The IRS issued proposed rules in April regarding community health needs assessments and other requirements that section 501(c)(3) hospitals must meet to maintain tax-exempt status.
At a Glance
- Section 501(r) of the Internal Revenue Code, enacted as part of the Affordable Care Act, requires that section 501(c)(3) hospitals conduct community health needs assessments (CHNAs) every three years.
- Proposed regulations issued in April 2013 provide guidance on the CHNA requirement and other issues arising under section 501(r).
- The proposed regulations generally supersede the guidance provided in Notice 2011-52, although a transition period is provided. Hospitals can generally rely on the proposed regulations until final regulations are issued.
Section 501(r) of the Internal Revenue Code, enacted as part of the Affordable Care Act (ACA), generally requires a tax-exempt hospital organization described in section 501(c)(3) to:a
- Conduct a community health needs assessment (CHNA) at least once every three years and adopt an implementation strategy to meet the community health needs identified through such assessment
- Have a written financial assistance policy (FAP) and an emergency medical care policy that meet certain requirements
- Limit charges for emergency and other medically necessary care provided to FAP-eligible individuals to not more than the amounts generally billed to individuals who have insurance coverage and prohibit the use of gross charges for such individuals
- Not engage in extraordinary collection efforts before making reasonable efforts to determine eligibility for financial assistance b
For these purposes, hospital organization refers generally to an organization that operates a facility required by a state to be licensed, registered, or similarly recognized as a hospital. A hospital organization that operates more than one hospital facility is required to meet the requirements of section 501(r) separately with respect to each hospital facility.
Proposed regulations issued by the IRS and the U.S. Department of the Treasury on April 5, 2013, provide guidance for section 501(c)(3) hospitals regarding the requirement under section 501(r) that they conduct CHNAs and adopt implementation strategies at least once every three years.c This requirement is effective beginning with a hospital’s first tax year beginning after March 23, 2012. The proposed regulations also address other issues under section 501(r), including the consequences for failure to satisfy any of the requirements spelled out in the section. The proposed regulations generally supersede the guidance provided in Notice 2011-52, “Notice and Request for Comments Regarding the Community Health Needs Assessment Requirements for Tax-Exempt Hospitals,” although a transition period is provided. Hospitals can generally rely on the proposed regulations until final regulations are issued, subject to a grandfather rule.d
Although the regulations are proposed, they can be relied upon now and are likely predictive of the final guidance that will eventually be issued. Accordingly, executives of section 501(c)(3) hospitals should be familiar with the proposed regulations and how the guidance they provide differs from previous guidance on section 501(r).
Under the proposed regulations, the term hospital facility applies to one or more buildings operated by a hospital organization under a single state license. A hospital organization operates a hospital facility directly, or indirectly or as a partner in a joint venture, limited liability company, or other entity treated as a partnership for federal income tax purposes that operates the hospital facility, with two exceptions.
First, a section 501(c)(3) partner is not considered to operate the hospital facility if it does not have control over the operation of the hospital facility sufficient to determine that the operation of the facility furthers an exempt purpose described in section 501(c)(3),e and treats the operation of the hospital facility—including the facility’s provision of medical care—as an unrelated trade or business.
Second, a hospital organization is not considered to operate a hospital facility if it meets both of the following two conditions:
- At all times since March 23, 2010, the organization has been organized and operated primarily for educational or scientific purposes and not primarily engaged in the operation of hospital facilities.
- Pursuant to a partnership arrangement entered into before March 23, 2010, the organization owns no more than 35 percent of the capital or profits interest in the partnership, does not own a general partner or similar interest, and lacks sufficient control over the hospital facility to ensure the facility’s compliance with the requirements of section 501(r).
Guidance on CHNAs
A CHNA is considered to have been conducted on the date the hospital facility has completed three steps:
- Accounted for input from persons who represent the broad interests of the hospital facility’s community, including those with special knowledge of or expertise in public health
- Documented findings in a written report (the CHNA report) adopted for the hospital facility by an authorized body
- Made the CHNA report widely available to the public
Definition of Community
A hospital facility may take into account all of the relevant facts and circumstances in defining the community it serves, including the geographic area served by the hospital facility, target populations served (e.g., children, women, or the elderly), and principal functions (e.g., a particular specialty or disease). A hospital facility also may define its community to include populations in addition to its patient populations and geographic areas outside of those in which its patient populations reside.
For example, a hospital facility collaborating with other hospital facilities in its metropolitan statistical area (MSA) may define its community in its CHNA as the entire MSA in which all the collaborating hospital facilities are located, even if the hospital facility itself generally serves and draws its patients from only a portion of that MSA. A hospital facility generally may not define its community, however, in a way that excludes medically underserved, low-income, or minority populations.
A CHNA must address the following concerns, which include considerations with respect to completing a CHNA report and making findings public.
Significant health needs of the community. A CHNA must identify significant health needs of the community, prioritize those health needs, and identify potential measures and resources available to address them. Considerations for meeting health needs include what is required to improve or maintain the health status of both the community at large and particular parts of the community, which may include improving access to care by removing financial and other barriers to care.
A CHNA must identify, prioritize, and assess only significant health needs (not all health needs), as determined by the hospital facility based on all of the facts and circumstances. A hospital facility may use any method or criteria it deems appropriate in prioritizing health needs.
Public input. A CHNA must take into account input from, at a minimum:
- At least one state, local, tribal or regional ( but not federal) governmental public health department or equivalent department or agency with relavant knowledge, information or expertise.
- Members of medically underserved, low-income, and minority populations in the community, or individuals or organizations serving or representing the interests of such populations
- Written comments received on the hospital facility’s most recently conducted or current draft CHNA and most recently adopted implementation strategy
The CHNA report. The CHNA must be documented in a CHNA report that is adopted by an authorized body of the hospital facility and that includes:
- A definition of the community served by the hospital facility and a description of how the community was determined
- A description of the process and methods used to conduct the CHNA
- A description of how input from persons who represent the broad interests of the community was taken into account
- A prioritized description of the significant health needs of the community identified through the CHNA, along with a description of the process and criteria used in identifying and prioritizing them
- A description of potential measures and resources identified to address the significant health needs
Each hospital facility must document its CHNA in a separate CHNA report. However, if a hospital facility collaborates with other facilities and organizations in conducting its CHNA or is basing its CHNA, in part, on a CHNA conducted by another organization, portions of the hospital facility’s CHNA report may be substantively identical to the CHNA of a collaborating hospital facility or organization conducting a CHNA.
If a hospital facility collaborates with other hospital facilities in conducting its CHNA, all the collaborating hospital facilities may produce a joint CHNA report, provided that all the facilities define their community to be the same and conduct a joint CHNA process. The joint CHNA report must identify each hospital facility to which it applies, and an authorized body of each collaborating hospital facility must adopt the joint CHNA report as its own.
Requirement to make CHNAs widely available to the public. A hospital facility must post the CHNA report conspicuously on its website or, if it lacks its own website, on the website of the hospital organization that operates it. Alternatively, the CHNA may be posted on a linked third-party website. Individuals must be able to access, download, view, and print hard copies of the CHNA report without charge.
The CHNA report must remain on the website until two subsequent CHNA reports have been posted.
The above requirements also apply to the hospital facility’s financial assistance policy and related documents.
Similarly, a hospital facility also must make a paper copy of its CHNA report available for public inspection.
The health needs covered in the implementation strategy must correspond to the significant health needs identified through the CHNA. The implementation strategy must, with respect to each significant health need identified, either describe how the hospital facility plans to address the health need or identify the health need as one the hospital facility does not intend to address and explain why it does not intend to address it.
The implementation strategy must:
- Identify the programs and resources the hospital facility plans to commit to address the health need
- Describe any planned collaboration with other facilities or organizations in addressing the health need
- Contain a brief explanation of why a hospital facility does not intend to address a particular significant health need
A hospital facility may develop an implementation strategy in collaboration with other facilities and organizations, but it must document its implementation strategy in a separate written plan that is tailored to the particular facility.
However, a hospital facility that adopts a joint CHNA report may also adopt a joint implementation strategy. Such a joint strategy must be clearly identified as applying to the hospital facility, and it must clearly state the hospital facility’s particular role and responsibilities in taking actions under the strategy and include a tool that helps readers easily locate those portions of the joint implementation strategy that relate to the hospital facility.
An authorized body of the hospital facility must adopt the implementation strategy by the end of the same tax year in which the facility completes its CHNA (typically, when the CHNA report is made widely available to the public).
CHNA Requirements for New Hospital Facilities
A hospital facility that is newly acquired or placed in service by a hospital organization must conduct a CHNA and adopt an implementation strategy by the last day of the second tax year beginning after the date it was acquired or placed in service or became newly subject to section 501(r). A short tax year is considered a tax year for this purpose.
A hospital facility that conducted a CHNA in either of its first two tax years beginning after March 23, 2010, is not required to meet the CHNA requirements again until the third tax year following the tax year in which it conducted the CHNA, but only if the hospital facility adopts an implementation strategy for the CHNA on or before the 15th day of the fifth calendar month following the close of its first tax year beginning after March 23, 2012.
If a hospital facility conducts a CHNA in its first tax year beginning after March 23, 2012, and an authorized body of the hospital facility adopts an implementation strategy for that CHNA on or before the 15th day of the fifth calendar month following the close of its first tax year beginning after March 23, 2012, the hospital facility will be deemed to have satisfied the requirements to adopt an implementation strategy in the same tax year the CHNA is conducted.
CHNA Reporting Requirements
A hospital organization may either attach to its IRS Form 990 a copy of its most recently adopted implementation strategy for each of its hospital facilities or provide on its Form 990 the URLs of any web pages on which it has made each implementation strategy widely available.
In addition, a hospital organization must provide annually on its Form 990 a description of the actions taken during the year to address the significant health needs identified through its most recent CHNA for each hospital facility it operates or, if no actions were taken with respect to one or more of such health needs, the reasons why no actions were taken.
A hospital organization must attach a copy of its audited financial statements to its Form 990. If an organization’s financial statements are included in consolidated financial statements, the organization is required to attach the consolidated financial statements.
Government hospital organizations that are not required to file Forms 990, in accordance with Revenue Procedure 95-48, are not subject to any of these new reporting requirements.
Consequences of Failure to Satisfy Section 501(r) Requirements
In general, failure to meet the requirements of section 501(r) will result in the loss of a hospital organization’s tax-exempt status. Where a hospital organization operates multiple hospital facilities, loss of exemption may be limited to a particular facility.
The new regulations make allowances if a hospital facility omits required information from a policy or report, or makes an error with respect to the implementation of operational requirements.
In such an instance, the facility will still be considered to have met the requirements of section 501(r) as long as the omission or error was minor, inadvertent, and due to reasonable cause and the hospital facility corrects the omission or error promptly after discovery.
The IRS has indicated it will issue guidance providing that a hospital facility’s failure that is neither willful nor egregious will be excused if the failure is corrected and properly disclosed. No such guidance has been issued to date and may not be available until final regulations are issued.
Notwithstanding a hospital facility’s compliance with such future guidance, the IRS retains the discretion to subject hospital facilities to excise taxes under section 4959 for failure to meet the CHNA requirements. The $50,000 excise tax on a hospital organization that fails to meet the CHNA requirements may be imposed, on a facility-by-facility basis, for each tax year that any of the organization’s facilities fail to meet the CHNA requirements, in addition to any other tax imposed on the noncompliant hospital organization.
When determining whether a situation warrants revoking an organization’s section 501(c)(3) status, the IRS will consider all relevant facts and circumstances, such as the relative size, scope, nature, and significance of the failure to meet the section 501(r) requirements, as well as the reasons for the failure and whether similar failures have previously occurred. Ordinarily, a hospital organization’s section 501(c)(3) status will be revoked if its failures to meet the requirements of section 501(r) are willful or egregious.
Taxation of Noncompliant Hospital Facilities
If a hospital organization operates more than one hospital facility, the organization ceases to be exempt from tax with respect to any facility for which the section 501(r) requirements are not separately met. This situation may not affect the overall tax-exempt status of the hospital organization. However, income derived from the noncompliant hospital facility will be subject to tax at corporate or trust rates, as appropriate.
The income derived from a noncompliant hospital facility during the tax year will be the gross income derived from that hospital facility during the year, less the deductions directly connected to the operation of that hospital facility, excluding any gross income and deductions already taken into account in computing unrelated business taxable income (UBTI) from the facility.
The income and deductions of a noncompliant hospital facility may not be aggregated with the income and deductions of the hospital organization’s other noncompliant hospital facilities or its unrelated trade or business activities.
Thus, a hospital organization operating more than one noncompliant hospital facility that is subject to the facility-level tax must compute each facility’s income separately and may not use net operating losses from one noncompliant hospital facility to offset taxable income derived from another noncompliant hospital facility or to offset any UBTI. The facility-level tax must be reported on Form 990-T, Exempt Organization Business Income Tax Return.
It should be noted that, if a hospital organization continues to be recognized as tax-exempt under section 501(c)(3), the fact that a facility-level tax is imposed will not itself cause the interest on qualified section 501(c)(3) bonds to be taxable.
The proposed regulations—and the proposed regulations issued in 2012 on the other requirements of section 501(r)—will be effective on the date they are published in the Federal Register as final or temporary regulations. For six months after the publication date for the final or temporary regulations, hospital facilities may continue to rely on the provisions in the proposed regulations for any CHNA conducted or implementation strategy adopted within or prior to that time frame.
Hospital organizations may continue to rely on the interim rules described in Notice 2011-52 for any CHNA conducted or implementation strategy adopted on or before Oct. 5, 2013. After that date, Notice 2011-52 will be obsolete.
Since the enactment of section 501(r) in 2010, the IRS and the Treasury Department have issued guidance with respect to various aspects of section 501(r) in the form of notices and proposed regulations, each time soliciting (and receiving) considerable public comment.
The new regulations are in proposed form and will require further consideration of comments that have been submitted before being finalized. It is unclear when the process will be completed and when final guidance will be issued, but in the meantime, not-for-profit hospital leaders should understand and may rely on the proposed regulations.
Richard A. Speizman, CPA, is national partner-in-charge, exempt organizations tax practice, Washington national tax office, KPMG, LLP, Washington, D.C., and a member of HFMA’s Maryland Chapter.
Alexandra O. Mitchell is a senior manager, exempt organizations tax practice, Washington national tax office, KPMG, LLP, Washington, D.C.
a. All section references are to the Internal Revenue Code of 1986, as amended and in effect, except as indicated.
b. For a discussion of other requirements of section 501(r), see Speizman, R. A., Moore, V.A., and Mitchell, A.O., “Proposed Regs Address New Hospital Tax-Exemption Requirements, hfm, March 2013.
c. These requirements are in addition to, and do not supersede, the requirements generally applicable to tax-exempt organizations described in section 501(c)(3), and the existing nonstatutory standards for hospitals to qualify for exemption under section 501(c)(3). See, for example, Revenue Ruling 69-545, 1969-2 C.B. 117.
d. See Internal Revenue Bulletin No. 2011-30, July 25, 2011.
e. See, for example, Revenue Ruling 2004-51, 2004-1 C.B. 974 and Revenue Ruling 98-15, 1998-1 C.B. 718. Revenue Ruling 2004-51 addresses the tax consequences for a tax-exempt organization that enters into a joint venture with a for-profit organization as an insubstantial part of its activities. Revenue Ruling 98-15 addresses the question of whether an organization that operates an acute care hospital can continue to qualify for tax exemption as a section 501(c)(3) organization if it forms a limited liability company with a for-profit corporation and then contributes its hospital and all of its other operating assets to the LLC, which then operates the hospital.
Publication Date: Sunday, September 01, 2013