An Overview of the IRS’s Proposed Rule on Community Health Needs Assessments

by Cozen O'Connor

On April 5, 2013, the Internal Revenue Service (IRS) officially issued proposed regulations addressing the requirement under Section 501(r)(3) of the Internal Revenue Code (Code) that tax-exempt hospitals conduct community health needs assessments (CHNA).1 The proposed regulations also provide details on related reporting obligations and the consequences of noncompliance with CHNA and other requirements of Section 501(r).

Although compliance still may be a challenge and penalties for noncompliance remain significant, tax-exempt hospitals can breathe a sigh of relief as the proposed regulations specify that a hospital will not automatically lose its exempt status or the exempt status of any bonds for minor and inadvertent errors made in complying with Section 501(r) requirements.


In 2010, the Patient Protection and Affordable Care Act (ACA) added Section 501(r), which imposed for the first time certain requirements that hospitals had to meet to qualify for exemption under Section 501(c)(3). Section 501(r) generally requires a tax-exempt hospital to:

  • Conduct a CHNA at least once every three years for tax years beginning after March 23, 2012;
  • Establish written financial assistance and emergency medical care policies;
  • Limit charges for emergency and other medically necessary care provided to individuals who qualify for financial assistance; and
  • Not employ extraordinary collection actions until the hospital has made reasonable efforts to determine whether an individual qualifies for financial assistance.

The ACA also added Sections 6033(b)(15) and 4959 to the Code. Section 6033(b)(15) requires a tax-exempt hospital to report on its IRS Form 990 a description of how it is addressing the needs identified in the CHNA, a description of any such needs that are not being addressed, and the reasons such needs are not being addressed. Section 4959 imposes a $50,000 excise tax for any tax year in which a tax-exempt hospital fails to meet the CHNA requirement of Section 501(r).

Failure to Satisfy Section 501(r) Requirements

The proposed regulations state that minor compliance issues will not automatically jeopardize a hospital’s tax-exempt status or cause the exempt status of any bonds to become taxable. If a hospital fails to report required information in a policy or report or makes errors with respect to implementation or operational requirements, it will not be considered a failure to comply with the requirements of Section 501(r) if (1) the omission or error is minor, inadvertent and due to reasonable cause and (2) such omission or error is corrected within a reasonable amount of time after discovery. In addition, a hospital’s failure to meet a requirement under the Section 501(r) regulations that is neither willful nor egregious will be excused if the hospital promptly corrects and discloses the failure. Further, if a hospital fails to meet one or more requirements of Section 501(r) but continues to be exempt under 501(c)(3), the noncompliance itself will not cause the interest of bonds issued to the hospital to be taxable.

Nonetheless, the IRS has the authority to revoke a hospital’s tax-exempt status if the hospital fails to meet one or more requirements of Section 501(r). When determining whether to revoke a hospital’s 501(c)(3) status, the IRS will consider all relevant facts and circumstances, including:

  • The size, scope, nature and significance of the failure;
  • Reasons for such failure;
  • Whether the failure is a repeat offense;
  • Whether the failure was corrected promptly;
  • Whether the hospital adjusted its procedures to avoid the failure in the future; and
  • Whether the hospital took corrective action before being caught by the IRS.

In addition, if a hospital within a multi-hospital system fails to comply with Section 501(r) and the failure resulted in the revocation of the tax-exempt status of the hospital, the proposed regulations would impose a tax on the income of the noncompliant hospital.

Community Health Needs Assessments

Although generally consistent with IRS’s Notice 2011-52 issued in July 2011,2 the proposed regulations do modify and clarify the IRS’s earlier guidance on implementing the CHNA requirements.

Significant Health Needs. The proposed regulations require a hospital to identify significant health needs of the community, prioritize those needs, and identify measures and resources to address those needs. A hospital may determine significance based on the facts and circumstances and may prioritize by using any criteria it deems appropriate.

Government and Community Input. Under the proposed regulations, a hospital must take into account input from state, regional or local public health departments, members of medically underserved populations, and other members of the community (through a public review and comment process) in conducting its CHNA.

CHNA Collaboration. The proposed regulations permit hospitals to collaborate with each other in conducting CHNAs although each hospital generally is required to document its CHNA in a separate CHNA report. If, however, they define their communities to be the same and meet certain other requirements, collaborating hospitals may issue a joint CHNA report.

Availability of CHNAs. Hospitals must make CHNA reports widely available to the public, and the proposed regulations require CHNA reports to be posted on the Internet until at least two subsequent CHNA reports have been posted (approximately six years). In addition, a hospital must have printed copies of its CHNA report available on request.

Implementation Strategy. The proposed regulations require a hospital to adopt an implementation strategy by the end of the same tax year in which the hospital finishes conducting the CHNA. The implementation strategy must correspond to the health needs identified through the CHNA and must provide a description of the following:

  • Each significant health need and how the hospital facility plans to address that need, the anticipated impact of the actions, and the plan to evaluate such impact;
  • Significant health needs not being addressed and explain why those needs are not being addressed; and
  • Description of any planned collaboration with other hospital facilities.

Transitions. The proposed regulations extend the period within which certain hospitals that have conducted or are now conducting their first CHNAs must adopt an implementation strategy. In addition, the proposed regulations provide that a new hospital has until the end of the second tax year after becoming subject to Section 501(r) to complete its CHNA.

Important Dates. Hospitals that complete their CHNA reports and implementation strategies by October 5, 2013 will be considered compliant if they meet the requirements outlined in Notice 2011-52 or the proposed regulations. CHNA reports and implementation strategies completed after October 5, 2013 will be considered compliant only if they meet the requirements set forth in the proposed regulations. Hospitals can rely on the proposed regulations until six month after the IRS publishes its final regulations.


In general, the proposed regulations were received favorably by the community as they provided hospitals with some flexibility and discretion in conducting CHNAs. However, each time the IRS has issued guidance on Section 501(r), it has received considerable public comment in response. For this proposed rule, comments and requests for a public hearing must be received by July 5, 2013.

The final regulations for all of Section 501(r) are expected to be issued later this year. Although the proposed regulations clarify how hospital facilities can comply with Section 501(r), publication of the final regulations cannot come soon enough.

This article originally appeared in Health Lawyers Weekly (May 3, 2013) © 2013 American Health Lawyers Association.

Please feel free to contact the author or any member of the Cozen O’Connor Health Law Practice Group if you have any questions or need assistance with the IRS's new proposed regulations for tax-exempt hospitals.

[1] 78 Fed. Reg. 20 523 (April 5, 2013).

[2] 2011-30 I.R.B. 60 (July 7, 2011).


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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