Final Internal Revenue Service Regulations for Charitable Hospitals—Section 501(r)


February 3, 2015
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On December 29, 2014, the IRS released the much anticipated final regulations for Section 501(r) (the “Final Regulations”) for tax-exempt hospital organizations.  The requirements under Section 501(r) were added by the Patient Protection and Affordable Care Act, Public Law 111-148 (ACA), which was enacted on March 23, 2010.  Although the Final Regulations generally follow the proposed regulations, there are some differences, and hospitals will need to make sure they are compliant with this final set of rules.
 
Failure of a hospital facility to meet one or more of the requirements of Section 501(r) may result in revocation of said hospital’s Section 501(c)(3) tax-exempt status.  In addition, failure of a hospital facility to comply with community health needs assessment (CHNA) requirements for any tax year may result in an excise tax of $50,000.  Therefore, it is imperative for all hospitals to thoroughly understand these requirements and work diligently to comply with Section 501(r) provisions.
 
Background
 
Section 501(r) imposes new requirements on Section 501(c)(3) hospital organizations that operate one or more hospital facilities.  Each 501(c)(3) hospital organization is required to meet four general requirements on a facility-by-facility basis:
 
  • Conduct a CHNA and adopt an implementation strategy at least once every three years.
 
  • Establish written financial assistance and emergency medical care policies.
 
  • Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy (FAP).
 
  • Make reasonable efforts to determine whether an individual is eligible for assistance under the hospital’s FAP before engaging in extraordinary collection actions against the individual.
 
The ACA also added new Section 4959, which imposes an excise tax for failure to meet the CHNA requirements.

General Definitions
 
Section 501(r)(2) defines a “hospital organization” as an organization recognized (or seeking to be recognized) as described in Section 501(c)(3) that operates one or more “hospital facilities.”  A hospital facility is defined as a facility that is required by the state to be licensed, registered, or similarly recognized as a hospital.  It is important to note the following:
 
  • Multiple buildings operated by a hospital organization under a single state license are considered to be a single hospital facility.
 
  • The Final Regulations require Section 501(r) requirements to be met by all hospital organizations that are (or seek to be) recognized as described in Section 501(c)(3), including those that are government hospital organizations.  However, government hospital organizations that have previously been recognized as described in Section 501(c)(3) but do not wish to comply with the requirements of Section 501(r) may submit a request to voluntarily terminate their Section 501(c)(3) status.
 
Failure to Satisfy the Requirement of Section 501(r)
 
If an omission or error is minor, inadvertent, or due to reasonable cause, and a hospital facility corrected such an omission or error as promptly after discovery as was reasonable given the nature of the omission or error, it will not be considered a failure to meet a Section 501(r) requirement.  In the case of multiple omissions or errors, the omissions or errors are considered minor only if they are minor in the aggregate.  A hospital facility that corrects and discloses failure to meet a Section 501(r) requirement is less likely to have acted willfully in failing to meet that requirement, and the Final Regulations provide that correction and disclosure of a failure is a factor tending to show that an error or omission was not willful.
 
  • The Final Regulations make it clear that a minor omission or error related to CHNA requirements that is corrected will not give rise to an excise tax.  All relevant facts and circumstances will be considered before determining whether revocation is warranted.
 
  • The final regulations clarify that, in the case of multiple omissions or errors, the omissions or errors are considered minor only if they are minor in the aggregate.
     
Effective Date
 
The final regulations under Section 501(r) apply to a hospital facility’s taxable years beginning after December 29, 2015.  This will give all hospital facilities at least one year to come into compliance with the Final Regulations.  For taxable years beginning on or before December 29, 2015, the Final Regulations provide that a hospital facility may rely on a reasonable, good-faith interpretation of Section 501(r) based on the provisions of the 2012 and/or 2013 proposed regulations or the Final Regulations.  The effective date for full compliance is as follows:
 
 
Current
Year-End
Section 501(r)
Final Regulations Deadline for
Full Compliance
March
April 1, 2016
June
July 1, 2016
September
October 1, 2016
December
January 1, 2016
 
In Conclusion
 
Although the Section 501(r) Final Regulations generally follow the proposed regulations, it is clear that hospitals face a great deal of work and follow-through to ensure they are compliant with the Final Regulations before their respective effective date.  We will be addressing more specific requirements regarding the CHNA, FAP, amounts generally billed, and extraordinary collection actions in future e-blasts.
 
Please contact your Wipfli relationship executive if you have any questions.

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