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IRS Releases Revenue Procedure for Failure to Comply with 501(r) Requirements of ACA

on Tuesday, 14 April 2015 in Health Law Advisory: Zachary J. Buxton, Editor

On March 10, 2015 the Internal Revenue Service published Revenue Procedure 2015-21 – which provided remedial procedures for tax-exempt hospitals that have minor errors in the implementation of or fail to implement requirements established by § 501(r).

Revenue Procedure requirements piggyback on the Treasury Department and the IRS’s 501(r) final regulations, released in late December 2014 (79 Fed. Reg. 78954), and finalizes proposed revenue procedures originally published in Notice 2014-3 in January 2014.

It clarifies the obligations for those facilities and organizations that encounter minor errors or omissions with respect to 501(r) implementation. It also finalizes disclosure requirements for facilities that are considered to have failed implementing any of the regulatory requirements of the new regulations.

Tax-exempt hospitals that fail to meet CHNA, FAP, or billings and collections regulatory requirements risk revocation of their federal 501(c)(3) status. Facilities can avoid revocation if the shortcoming is considered a “minor omission or error[]” and is promptly corrected, or if it is a more significant failure and the hospital corrects and discloses the error to the IRS. The failure must not be willful nor egregious.

The Revenue Procedure clarifies that only failures to implement 501(r) should be disclosed and reported; minor omissions or errors that are discovered and promptly corrected are not considered failures and are therefore not required to be reported.
Failures that are neither willful nor egregious should be disclosed on the hospital’s 990. In order to be “disclosed” the 990 must include: (a) a description of the failure, (b) a description of the steps taken to correct the failure, and (c) how policies, practices, and procedures were changed in response to the failure. These elements must appear on the Form 990 for the tax year in which the failure (or failures) was discovered.

Facilities that do not file a Form 990 will have properly disclosed information pertaining to a § 501(r) failure if they publish this information on their website, their parent organization’s website, or on another entity’s website as long a conspicuously displayed link is listed on the facility’s individual website.

The Revenue Procedure also provided two examples of “minor errors or omissions” that the IRS will not consider rising to the point of requiring disclosure on Form 990. The first illustrates a facility whose CHNA report is temporarily unavailable on its website due to a technological malfunction; the second describes an FAP notification in a facility’s emergency room that was either removed or obstructed due to actions outside of the provider’s control. The guidance notes that these errors do not need to be disclosed and can be corrected taking into account the individuals affected, a reasonable and appropriate correction.

In addition, Rev. Proc. 2015-21 makes a few additional changes:

  1. Hospital organizations or facilities failing to meet the CHNA requirements (§ 501(r)(3)) will be subject to a § 4959 excise tax (the excise tax was originally permissive and not mandatory under Notice 2014-3);
  2. Hospital facilities whose failure affects certain individuals must take steps to “restore” those impacted. This restoration “correction principle” applies to errors under the FAP, billing and collections policies; Revenue Procedure 2015-21 is effective as of March 10, 2015.


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Section 501(r) establishes the financial assistance policy (FAP), limitation on charges, billing and collections procedures, and the Community Health Needs Assessment (CHNA) for 501(c)(3) charitable hospitals.

Zachary J. Buxton

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