Proposed IRS Regulations Address Community Health Needs Assessment for Tax-Exempt Hospitals

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The IRS has recently proposed regulations affecting tax-exempt hospitals that provide guidance and comfort about the consequences of failing to meet the community health needs assessment (CHNA) requirement.

As described in our alert issued on March 26, 2010, 501(c)(3) hospitals and hospital organizations (each a defined term) must conduct a CHNA at least once every three years, and report on Form 990 how they are addressing such needs. This requirement was added under Section 501(r)(3) of the Internal Revenue Code by the Patient Protection and Affordable Care Act (ACA). In addition to outlining the consequences of noncompliance, the proposed regulations build upon earlier IRS guidance on the process for conducting the CHNA and address comments submitted to the IRS following issuance of prior guidance.

The proposed regulations recognize that minor and inadvertent or technical errors may occur in complying with Section 501(r), even where a hospital has made reasonable efforts to prevent those errors. The omission of required information in a policy or report, or an error related to operational requirements, will not necessarily result in the failure to meet Section 501(r) requirements if the hospital can demonstrate that the error was neither “willful” nor “egregious,” and that the error was promptly corrected upon its discovery. This provides significant relief to tax-exempt organizations fearful of losing 501(c)(3) status, and suffering the consequences, such as loss of tax-exempt bonds, as a result of minor failures.

The proposed regulations also explain that where a hospital organization operates multiple facilities, the failure of one facility to satisfy its Section 501(r) requirements will not result in the entire hospital organization losing its tax-exempt status. In other words, the revocation of tax-exempt status is determined on a facility-by-facility basis. Hospital organizations would face an excise tax penalty of $50,000, however, for each facility’s failure to meet the requirements, in addition to the revocation of a facility’s tax-exempt status.

Other guidance in the proposed regulations makes minor changes to the definitions of “hospital facility” and “hospital organization,” and provides a new definition of “operating” a hospital facility for purposes of Section 501(r). These definitions will affect, among other things, a hospital operated under a joint-venture agreement.

The comment period for the proposed regulations ends July 5, 2013.

As the federal health care reform effort gained steam, Ballard Spahr attorneys established the Health Care Reform Initiative to monitor and analyze legislative developments. With federal health care reform now a reality, our attorneys are assisting health care entities and employers in understanding the relevant changes and planning for the future. We have launched the Health Care Reform Dashboard, an online resource center for news and analysis on developments under the Affordable Care Act.

Organizations that may be affected by these proposed regulations are encouraged to contact Mary J. Mullany at 215.864.8631 or mullany@ballardspahr.com, Timothy R. Mulliner at 702.387.3094 or mullinert@ballardspahr.com, or any member of the Health Care Reform Initiative or the Exempt Organizations Group to address their questions and the implementation of policies to comply with the new regulations.

Topics:  Affordable Care Act, CHNA, Healthcare, Hospitals, IRS, Tax Exemptions

Published In: Health Updates, Nonprofits Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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