type/nature, facilities involved, date(s), persons affected, dollar amounts involved, cause of error/omission, applicable policies/procedures, etc.)
  • The discovery of the error/omission
  • The correction (e.g., method of correction, restoration of affected persons, date of correction, etc.)
  • The practices and procedures, if any, revised or implemented as part of the correction (or an explanation of why no changes or new policies were needed)

For a correction and disclosure to be considered timely, the hospital facility must have commenced correction of the error/omission and reported the error/omission on its annual tax return (to the extent such return, with extensions, was due) prior to being contacted by the IRS concerning an examination.

The notice also states that while correction and disclosure of an error/omission does not prevent such error/omission from being considered willful or egregious (i.e., an error/omission for which the correction/disclosure remedy is not available), it will be considered as a positive factor in such determination.

The IRS and Treasury Department have requested comments on the proposed correction and disclosure procedures. Please note that comments are due by March 14, 2014.

For more detailed information, please see the following links to the two notices:

For More Information

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 Although, as discussed above, certain minor and inadvertent errors do not need to be disclosed to the IRS, the notice indicates that hospital facilities may rely on the IRS’s correction guidance and procedures, as described herein, to properly correct such errors.