Hospitals with 501(c)(3) status—did you know that the IRS is assessing your compliance with Section 501(r) regulations at least once every three years?
When the Patient Protection and Affordable Care Act was enacted by Congress in March of 2010, Section 501(r) was added to the Internal Revenue Code, imposing additional requirements on tax-exempt hospitals to promote charitable behavior. As a result, the Internal Revenue Service (IRS) is required to perform a desk review of the Form 990, Schedule H of each hospital at least once every three years to ensure compliance with Section 501(r) requirements. With nearly 3,000 nonprofit hospitals across the nation, the IRS is likely looking at approximately 1,000 nonprofit hospitals a year.
Are you a government hospital and think these reviews don’t apply to you?
Section 501(r) applies to “dual status” hospitals, or government hospitals that also have exempt status under Section 501(c)(3). Certain government entities are relieved from filing IRS Form 990. However, to be treated as a Section 501(c)(3) tax-exempt organization, government hospital organizations still must meet all section 501(r) requirements that do not involve disclosure on or with the Form 990, including making their community health needs assessment reports and financial assistance policies widely available on their website.
General Requirements for Tax-Exempt Charitable Hospitals
A nonprofit hospital demonstrates its commitment of community care and maintains its tax-exempt status by satisfying three sets of requirements mentioned below. The focus of this post however is the third bullet.
- Section 501(c)(3) – Organized and operated for charitable purposes
- Revenue Ruling 69-545 – Community benefit standard (beyond charity care)
- Section 501(r) – Community Health Needs Assessment and billing policies applied on a facility-by-facility basis
Section 501(r)
There are several particulars to each Section 501(r) that apply to tax-exempt hospitals—highlights that are most relevant to our nonprofit clients to come in a later post.
Each 501(c)(3) hospital organization is required to meet four general requirements on a facility-by-facility basis:
- Community health needs assessment (CHNA) – including an implementation strategy
- Financial assistance policy (FAP) – including an Emergency Medical Care Policy (EMCP)
- Limitation on charges
- Billing and collection policy
Reporting
Tax-exempt hospitals report on community benefit and 501(r) requirements when annually filing Schedule H with its IRS Form 990. Schedule H reporting substantiates the hospital’s tax-exempt status to the communities they serve. Hospital organizations also attach a copy of its most recent audited financial statements to the 990 when filed.
Hospitals report information on policies and practices that are addressed in Section 501(r) in Part V, Section B of Schedule H. This section asks for information concerning each hospital’s CHNA, financial assistance, emergency medical care, and billing and collection policies. The hospital organization must complete a separate Section B for each of its hospital facilities listed in Section A of Schedule H. A “hospital facility” is a facility that is required by a state to be licensed, registered, or similarly recognized as a hospital.
Assessment Procedures
The IRS is typically assessing compliance with Section 501(r) regulations through a desk review or compliance check.
A compliance check primarily focuses on the public availability of policies and practices, including CHNA, Implementation Strategy, FAP, FAP application form, a plain language summary of the FAP, translated FAP (if applicable), EMCP, and billings and collections policy. If follow-up is necessary, the hospital will receive IRS Form 13837, Compliance Check Information Request.
Depending on what is found during the compliance check, the hospital may be referred for an audit. If an audit is deemed necessary, the hospital will receive IRS Form 4564, Information Document Request, typically requesting policies, billing statements, board/committee meeting minutes, or resolutions demonstrating that an authorized body has adopted and implemented the report or policy.
There could also be an on-site field examination at the hospital. While on site, the auditors may interview persons who were responsible for the content of the CHNA and implementation strategy, and who are familiar with FAP, billing and collection practices, and computation of amounts generally billed, as well as check for FAP-related signage and publications conspicuously posted throughout the facility.
Internal Compliance Assessment
With heightened focus on IRS 501(r) compliance reviews through a hospital’s website, we recommend being familiar with the requirements and making sure links to the information required to be widely publicized are working on the hospital’s website. We also recommend that the hospital website’s search engine be updated to provide results for the 501(r) key word searches. Having all documents updated with current regulations readily available is an opportunity to strengthen ties with patients and the community as well as ensuring compliance.
The hospital should designate an individual(s) with suitable knowledge or experience to monitor the 501(r) requirements on a regular basis. Verifying the hospital’s compliance is about fixing current issues, but also about making sure internal controls and processes are in place to monitor compliance over time, and consistently, in the event of turnover. This includes coordination of different departments that contribute to Section 501(r) compliance.
Through navigation of the hospital’s website, verify that you can easily locate the following documents:
- Community health needs assessment (CHNA)
- Implementation Strategy
- Financial assistance policy (FAP)
- FAP application form
- A plain language summary (PLS) of the FAP
- FAP and related documents translated for significant populations that have limited English proficiency (LEP)
- Emergency Medical Care Policy (EMCP)
- Billing and Collection Policy
- List of providers delivering emergency or medically necessary care in the hospital
Then crosscheck each of the above listings to the requirements included in IRS Form 990 Schedule H and/or to a checklist of 501(r) requirements. Make an assessment of which 501(r) requirements appear to be met, at risk, or could not be determined. This will help you anticipate what the IRS will be requesting on their next compliance check and prepare you for any responses or follow-up that are deemed necessary.
Failure to Comply
Failure to comply with these requirements can result in penalties or even loss of tax-exempt status. If a hospital fails to demonstrate compliance with the CHNA requirement under 501(r)(3), a $50,000 excise tax may be assessed for that year and in each succeeding year of noncompliance. Organizations with multiple hospitals can be hit even harder. A more serious penalty is the loss of tax-exempt status for noncompliance with any of the Section 501(r) requirements.
Section 501(r) applies to all Section 501(c)(3) hospitals whether you file a 990 or not. Government hospitals with dual status that do not wish to comply with the requirements of Section 501(r) may submit a request to voluntarily terminate their Section 501(c)(3) recognition, as described in section 3.01(12) of Revenue Procedure 2018-5 (or a successor revenue procedure). Before considering voluntarily terminating 501(c)(3) recognition, we recommend doing a pro-versus-con analysis and determine if your pension plan requires 501(c)(3) status.
Closing
Tax-exempt hospitals should perform their own assessment by the end of the year to ensure continued compliance under Section 501(r) and update any policies and procedures as necessary. If you have questions, need a 501(r) compliance tool, or need assistance with a 501(r) compliance analysis, contact DZA today.
