Governmental Hospitals and Section 501(r) Compliance
Over the past few months, we have received a number of calls from representatives of governmental hospitals inquiring about the application of section 501(r) of the Internal Revenue Code to their respective organizations. Some governmental hospitals have assumed that, because they are not obligated to file a Form 990, 501(r) does not apply to them. If a governmental hospital also has 501(c)(3) status, this assumption is inaccurate.
Section 501(r) was added to the Code by the Affordable Care Act and includes five new standards hospitals must satisfy to maintain their tax-exempt status under section 501(c)(3) of the Code. Most notable are the provisions regarding the performance of community health needs assessments, the implementation of financial assistance and collections policies to include specific provisions required by the statute, and the limitation on charges to patients who qualify for assistance under a hospital’s financial assistance policy.
When the Act passed, there was some uncertainty as to the application of the Act to governmental hospitals that also maintain separate 501(c)(3) status. These governmental hospitals are known as “dual status” hospitals due to the fact that governmental entities are also exempt from federal income tax under section 115 of the Code. Even though they are exempt from federal income tax, dual status governmental hospitals traditionally elected to obtain separate 501(c)(3) status in order to offer certain employee benefit plans that were historically unavailable to non-501(c)(3) entities.
Notice 2011-52, published by the IRS on July 7, 2011, clarified and confirmed the IRS’s position on this point. According to the Notice, the requirements of section 501(r) apply to dual status governmental hospitals. Thus, dual status governmental hospitals are required to comply and should be complying with section 501(r). This includes the timely performance of a community health needs assessment and the establishment of compliant charity care and collections policies.1
It remains unclear how the IRS intends to obtain information as to the compliance of dual status governmental hospitals with 501(r). The IRS has indicated that it intends to monitor compliance with 501(r) through desk reviews of filed 990s and potential audit referrals based upon responses to various questions and the contents of the Form. However, traditionally, governmental entities are not required to file 990s with the IRS. Notice 2011-52 further confirmed that, while 501(c)(3) governmental hospitals are subject to section 501(r), section 501(r) did not otherwise change the Form 990 reporting exemption. Thus, those governmental hospitals that are currently exempt from filing 990s continue to enjoy that exemption.
Nonetheless, if a dual status hospital’s 501(c)(3) exemption is revoked due to a failure to comply with section 501(r), it could have serious consequences on the hospital’s employee benefit plans. Governmental hospitals should first determine whether they maintain separate 501(c)(3) status. If so, the hospital should ensure that it is compliant with the terms and conditions of section 501(r). For hospitals that are unsure whether they have dual status, if you maintain a 403(b) employee benefit plan, you almost certainly have 501(c)(3) status. Doubts may be resolved by calling the IRS exempt organization helpline with your employer identification number. IRS staff should be able to confirm whether your organization has separate 501(c)(3) status.
It is hoped that the IRS may exempt dual status governmental hospitals from the requirements of 501(r), but the IRS has noted that the statute does not provide them with the authority to do so. Unless and until the IRS formulates an acceptable workaround that alleviates some or all of the 501(r) requirements from dual status hospitals, those hospitals should immediately take the steps necessary to comply with the terms and conditions imposed by 501(r).
1 Hospitals should be complying with the financial assistance, collections and limitation on charges provisions of 501(r) at this time. A community health needs assessment must be performed and adopted at least once every three years beginning on the date of the Act’s enactment. The community health needs assessment should be performed in accordance with the provisions in Notice 2011-52.