IRS Issues Notices 2014-2 And 2014-3 To Assist Not For Profit Hospitals Comply With §501(r)

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On 12/30/2013, the IRS issued two Notices designed to help §501(c)(3) hospitals comply with Internal Revenue Code (IRC) § 501(r). Section 501(r) is part of the Affordable Care Act and requires each tax exempt hospital to (1) conduct a community health care needs assessment (CHNA), (2) adopt a financial assistance policy, (3) limit charges to persons qualifying for financial assistance and (4) prohibit extraordinary collect actions before determining if a patient qualifies for financial assistance. If a not-for-profit hospital fails to satisfy the four §501(r) requirements, the hospital may lose its §501(c)(3) tax exempt status.

In June 2012, and June 2013, the IRS published proposed rules implementing the § 501(r) requirements. Section 501(r) is the law and must be satisfied even though the rules are not final. There is no clue as to when the rules will be finalized.

Notice 2014-2 provides that a hospital may rely on the June 2012 and June 2013 proposed rules to comply with §501(r) until final rules are published, however, hospitals are not required to follow those rules. Again, no indication when final rules will be published.

Notice 2014-3 deals with correcting failures to comply with § 501(r). The June 2013 proposed regulations specify that a hospital that corrects and discloses § 501(r) failures will not lose its tax exempt status, i.e., the failure will be excused. Notice 2014-3 contains proposed procedures describing how to disclose and correct a § 501(r) failure. Willful or grossly negligent failures, however, will not be excused. Even if the failure is excused the hospital may still be subject to an excise tax for failure to properly conduct a community health need assessment as required by § 501(r)(3).