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More than 100 Comments Available for Review on New Tax Exemption Requirements for Nonprofit Hospitals

Industries Served
Legal Services
08.11.10

In June, the Internal Revenue Service (IRS) released a notice soliciting comments from the nonprofit hospital industry on certain issues relating to the new section 501(r) requirements for nonprofit hospitals to maintain their tax-exempt status. These requirements were included as part of this year's comprehensive healthcare reform act.

The comment period has now closed and more than 100 comments were submitted to the IRS from a variety of organizations, including national and state hospital associations, health systems, individual hospitals, advocacy groups, public health departments, academic medical centers, legal and accounting firms, and others.  Many of the comments raise significant questions on the application of the 501(r) rules and offer specific insight into ways for the IRS to address these issues.

A sample review of the comments shows several areas of concern that were repeated often and the need for specific guidance. For instance, the application of the 501(r) rules to certain types of nonprofit hospitals, particularly dual status entities such as governmental hospitals, was a common question raised. Other comments focused on the community needs assessment requirements and exactly how a "community" should be defined and how its healthcare needs should be assessed.  In addition, the comments frequently questioned the prohibition on the use of gross charges and whether it should only be applicable, for example, when billing patients who are "known" to qualify for financial assistance. Other concerns raised were the consequences of not meeting the 501(r) requirements and whether there should be a "substantial failure" trigger, a reasonable cure period, or some interim tax status before any adverse result such as loss of section 501(c)(3) status.

Background

Section 501(r) Requirements

Section 501(r) was included in the Internal Revenue Code as part of the Patient Protection and Affordable Care Act (PPACA) enacted earlier this year and imposes four additional requirements on hospitals relying on tax exemption under section 501(c)(3). Each hospital organization and hospital facility must:

  • Have a written financial assistance policy and emergency medical care policy.
  • Conduct a community health needs assessment every three years and adopt an implementation strategy to meet the community health needs identified through the needs assessment.
  • Limit the amounts charged for emergency or other medically necessary care that is provided to individuals eligible for assistance under the hospital's financial assistance policy to not more than the amounts generally billed to individuals who have insurance covering such care.
  • Forego extraordinary collection actions against an individual before the organization has made reasonable efforts to determine whether the individual is eligible for assistance under the hospital's financial assistance policy.

Waller has prepared a detailed checklist of the new requirements.

Notice 2010-39

PPACA requires the Treasury Department to issue regulations and guidance as necessary to implement the section 501(r) requirements.  In Notice 2010-39, the IRS requested comments regarding the application of the section 501(r) requirements to hospitals subject to the new rules. The comment period ended on July 22, 2010.

The IRS indicated it was interested in the need, if any, for additional guidance regarding the section 501(r) requirements. In addition, the following items were highlighted by the IRS in the Notice as of particular interest in receiving comments from the nonprofit hospital industry:

  • The appropriate requirements for a community health needs assessment.
  • What constitutes "reasonable efforts" to determine eligibility for assistance under a financial assistance policy?
  • The meaning of the 501(r) provisions when an organization that operates more than one hospital facility shall not be treated as described in section 501(c)(3) with respect to any such facility for which such requirements are not separately met.
  • The tax consequences of a failure with respect to some, but not all, hospital facilities to meet the requirements and the proper tax treatment in future periods in such a case.

Next Steps

Nonprofit hospitals must comply with most of the new rules for tax years beginning after March 23, 2010. Hospitals have two additional years to comply with the community health needs assessment requirements, which take effect for tax years beginning after March 23, 2012.

The IRS is currently reviewing the comments submitted and will consider what regulatory and other type of guidance may be needed to assist hospitals in meeting the new 501(r) requirements. No specific time frame has been provided as to when any guidance will be issued.

For calendar year hospitals, there is a period of time between now and the end of this year where any IRS guidance will be welcome in order for those hospitals to prepare to meet the 501(r) requirements. For hospitals with a fiscal year that has already started since March 23 of this year, those hospitals and each of their hospital facilities must already be in compliance with most of the requirements. Based on the large number of comments submitted and requests for guidance, some hospitals are in the awkward position of trying to currently meet the 501(r) requirements in good faith even though certain parts of the new rules lack clarity and are open to various interpretations.

For additional information or assistance with the new section 501(r) requirements, please contact Donald B. Stuart or any member of our Healthcare Reform Task Force.

The opinions expressed in this bulletin are intended for general guidance only. They are not intended as recommendations for specific situations. As always, readers should consult a qualified attorney for specific legal guidance.

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