New Requirements for Hospitals Seeking to Maintain Federal Tax Exemption

Posted on July 24, 2012

On June 28, 2012, the Supreme Court announced its long-awaited decision to uphold the constitutionality of the Patient Protection and Affordable Care Act (“Affordable Care Act”). Predictions of how health care reform will affect health care systems, hospitals, and providers are daunting. Commentators warn of decreased reimbursements, overcrowded emergency rooms, and increased regulatory pressure. Yet, many have failed to consider one of the Affordable Care Act’s most powerful provisions – the new requirements for hospitals seeking to obtain or maintain exemption from federal income tax.

As you are aware, the Internal Revenue Service (IRS) sets forth regulations for entities seeking exemption from federal income tax under Internal Revenue Code (IRC) Section 501(c)(3). Section 9007 of the Affordable Care Act, entitled “Additional Requirements for Charitable Hospitals,” adds Sections 501(r) and 4959 to the existing IRS regulations. The IRS recently issued proposed regulations regarding IRC Section 501(r) in IRS Notice 2011-52 for public review and comment.

In general, the new Section 501(r) provides that a hospital must meet the following four requirements in order to maintain its exemption from federal income tax: (1) the hospital must conduct a periodic community health needs assessment (“CHNA”); (2) the hospital must adopt and provide written financial assistance and emergency care policies; (3) the hospital must establish limitations on charges for emergency or medically necessary care; and (4) the hospital must set policies and procedures related to billing and collections actions.

The most burdensome of the new 501(r) standards is the requirement that hospitals complete aCHNA. A valid CHNA is not simply a list of the hospital’s general community initiatives. On the contrary, the Affordable Care Act and corresponding IRS preliminary regulations set forth stringent standards that require hospitals to conduct a CHNA according to specific procedures and documentation methods. The new Section 501(r) also requires that CHNAs include input from those “with special knowledge of or expertise in public health” as well as list such persons in the submitted assessment documents. Further, if a hospital organization operates more than one “hospital facility,” the organization shall meet all the requirements of Section 501(r), including the CHNA, separately with respect to each hospital facility.

The Affordable Care Act states that the deadline for completing the first CHNA is the end of the tax year that starts after March 23, 2012. For example, if a hospital’s tax year starts July 1, 2012, the hospital would have until June 30, 2013 to complete its initial CHNA. After a hospital’s initial assessment, a CHNA must be completed every three years. Please note that the non-CHNA related 501(r) requirements are effective for tax years beginning after March 23, 2010 and thus are currently available to IRS agents in reviewing a hospital’s tax-exempt status.

The penalties for failing to comply with the new regulations are severe. New IRC Section 4959 states that if a hospital fails to conduct a CHNA, a $50,000 excise tax may be assessed for that year and in each following year of non-compliance for each hospital facility. Additionally, failure to comply with 501(r) in its entirety may result in loss of tax-exempt status.

Section 9007 of the Affordable Care Act and the IRS proposed regulations clearly demonstrate the government’s intent to force hospitals to prove deservedness of federal income tax exemption. Reports estimate that the new accountability measures set forth by IRC Section 501(r) may take as long as six months to a year to complete. In light of both this estimated time frame and potential for severe penalties, hospital administrators should act fast to familiarize themselves with the new requirements. Hospital administrators should also be aware that waiting too long to consult the appropriate public health professionals and start collecting the required data may result in an inability to comply with the stringent procedural and documentation requirements set forth by the new regulations.

The attorneys at Knox, McLaughlin, Gornall & Sennett are committed to assisting clients navigate the complex regulations promulgated under the Affordable Care Act. Attorney Joy Sadaly, who holds a Master’s of Public Health from Tulane University and formerly interned with the Erie County Department of Health, has combined her knowledge of public health and tax law to develop strategies to help hospital clients comply with the new IRC Section 501(r) and CHNA requirements, as well as comply with the IRS Form 990 and billing and collection standards. If you would like more information about developing financial assistance, emergency care, or billing and collection policies, or conducting a valid CHNA, please contact us at (814) 459-2800.

Joy E. Sadaly is an Associate at Knox McLaughlin Gornall & Sennett, P.C.’s Erie office.

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