New IRS Guidance for Charitable Hospitals
The Patient Protection and Affordable Care Act added section 501(r) to the Internal Revenue Code, which imposes new requirements on 501(c)(3) organizations (nonprofit hospitals) that operate one or more hospital facilities. Under section 501(r), each hospital facility operated by a 501(c)(3) organization must meet four general requirements on a facility-by-facility basis in order for the nonprofit hospital to maintain its tax exempt status:
- Establish written financial assistance and emergency care policies;
- Limit amounts charged for emergency or other medically necessary care to individuals eligible for assistance under the hospital’s financial assistance policy;
- Make reasonable efforts to determine whether an individual is eligible for financial assistance before engaging in extraordinary collection actions; and
- Conduct a community health needs assessment (“CHNA”) and adopt an implementation strategy at least once every three years.
Section 501 (r) became effective for tax years beginning after March 23, 2010, except for the CHNA requirement which became effective for tax years beginning after March 23, 2012.
The CHNA is a written report and implementation plan that identifies and ranks the community’s needs in the area where the hospital is located. If a tax-exempt hospital fails to conduct a CHNA, a $50,000 excise tax could be imposed. On August 14, 2013, the IRS issued final regulations outlining the excise tax filing process for tax-exempt hospitals that do not meet the CHNA requirement.
According to the newly-released guidance by the IRS, a tax-exempt hospital that is liable for excise tax must file a return on Form 4720 with its excise tax payment. Form 4720 must be filed by the 15th day of the fifth month after the end of the organization’s taxable year in which the liability was incurred. For tax-exempt facilities that inadvertently failed to comply with the CHNA requirement, there is relief as long as the hospital takes corrective measures. Tax-exempt status will only be revoked when a hospital’s failure to meet a requirement is willful or egregious.
The new requirements ushered in by the ACA are time-consuming and complicated. According to the American Hospital Association, satisfying the proposed requirements could take “thousands of hours and cost tens of thousands of dollars or more.”