Preventing Common 501(r) Mistakes
Section 501(r) of the Internal Revenue Code (“Code”) and the final regulations published by the IRS put into place very specific requirements for tax-exempt hospitals relative to financial assistance policies (FAPs) and community health needs assessments (CHNAs). The Code requires the IRS to perform desk reviews of the Form 990, Schedule H of each hospital at least once every three years. The IRS is clearly performing these reviews and is actively referring hospitals out for issue audits on matters related to section 501(r) compliance.
As these audits have progressed, we’ve spotted some common errors, omissions and issues amongst hospitals. These are “low hanging fruit” and if properly addressed should help hospitals avoid audits and, if audited, should help quickly resolve common issues raised by the IRS.
Financial Assistance Policy
- The IRS is clearly checking each hospital’s website for required 501(r) documentation. Make sure all required FAP documents are uploaded to your website and are easy to find and access from your homepage. This means hospitals should have the following posted to its website:
- The FAP;
- Plain language summary of the FAP;
- FAP application;
- List of providers who are subject to your FAP;
- List of providers who are not subject to your FAP;
- A statement setting forth the calculation of amounts generally billed (AGB) (if not set forth directly in the FAP);
- Billing and collection policy (if your 501(r)-compliant billing and collection policy is not part of your FAP); and
- Translated versions of the above documents if your hospital is subject to the translation requirements.
- Make sure your FAP includes a statement of what your discounts are taken from. For most hospitals this is some statement such as “discounts will be taken from gross charges.” This seems to be understood, but the IRS is looking for this or similar language in your FAP.
- Many hospitals find that including a definition of medical necessity in the FAP is helpful. The regulations permit, but do not require, hospitals to use a definition tied to Medicaid, generally accepted standards of medicine in the community or an examining physician’s determination.
- Make sure you regularly perform (and retain for evidentiary purposes) documentation showing whether and into what languages you must translate your FAP documents. As a reminder, FAP-related documents must be translated into any language group that constitutes the lesser of 1,000 individuals or five percent of the community served by the hospital or the population likely to be affected or encountered by the hospital. We recommend performing and refreshing this analysis at least once per year.
- Make sure you publicize your FAP outside of your facility. Most facilities are attentive to the posting requirements within the four walls of the facility and the notification requirements on bills, but many lapse in the additional publication requirements. The regulations require hospitals to notify the community of the FAP “in a manner reasonably calculated to reach those members who are most likely to require financial assistance from the hospital”. Many hospitals provide this additional notification through hospital newsletters, advertisements and placing FAP information at local charities. The bottom-line is hospitals must do more than just posting notices within the hospital and providing notices on billing statements.
Community Health Needs Assessments
- Upload both your CHNA report and implementation strategy to your website and make sure those documents are easy to find and access from your homepage.
- When you perform a new CHNA, make sure your past 2 CHNA reports and implementation strategies remain on your website on the same page where your current CHNA is posted. Do not take down your old CHNAs.
- Make sure your Board formally adopts both the CHNA report and the CHNA implementation strategy. These should be two separate documents (both of which have specific content requirements) and both documents should be formally approved by your Board.
- Make sure you satisfy the 501(r) deadlines by which the CHNA report and implementation strategy must be adopted by your Board.
- CHNA reports must be formally adopted by the end of the tax year in which it is required to be performed. (Once every three tax years).
- CHNA implementation strategies must be adopted by the 15th day of the 5th month following the applicable tax year.
- Note that most hospitals adopt both documents at the same meeting. Meeting minutes should clearly articulate that both documents have been adopted.
- Make sure the CHNA documents are also posted to your website prior the end of the applicable tax year. Even if your Board adopts the CHNA and implementation strategy in a timely manner, the final regulations do not consider the CHNA to have been “conducted” unless and until the documents are uploaded to your website. Posting a “draft” copy is not sufficient.
- When performing your CHNA, you must take into account and review your prior CHNA and your performance under your prior CHNA and include related discussion and findings in your new CHNA.
Again, addressing and/or preventing these matters will go a long way to avoiding 501(r) audits. As with many types of governmental audits, the IRS is looking for “low hanging fruit,” and we do not want to give them anything ripe for harvest.