Final § 501(r) Regulations Provide Community Health Needs Assessment and Corrective Guidance
Tax-exempt hospitals received a late-season present from the Department of the Treasury and the Internal Revenue Service after the agencies released long-awaited final regulations for requirements under the Patient Protection and Affordable Care Act (“ACA”). In addition to rules related to the provision of financial assistance and billing and collection policies, discussed here, the final regulations address Community Health Needs Assessments and the failure to satisfy § 501(r).
Failures to Satisfy the Requirements of Section 501(r)
Section 501(c)(3) hospitals are required to meet all of the elements of § 501(r) or risk excise taxes and/or tax-exemption for failure to do so. Other than a $50,000 excise tax for the failure to perform a Community Health Needs Assessment (“CHNA”), the ACA did not provide for any intermediate sanctions or steps which the IRS could take to address non-compliance with § 501(r) short of revocation of exemption. Nonetheless, the final regulations provide intermediate remedies for certain failures to satisfy § 501(r).
Errors or omissions are divided into two categories according to the level of severity. Minor omissions or errors are addressed with a “correct and move forward” standard, while more significant errors and omissions, such as ones that may impact a hospital’s community, are subject to more stringent requirements such as notification and potential loss of exemption.
For minor errors, both the proposed and final regulations provide certain relief for hospitals that fail to meet the requirements of the § 501(r) as long as the errors meet enumerated requirements. In the proposed regulations, the IRS did not require disclosure of a failure to meet a § 501(r) requirement if that failure or omission was minor, inadvertent and due to reasonable cause. The final regulations slightly modify this standard by not requiring disclosure of omissions or errors that are minor and either inadvertent or due to reasonable cause. In such a case, hospitals are also required to correct and appropriately respond to the minor error, including revision of applicable policies and procedures.
Significant errors or omissions are subject to more stringent requirements. Hospitals are required to disclose significant failures to satisfy the requirements of § 501(r) to the IRS and correct the failures. Such failures will be excused as long as they are not willful or egregious. A “willful” failure is one caused by “gross negligence, reckless disregard, or willful neglect,” while an “egregious” failure is one that is “very serious” based on the severity and scope of the impact. The IRS will consider the facts and circumstances of the failure in determining whether it is “willful” or “egregious.”
In preamble to the rule, the IRS routinely suggests that it will look favorably on organizations that have policies or procedures in place to address the § 501(r) provisions. The IRS will also consider whether the failure is repetitive in nature. Although these are only a few of the factors in the IRS’s assessment of the impact of omissions or errors, it is best practice for hospitals to develop, implement, and execute § 501(r)-compliant policies.
Further, the final regulations highlight the facility-level tax against the income derived from a noncompliant hospital facility that is part of a larger tax-exempt health system. The tax is applicable when a health system, by virtue of its other § 501(r)-compliant hospital facilities, retains its federal tax exemption but would otherwise lose it if the noncompliant facility was the only one in the system. While the noncompliant facility’s income will still be subject to tax, the IRS made clear that the failure of the hospital facility to satisfy § 501(r) would not impact the tax-exempt status of bonds and it would not classify the noncompliant facility’s income as unrelated trade or business income for such purposes.
Conducting a Community Health Needs Assessment and Adopting an Implementation Strategy
Prior to these final rules, the IRS provided guidance on conducting a CHNA and adopting an implementation strategy in IRS Notice 2011-52 and proposed regulations from April 2013. Many tax-exempt organizations are familiar with the CHNA, related documentation, and implementation strategy process as its provisions applied to taxable years beginning after March 23, 2012.
The final regulations retain the requirements that a CHNA be conducted every three years, but some changes may bring potential cost-savings for providers that dedicated substantial resources to the initial CHNA and implementation strategy process. For example, the final regulations permit providers to “update” a previously conducted CHNA. The IRS noted that it “expect[s] that, in conducting CHNAs, hospital facilities will build upon previously-conducted CHNAs, and nothing in either the 2013 proposed regulations or the final regulations is intended to prevent this practice.” It cautioned providers, however, that if they elect to update a previously conducted CHNA, they must take steps to account for comments from those individuals that represent the broad interests of the community on the updated version. In addition, hospitals must ensure that their prior CHNAs comply with the final regulations.
The proposed regulations required hospitals to describe the data and methods used to collect the data in the CHNA report. The final regulations permit facilities that rely on external data sources, such as a publicly available dataset from the local public health department, to simply cite to the source of the data and eliminate the requirement to describe the dataset and methods used to collect it.
The final regulations also permit hospital facilities to adopt the CHNA implementation strategy in the tax year following the performance of the CHNA. The implementation strategy must be adopted by the 15th day of the fifth month after the close of the tax year in which the CHNA was performed and approved by the board, which also coincides with the Form 990 reporting obligation.