IRS Actively Auditing Hospitals For 501(r) Compliance
The Patient Protection and Affordable Care Act (ACA) added Section 501(r) to the Internal Revenue Code (the “Code”). Section 501(r) of the Code put in place a number of new requirements for tax-exempt hospitals, including provisions related to financial assistance policies (FAP), limitations on charges, and billing and collection matters. Every tax-exempt § 501(c)(3) hospital, including “dual status” governmental hospitals (those governmental hospitals that separately obtained § 501(c)(3) status), must have adopted and implemented financial assistance and billing and collection policies that comply with the final 501(r) regulations. If a tax-exempt hospital has done nothing to its financial assistance and billing and collection policies since the publication of the final 501(r) regulations (December 29, 2014), it is likely out of compliance and its 501(c)(3) status could be at risk.
Now that the final regulations have been adopted, the IRS has turned its attention to auditing hospitals for compliance with 501(r) requirements. The ACA requires the IRS to perform a desk review of the Form 990, Schedule H of each hospital at least once every three years. Given the ongoing audits, the IRS is clearly performing these reviews and is actively referring hospitals out for audit. It is also clear that the IRS is checking each hospital’s website during these reviews for the required 501(r) documentation and if any inconsistencies are found are referring the hospital out for audit.
As a result, a number of hospitals in Nebraska and Iowa have been selected for audit. Further, many “dual status” governmental hospitals have been selected for audit even though many do not file a Form 990. We are unaware of the IRS threatening the loss of exemption for non-compliance discovered in these audits. However, hospitals should take note that violations found to be willful or egregious can be grounds for the loss of exemption.
It is also important to note that many of these audits cover tax years that were prior to the date on which hospitals were required to be compliant with the final regulations. Nonetheless, the IRS has required hospitals to correct errors and disclose those errors on the Form 990. Once the IRS begins auditing tax years covering periods where compliance with the final regulations was mandatory, the audits may be more intense and more hospitals could be at risk for the loss of exemption.
Based on our experience with these audits we recommend hospitals do the following to prepare for a potential 501(r) audit:
- Ensure the hospital’s financial assistance and billing and collection policies have been updated to comply with the final regulations and that they have been formally adopted by the board. If the hospital has not updated its financial assistance and billing and collection policies since December 29, 2014, it is likely not compliant with the rules.
- Ensure that a copy of the following are included on the hospital’s website:
- A compliant plain language summary of the hospital’s FAP;
- A current copy of the FAP, including the date on which it was adopted or last updated;
- If not included directly in the FAP, a document setting forth the amounts generally billed (“AGB”) and how the AGB was calculated for those hospitals utilizing the look-back method;
- If not included directly in the FAP, a document setting forth the providers (by name or by group name) that both do and do not participate in the hospital’s FAP.
- Ensure that the public is appropriately notified of the hospital’s FAP both within the hospital (signage, posting, etc.) and in the community (brochures, advertisements, etc.) in accordance with the regulatory requirements.
- Ensure the hospital has analyzed the translation requirements in the final regulations to determine whether its 501(r) policies must be translated into any foreign languages. The hospital should document that analysis. Further, if the FAP is required to be translated, the hospital should ensure translated versions of the documents described above are included on its website.
If a hospital discovers that it is not compliant when reviewing its policies or activities related to 501(r), it is important that the hospital promptly correct the error. However, the hospital should not stop there. The final regulations require that a determination be made as to whether the error was minor and inadvertent or due to reasonable cause or whether the error rises to a level that requires disclosure on the Form 990 in order to “cure” the non-compliance.