Since April 2020, many health care providers have received payments from the CARES Act Provider Relief Fund (PRF) in the form of general or targeted distributions. Many providers have questions about receiving and using these funds, as well as ongoing compliance requirements. The Department of Health and Human Services (HHS) is continuing to update its list of frequently asked questions, with changes as recent as July 30. Highlighted below are some of the more interesting clarifications that were issued in July.
Provider Relief distributions paid to for-profit providers are taxable.
Recently, the IRS issued guidance in the FAQ section of its website stating that payments from the PRF did not qualify as qualified disaster relief payments under section 139 of the Internal Revenue Code, and thus were taxable income to health care providers that are not tax-exempt entities. The IRS also confirmed that, for tax-exempt health care providers, PRF payments could be taxable income if these payments were made to reimburse expenses or lost revenue with respect to an unrelated trade or business of the tax-exempt entity. In the absence of a legislative fix to specifically exclude these relief payments from income, the most prudent course of action would be to treat PRF payments as taxable income.
More detailed reporting requirements are expected on August 17, 2020.
Recipients of PRF payments must file periodic reports as set forth by the Health Resources and Services Administration (HRSA). It is anticipated that those providers that received less than $10,000 in the aggregate, or that rejected or returned the PRF payments sent to them, have no further obligations to report at this time.
In a July 20 notice, the HRSA announced its intention to issue on August 17, 2020 policies and procedures for the reporting requirement for PRF payment recipients. Both “general” distribution and “targeted” distribution recipients will have obligations to report and demonstrate compliance with the terms and conditions agreed to by the recipient, including using the PRF payments for allowable purposes. As additional details are published on August 17, providers may look more closely at their use of the PRF payments and make strategic decisions about how to use any remaining funds. Outside auditors will want to confirm that providers are compliant with the new reporting standards.
Clarifications on allocating PRF payments between parent organizations and subsidiaries.
Parent organizations that wish to allocate PRF payments to subsidiary organizations will be able to do so with general distribution funds, but they will not be able to share targeted distribution funds. Recent guidance from HHS indicates that only the organization that qualified for a targeted distribution payment may control and use the funds.
General distribution payments, however, may be allocated by a parent organization to various subsidiaries at its discretion. Parent organizations that exercise this discretion will want to have proper mechanisms in place to monitor and, potentially, review how their subsidiaries use the funds allocated to them. They may even want to require the leadership of these subsidiaries to sign a mini-attestation certifying that the funds were used only to cover increased COVID-19 expenses or losses, and/or require the submission of reports documenting their use.
For-profit providers that received PRF payments may be subject to single-audit requirements.
For-profit providers that received $750,000 or more in total PRF payments must undertake: (1) a financial audit of the payments conducted in accordance with Government Auditing Standards; or (2) a single audit in conformance with the requirements of 45 C.F.R. 75, subpart F. In determining the total amount of PRF payments received, the provider must include both general and targeted distribution payments, and uninsured testing and treatment reimbursement payments. Because this may be the first time a provider is subject to these auditing requirements, providers that received more than $750,000 in PRF payments should consult their accountants about the content and timing of these audits.
PRF payments cannot be transferred as part of an asset purchase.
As providers begin to revisit mergers and acquisitions that were being negotiated before the pandemic and to look at new transactions, they have asked about the ability to transfer PRF payments as part of an asset purchase. PRF payments cannot be transferred to the purchaser of a provider’s assets. The payments must be used by the provider to fund its eligible expenses and lost revenues. If the provider does not use all of the payments for a COVID-19 purpose, then the provider must return any unused funds to HHS. If, however, the transaction is an equity purchase (e.g., a purchase of the provider entity’s stock or membership interests), then the provider may continue to use the funds, regardless of its new owner. Any representations, warranties, or indemnifications related to PRF payments should be carefully reviewed by the provider’s counsel.