The Patient Protection & Affordable Care Act (ACA) added new requirements under 501(r) that all organizations that operate one or more hospital facilities must meet to remain a public charity under 501(c)(3).
Ten years later, the ACA’s 501(r) requirements are at the forefront of the IRS, Congress and in the public eye.
Here is what you need to know about 501(r) compliance:
In addition to the general requirements for tax exemption under 501(c)(3) and Revenue Ruling 69-545 (a hospital facility must make its services available according to the “community benefit” standard), hospital facilities must meet the following requirements imposed by Section 501(r) on a facility-by-facility basis:
- Community Health Needs Assessment (CHNA): A hospital facility is required to conduct a community health needs assessment (CHNA) every three years and to adopt an implementation strategy to meet the community health needs identified through such an assessment.
- Financial Assistance Policy and Emergency Medical Care Policy: The FAP must apply to all emergency and other medically necessary care provided by the hospital facility.
- Limitations on charges: The amount charged for emergency or other medically necessary care that is provided to individuals eligible for assistance under the organization’s FAP can be no more than the amounts generally billed to individuals who have insurance covering such care.
- Billing and collection practices: A hospital facility must make reasonable efforts to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions.
The ACA also requires the IRS to review, at least once every three years, the community benefit activities of approximately 3,000 charitable hospitals. They review approximately one-third of the hospitals annually.
IRS has made compliance with 501(r) a part of their annual work plans. As part of the compliance checkup, the IRS will look at your website, Form 990, Schedule H, newspaper articles, other filings with various government agencies, etc. Below are some of the areas of IRS focus:
- Community health needs assessment
- Is it easy to find your CHNA?
- Do you have your current and prior CHNA posted on your website?
- Is your implementation strategy on your website or included with your Form 990 filing (made widely available)? Note that IRS has asked specifically about placement on organization’s website.
- Have both the CHNA and the implementation strategy been timely approved by an authorized body?
- Has your Form 990 been updated annually to reflect any progress with your CHNA implementation strategy?
- Financial assistance policies
- Is the FAP easy to locate?
- Do you have committee minutes describing the hospital’s actions regarding widely publicizing its FAP?
- Is the FAP, FAP application, and plain language summary of the FAP available on your website?
- Is the FAP, FAP application, and plain language summary of the FAP translated into required other languages?
- Is there a list of providers, other than the hospital itself, delivering emergency or medically necessary care in the hospital and whether or not these providers are covered by the hospital’s FAP?
- Limitations on charges and billing and collection practices
- How did you determine “amounts generally billed”?
In the IRS’s April 11, 2019 response to the Committee on Finance’s request for information regarding the IRS review of hospitals, the following was noted the following:
- As of February 22, 2019, the IRS completed reviews of 832 tax-exempt hospitals.
- 625 were closed without further action
- 129 were referred for a compliance check
- As of February 22, 2019, 89 of the 129 were closed; 57 were still open; and 4 audits had not yet begun
- 139 referrals were for Financial Assistance Policy issues
- To date, the IRS has not identified any organization that has not met the requirements regarding billing and collection activities.
Senator Grassley’s activity
Senator Chuck Grassley of Iowa has a long history of efforts to ensure that tax-exempt hospitals are fulfilling the standards of community benefits that are enhanced by the 501(r) provisions.
In his December 2, 2020 letter to the Senate Finance and Judiciary Committees regarding his investigation of UVA Medical Center and Methodist Le Bonheur Healthcare Hospital for engaging in allegations of aggressive debt-collection practices, he noted:
“Since the enactment of Section 501(r) into law ten years ago, I have heard from the healthcare industry that Section 501(r)’s requirements are overly strenuous for non-profit hospitals. This inquiry unfortunately has shown that, if anything, the requirements of 501(r) need to be strengthened rather than softened. Stories about non-profit hospitals engaging in billing and debt-collection practices that defy the spirit of Section 501(r), at least, are not limited to the two hospitals discussed above. There seems to be a pattern: questionable behavior leads to negative press attention: negative press attention leads to more desirable behavior. That may create some good outcomes, but it is an unsustainable way to ensure a distinction between for-profit and non-profit hospitals. Any changes to Section 501(r) in the future should make clearer what non-profit hospitals must do for low-income patients in order to maintain their tax-exempt status.”
These investigations resulted in debt relief of almost $17 million for thousands of low-income patients. As chairman of the Senate Finance Committee, Grassley continues his quest to make sure that tax-exempt hospitals abide by their community benefit standards.
IRS correction procedures
Failure to comply (other than minor omissions and errors) can result in:
- The imposition of $50,000 per year excise tax for failure to meet the CHNA and implementation strategy requirements
- A loss of tax-exempt status
- A requirement to report any deficiencies on Form 990 (a public document)
- An impediment to hospitals seeking new or refunding bonds
Some 501(r) noncompliance is inevitable. Revenue Procedure 2015-21 provides guidance regarding correction and disclosure procedures for hospital organizations to follow. There are two paths to forgiveness. Some minor omissions and errors may not be considered failures, while larger failures may be excused for some purposes.
- Minor omissions and errors – In this case, the omission is minor and either inadvertent or due to reasonable cause, and the hospital facility corrects the omission or error promptly after discovery. The correction must include establishment of practices or procedures to promote overall compliance with 501(r).
- Failures that are neither willful nor egregious – these shall be excused if the hospital facility corrects and makes disclosure in accordance with rules set by revenue procedure or IRS guidance. Facts and circumstances determine whether a failure is willful or egregious. IRS has stated that correction will be a factor showing the failure was not willful.
In rare cases, violations of 501(r) compliance can lead to revocation of 501(c)(3) status.
Based on all of the facts and circumstances — including the size, scope, nature, and significance of the failure — the IRS can revoke tax-exempt status and tax the noncompliant hospital facilities, while allowing the hospital organization to remain tax-exempt.
To date, there have been two hospital facilities that have lost their tax-exempt status due to 501(r) failures.
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