Travis L. Patton
How prepared are you to complete the new Form 990, regarding your organization's charity care and community benefit?
At a Glance
Hospitals should consider seven action steps with respect to the IRS's new Form 990:
- Establish a working group to ensure thoroughness of reporting on the Form 990.
- Find the gaps in the organization's readiness to file a complete Form 990.
- Complete the entire Form 990-even the parts not required for tax year 2008.
- Review existing policies and procedures for gathering needed information.
- Refine the hospital's existing reporting on community benefit.
- Start compensation disclosures early.
- Take advantage of the opportunity to improve operational performance.
For many hospitals, 2009 will be the first year of reporting the charity care and community benefits they provide on the new Schedule H of the IRS's significantly redesigned Form 990 (Return of Organization Exempt from Income Tax). The IRS released the final version of the new Form 990 in December 2007, the first overhaul of the form since 1979, and issued final instructions in August 2008. Many not-for-profit organizations must use the new form beginning with the 2008 tax year (generally, the tax year that begins during 2008). Some smaller organizations will have as long as three years to fully transition to the new form, but few hospitals will be small enough to qualify for the longer transition.
The new,11-page core Form 990 updates the most often-used parts of the previous form. One of the redesign's major changes is an expanded summary up front, which provides readers with context-such as the organization's mission statement and summary of its activities-that can help them to understand the financial and operating information that follows. Notably, the first page includes a snapshot of financial data from the year being reported on and the previous year, offering easy comparison.
The new Form 990 also has a series of 16 schedules-a substantial increase from the previous two. The form includes a checklist that identifies the schedules each filer must submit for a complete and accurate return, thereby providing a road map to compliance. Some of the schedules merely collect information formerly reported on the basic form or its attachments. The most noteworthy addition, however, is the form's new Schedule H.
Software companies are now developing and rolling out their 2008 electronic filing software platforms, which will be adapted to address the information-reporting demands imposed by the new Form 990. Mandatory electronic filing three years ago created heartburn among practitioners and institutions because of IRS-imposed restrictions and software limitations. It is unclear whether the redesigned Form 990, a significantly more complicated form, will create new electronic filing problems.
Breaking Apart Schedule H
Because the new Schedule H is one of the most complex parts of the redesigned Form 990 for hospitals, reporting of information for 2008 is optional for every part of Schedule H except Part V, which addresses facility information. For every other part, the IRS is giving filers an extra year to comply with the new reporting requirements. Nonetheless, hospitals should consider preparing a complete Schedule H this year so they can understand the process and identify any shortcomings in their data collection and reporting systems.
To this end, it is helpful to take a detailed look at the provisions of Schedule H, especially the reporting requirements detailed in the instructions that accompany the form.
For purposes of Schedule H, the definition of a hospital includes any organization that is licensed, registered, or similarly recognized by a state as a hospital. To be consistent with the definition of a hospital, the definition of a facility has been revised to include any facility that is required to be licensed, registered, or similarly recognized by a state as a healthcare facility. This definition includes hospitals operated as joint ventures in a partnership.
Schedule H by the Parts
The new Schedule H includes six parts, each of which has its own requirements and unique challenges.
Part I: Charity Care and Certain Other Community Benefits at Cost. This part is the central element in the IRS's effort to obtain a description of a hospital's community needs assessments, how it educates patients on their eligibility for assistance, and its community-building activities.
The section begins with a somewhat leading question: "Does the organization have a charity care policy?" Hospitals that must answer this question "no" may be raising a red flag. It then asks what criteria are used to determine whether individuals qualify for charity care-for example, whether the federal poverty guidelines were used to determine eligibility.
Filers are required to complete a detailed tabular report of the cost of the charity care (such as unreimbursed care provided to Medicaid patients) and other community benefits they provide, including health education and support for community groups. Among the information required are the number of activities, number of people served, expenses and offsetting revenue, net community benefit expense, and percentage of total expense.
Worksheets in the instructions can be used to calculate the amounts disclosed in Part I, including charity care at cost, ratio of patient care cost to charges, unreimbursed Medicaid and other means-tested government programs, community health improvement services and community benefit operations, health professions education, subsidized health services, research, and cash and in-kind donations to community groups.
Part II: Community Building Activities. In this part, filers are required to report the activities they engaged in during the year to protect or improve the community's health or safety. They must report costs that are not otherwise reported in Parts I and III. Examples include housing, economic development, community leadership training, advocacy for community health improvement, and workforce development. In terms of format, Part II follows the same columnar reporting as Part I.
Part III: Bad Debt, Medicare, & Collection Practices. This part has three main sections. Section A of Part III is used to report bad debt expenses, at cost; hospitals are asked whether their bad debt expenses are reported in accordance with HFMA Statement No. 15. This section also reproduces the footnote in a hospital's financial statements explaining the treatment of bad debt. Section B addresses the allowable costs and Medicare reimbursements that a hospital reports in its Medicare Cost Report(s). Section C requests a summary of the hospital's collection practices, including details about its debt collection policy, if one exists.
Part IV: Management Companies and Joint Ventures. In this part, filers are required to list any joint ventures in which they participate or any other separate entities in which they are a partner or shareholder. The instructions set limits on how to identify reportable joint ventures, and exclude publicly traded entities or entities whose sole income is passive investment income. If the hospital's officers, directors, trustees, key employees, or other physicians share in the joint venture, disclosure is required of their percentages of profits, interest, and stock ownership.
Part V: Facility Information. This part is the only part of Schedule H required for tax year 2008. The instructions state that the facilities to be listed include those that, at any time during the tax year, were required to be licensed, registered, or similarly recognized as a healthcare facility under state law, whether the facility was operated directly by the organization or indirectly through a disregarded entity or joint venture taxed as a partnership. It is fairly straightforward, requiring only the name and address of each facility, together with its type. The instructions provide definitions for common types of facilities. There also is an "other" column, in which the hospital should list facilities that do not fit into the other categories, such as outpatient physician clinics and skilled nursing facilities. It is important to note that facilities can be listed under more than one category.
Part VI: Supplemental Information. This part is designed as a catch-all with several applications. It should be used to explain answers provided to questions in other parts of Schedule H, such as a description of how federal poverty guidelines are used to identify charity care recipients and the actual text of the footnote on bad debt expenses from the hospital's financial statements.
Part VI also can be used to describe the less easily quantifiable aspects of a hospital's activities. For example, it could include descriptions of the hospital's method for assessing the healthcare needs of its local community, the hospital's approach to educating its patients on their eligibility for assistance under government programs and the hospital's own charity care policy, the characteristics of the community in which the hospital operates, and the ways in which community-building activities sponsored by the hospital promote the health of the population.
The descriptions needed for Part VI should be written early in the Form 990 preparation process. Because so much of this section consists of descriptions of activities and community initiatives, the department responsible for filing the Form 990 should involve the hospital's government relations and public relations units and share drafts with senior management.
Properly completed, Schedule H can provide informative insights into the activities that justify a hospital's tax-exempt status. However, failure to make use of Schedule H not only is a lost opportunity, but also can lead to IRS and public inquiries, which, even if resolved, will unnecessarily divert financial and human resources.
Other Form 990 Flashpoints
In addition to Schedule H, several other new aspects of Form 990 require close attention. These aspects include the requirements for reporting compensation, governance, and tax-exempt bonds.
Compensation. The new Form 990 has considerably changed the reporting for compensation and transactions with interested parties. Compensation disclosures are summarized in the core form and detailed in a new Schedule J. As in the past, filers must list their officers, directors, trustees, and key employees, and report compensation received by these individuals whether or not paid by the hospital or a related organization. The descriptions and definitions have changed since last year, so there may be differences in who must be included in the filing.
A key employee is now defined as an individual who meets all of the following criteria:
- Earns more than $150,000 for the year
- Either has control or influence similar to that exercised by an officer or director, or who manages at least 10 percent of an organization''s activities, or who has or shares authority to control at least 10 percent of the organizations' capital expenditures, budget or payroll (a so-called "responsibility test")
- Is among the organization's top 20 earners who met both the $150,000 and responsibility tests.
Key employees are reported in addition to the five highest-paid employees.
Compensation must be reported based on a calendar year Form W-2 or Form 1099 regardless of the organization's fiscal year. This could be a welcome change in that it may simplify the calculation of reportable compensation and ties neatly back to amounts reported on other IRS tax forms.
The compensation section also makes new inquiries into the organization's compensation-setting process, its methods for calculating compensation, and the provision of deferred compensation and fringe benefits.
Governance. Form 990 now includes a section on governance, which asks filers to describe:
- The composition of the organization's governing body
- The organization's governance and management policies
- The organization's public disclosure practices
This section asks a range of policy questions akin to those required of public companies by the Sarbanes-Oxley Act, including whether policies exist governing conflicts of interest, whistle-blowers, record retention, and participation in joint ventures. These are yes-or-no questions, which leave no room for explanation or equivocation except in an attached schedule.
In line with this section's process-oriented theme, organizations are asked whether a copy of the Form 990 is provided to every voting member of the governing board before it is filed and how the Form 990 is reviewed internally. Hospitals should consider how they will respond to these questions and, if necessary, build into the Form 990 preparation process steps to allow for senior management or governing board review. Coordinating the timing of board meetings and the Form 990 filing date is critical.
Tax-exempt bonds. As with Schedule H, the new Schedule K, Supplemental Information on Tax-Exempt Bonds, makes additional demands of filers, asking for a list of certain outstanding tax-exempt bond liabilities, together with detailed information about the use or investment of bond proceeds. Filers must report the average percentage used in a private business or an unrelated trade or business during the year. No reporting is required for bonds issued before 2003, and refunding bonds are exempted from the reporting requirements of private business use.
To give filers time to assemble the required information, the IRS has provided a transitional option similar to that for Schedule H. Schedule K filers are required to submit only one part for tax year 2008: Part I, Bond Issues. Parts II through IV of the schedule are optional for 2008 but required beginning in tax year 2009.
7 Steps to Take Now
Hospitals should be taking steps now to prepare for reporting on Form 990. Seven steps, in particular, are worthy of a hospital's consideration.
Establish a working group to ensure thoroughness of reporting on the Form 990. The redesigned Form 990 is no longer a simple IRS information return. It is a public document that requires data and input from a number of sources typically dispersed throughout the organization-not only finance and accounting, but also public relations, the general counsel, government relations, and human resources. The organization's accounting firm or external auditor, outside counsel, and certain consultants (such as financial advisers) also may need to be involved.
Hospitals also should consider whether the governing board (or a committee of the board, such as audit or finance) should be involved. Educating the governing board about Form 990 may be required. A diverse cross-section of individuals will ensure not only that the right information is obtained, but also that different perspectives are taken into account.
Find the gaps in the organization's readiness to file a complete Form 990. Hospitals should measure their progress toward implementing the redesigned form. They should be able to ask and answer two hard questions: Where are we today compared with where we want to be when the first redesigned Form 990 is filed? If we had to file a complete Form 990 today, what would be missing?
Complete the entire Form 990-even the parts not required for tax year 2008. Hospitals should complete all parts of Form 990 that they eventually will be required to submit. However, they should take advantage of the one-year deferral for Schedules H and K by preparing mock submissions, testing responses while reporting is still optional.
Review existing policies and procedures for gathering needed information. As part of the reporting process, hospitals need to consider whether revisions to existing policies or the adoption of new policies are needed. Their review should discover any shortcomings in the data collection process and identify new policies, processes, or procedures that need to be established.
Refine the hospital's existing reporting on community benefit. Defining community benefit and explaining how the hospital provides it is a major objective of the revised Form 990. Hospitals need to carefully think through their community benefit goals, quantify the benefits in accordance with the definitions and worksheets provided in the form instructions, and prepare for the scrutiny community benefit reporting will receive once hospitals begin filing Schedule H.
Start compensation disclosures early. In early 2009, hospital administrators should decide which executives are to be listed on the Form 990 (remembering the expanded key employee definition) using the 2008 W-2s that were just filed. They should complete the compensation portions of Form 990 and Schedule J now, while the data are fresh, and share the compensation disclosures with the affected individuals.
Take advantage of the opportunity to improve operational performance. Compliance with Form 990 can be burdensome. However, hospitals should use the impetus it creates by examining their existing data collection and reporting systems, upgrading those that are inadequate, and implementing new ones where necessary. More important, they should design system changes not only to collect the required Form 990 information but also to improve performance in managing operations.
The redesigned Form 990 and its associated schedules require much new information. Compliance will not be easy for many hospitals because of the sheer scope of what is now required. But those organizations that begin now to assemble the necessary information and prepare for the filing will have a distinct advantage.
Travis L. Patton, CPA, is a tax director, Washington National Tax Services office, and a member of the Exempt Organization Tax Services practice, PricewaterhouseCoopers, Washington, D.C., and a member of HFMA's Maryland Chapter (firstname.lastname@example.org)
Publication Date: Sunday, February 01, 2009