Mike Ermitage, Special Interest Groups Manager for HFMA, interviewed Rob Friz and Gwen Spencer of PriceWaterhouseCoopers on the implications of the new form 990. (Listen to the audio)
Mike Ermitage, HFMA: What are the reasons behind a new form 990?
Rob Friz: The 990--the redesigned 990 really marks the first time since 1979 that the IRS has done a complete overhaul of the form 990. With respect to hospitals and other tax exempt healthcare organizations, the key focus has been on disclosure around charity care, community benefit and other types of activities that the institution is doing to justify its tax exempt status.
Traditionally, these types of activities were reported in a section of the 990 that just talks about program service accomplishments. And there was not a whole lot of guidance or specificity with respect to what to report.
And not surprisingly, a number of hospitals and institutions took different approaches to that with respect to what was reported for charity care community benefit, how it was reported--for example, charity care cost or charges. And over the last couple years with the congressional scrutiny of hospitals and looking at what are they doing to justify their tax benefits, there's been a lot of discussion and some criticism that policymakers, others have not been able to, you know, compare hospitals and get an accurate assessment as far as exactly what they're doing.
In response to that and largely in response to that, schedule H, which applies to hospitals, asks much more detailed information with respect to charity care policies, what organizations are doing around charity care and community benefit and actually prescribing in a tabular format, among other things, reporting for charity care and other benefits and also prescribing very specific definitions with respect to how they want those amounts calculated and disclosed as part of the 990 to put a lot more uniformity around the disclosure.
Gwen Spencer: And I would say also, in addition to schedule H, like other tax exempt organizations, hospitals will also have to deal with more extensive reporting in other areas such as compensation, tax exempt bonds and activities outside the United States.
Mike Ermitage: What are the challenges regarding compensation reporting?
Gwen Spencer: Yeah, the compensation requirements on the redesigned form, although on the face, they're somewhat similar to what was required in the past--you know, you're still reporting compensation of officers, directors and key employees--some of the thresholds have changed, and also, you know, the reporting of the top five highest paid. And, you know, so, that is still on this current form.
I would say, though, that the questions are much more detailed. There's greater focus on certain expenses and reimbursements that take place to certain individuals, and also focuses more on policies, asking more questions around your policies and procedures in the compensation area, as well as how you handle intermediate sanctions within your organization.
Rob Friz: Yeah, I think a couple things that organizations are gonna need to prepare or, as Gwen said, a lot more disclosure around certain practices such as whether or not the organization provides certain types of benefits to their highly compensated officers, directors, trustees, key employees such as first class or charter travel, health club or social club dues or initiation fees, certain other types of like discretionary spending accounts and other things that, you know, have come up in some of the hearings and scrutiny as--in essence is being subject to additional scrutiny.
Organizations also are allowed to and have the opportunity to describe their policies around these types of things, as well. And I think it's very important for organizations to have a good understanding about what types of compensatory or other benefits are gonna be getting this spotlight and additional disclosure and to think about how that's gonna be portrayed on the 990, which is a public document.
Also, more disclosure around non-fixed compensation - for example, questions around whether any compensation was paid or accrued based on revenues or based on net earnings of the organization or whether there's any other non-fixed payments. And many healthcare systems do have some type of non-fixed component of compensation. And there's gonna be a lot more disclosure around that aspect of compensation, as well.
Mike Ermitage: What requirements are there regarding making the form public?
Rob Friz: Yeah, maybe I'll--can start with that. That--it's a very good question. The 990 is a public document. And under the rules, the current tax rules, if someone presents himself or herself to the organization's office, it has to be provided or if someone makes a request in writing, it needs to be provided.
Having said that, however, there are certain Web sites--one of the most popular is guidestar.org--that typically will post the 990s. And many people will go to Guidestar to get access to the document. The redesigned 990 does ask some questions about how the organization discloses and makes public its form 990 and some other documents.
And one of the checkboxes is whether or not it in fact makes it available on its Web site. So, I think it'll be interesting to see for organizations that are not currently making it available on their Web site whether or not that question will prompt some to in fact put it on their Web site.
Mike Ermitage: What is the deadline for filing form 990?
Gwen Spencer: --Such that, you know, if you're a calendar year tax payer, then you would, you know, first file it for 2008. If you're a fiscal year filer, you're gonna use that for your fiscal year '09 reporting period. The--it's important to note, too, that there are--there is transition relief on some of the schedules.
In other words, schedule H, there's only one part of that schedule that needs to be reported in the first year. The full schedule will be required the second year that an organization uses the new form.
But, in saying that, you know, we're--it's highly recommended that organizations take a look at this now and also just, you know, prepare it in a, you know, a phantom format or mock format this year so that they can take a look at the information that would be required when they do have to file the form, the actual schedule H when it's required.
That may also lead into, you know, just some comments in general about timing. You know, the new form is required for 2008 calendar year or fiscal '09. But, there are some questions on the redesigned form that may drive organizations to change their process and their timing around the preparation of the form.
And that is there's a question that asks was a copy of the form 990 provided to the organization's governing body before it was filed. So, that may drive organizations to want to, you know, make sure that they're doing that so they can answer yes to that question, which may back up the timing of the preparation of the form.
And also, there is a question that does ask the organization to explain their review process, you know, and whether the review process was conducted prior to the form's filing and what were the specifics of that review process - you know, were there particular committees involved such as the Audit Committee and otherwise?
So, those are two questions that may actually change the timing that organizations will consider when they're considering their preparation and review process for the new form.
Mike Ermitage: Can you highlight some valuable strategies for dealing with form 990?
Rob Friz: Sure. You know, one I think is the one that Gwen mentioned. And I would just like to emphasize as a strategy for addressing this is doing a mock schedule H.
As Gwen mentioned, the schedule H is optional for the 2008 redesigned 990. Now, there may be certain institutions that feel that there--you know, have the data together in a format that's appropriate to prepare the schedule H. But, I think even, you know, organizations that are gonna take advantage of the optional period and not actually complete it to file with the IRS until 2009, which will be when it's required, I think are very well advised to take this year to work through, do the mock up of schedule H in connection with the charity care community benefit and other disclosures for hospitals that are part of schedule H.
I think the other areas to look at in preparing for--with specific next steps are looking at the compensation arrangements. And we hit on a couple of the areas that the service will be looking at. But, I really do think the time is now to inventory the compensation arrangements, understand what, if any, of those types of benefits or compensation arrangements are being provided and think about, you know, going into the year whether, you know, A, any changes may want to be made or, B, thinking about the descriptive language to put into context, you know, why those benefits are being provided in light of the fact that the 990 is a public document.
The other thing I'll just mention is that there are a lot of very specific procedural and governance questions. For example, we talked about, you know, one of the questions are far as whether the--was the 990 provided to the governing body before it was filed. There's a question, as Gwen alluded to earlier, of describing the process of the review around the 990 and a number of questions around written policies and procedures of whether or not those are in place.
Again, I think it's important for organizations to look at those types of policies and procedures, think about whether they exist and while a lot of them are not, per se, required under the federal tax rules, again, with the 990 being a public document, it's a--there's a large public perception issue. I think a lot of organizations are looking at those policies and would be wise to think about, you know, getting those in place in connection with the redesigned 990.