Rules Tax-Exempt Health Care Organizations Need to Know

27 May 2014 Health Care Law Today Blog

It’s that time again – another election year. And if your organization is exempt under Section 501(c)(3) of the Code (“Exempt Organization” or “EO”), the EO cannot participate in, or intervene in, any political campaign on behalf of or in opposition to a candidate for public office. The EO cannot distribute partisan materials, provide or solicit financial or other forms of support for a candidate, or form a political action committee. There are some things the EO can do – it can encourage its employees to vote – so long as it expresses no opinion about who or what issues to vote for or against; it can invite all of the candidates to speak to employees or the public at its facilities; it can provide unbiased educational materials on a particular issue – although the EO needs to make sure the materials are truly unbiased.

Of course, the First Amendment always protects an individual’s right to political speech and board members and executives may actively support a candidate. However, individuals who are in a position to speak for an EO, such as Board members or executives, must be careful to make sure that their political speech is not attributed to the EO. No one may use the EO’s resources for his/her political activities. For example, the individual may not use the EO’s secretarial support services, copy or postage machines, or computer systems. Political messages should not be sent over the EO’s email system, nor should the executive use the EO’s directory, unless it is a public document. When making political statements, the individual should make it clear that those statements are his or hers alone and are not being made in his or her role with the EO. Political messages should not be posted on the EO’s paper or electronic bulletin boards.

EOs also cannot have affiliated Political Action Committees (“PACs”). A common approach is for some combination of the EO’s patients (for health care Eos), friends and relatives of patients, officers, directors, management, and employees may form a PAC for the purpose of receiving contributions from these individuals and making contributions to candidates. The EO must maintain a strict demarcation between itself, its resources, and its activities, and any “Friends of” PAC. IRS guidance in this area is somewhat limited, but, by extrapolating from various rulings and other guidance, a “Friends of” PAC should operate within the following limitations:

  • The EO should not endorse any activities of a PAC. If executives of the EO are going to be involved, the PAC should not use any of the EO’s trademarks, including the EO’s name and insignia, because this could be seen as an implied endorsement and as the use of valuable intellectual property.
  • Generally, this sort of PAC will have a board of directors for purposes of making contribution decisions. The EO’s executives and employees may serve on the board, but only without pay and outside of their official capacities. For purposes of establishing separation, it is advisable to not have the board of directors of the PAC mirror the EO’s hierarchy (i.e., all department heads of a certain level should not serve on the board). It is better still if the EO’s executives or service providers did not control the board of the PAC.
  • EO executives, operating in their official capacity, cannot communicate to the PAC about which candidates to support. The PAC’s board of directors, in connection with any experts it hires, will determine which candidates to support.
  • EO employees who are not connected to the PAC should not refer patients, relatives of patients, or other potential contributors to the PAC. EO executives, operating in their official capacity as executives or officers of the EO, should not refer potential contributors to the PAC.
  • EO should not provide lists of potential donors to the PAC for fundraising or other purposes.
  • EO employees, operating on personal time, may fundraise for the PAC.
    • Any solicitation for contributions should include a disclaimer that the PAC is not affiliated with the EO. Any communication containing names and titles of EO executives and employees should clearly state that titles are for identification purposes only.
    • Communications for PAC fundraising should come from the EO employees’ personal addresses (whether residential or e-mail) or the PAC’s address. Communications should be addressed to contributors’ personal addresses. Contributions should be sent directly to the PAC’s address (they should not be collected on the EO’s facilities).
    • PAC employees cannot enlist administrative help from EO employees to assist in fundraising or assisting in PAC events.
    • PAC events should not be held using the EO’s facilities or the EO’s catering services.
    • Solicitations for PAC contributions should not be made using the EO’s e-mail system. Internal EO resources, such as internal e-mail lists should not be used. Solicitations from large numbers of individuals over the e-mail system from a high-ranking executive may constitute an endorsement of the PAC.
  • The EO cannot make an employee’s promotion or bonus related in any way to an employee’s contribution or involvement in the PAC.
  • The EO cannot pay the PAC’s administrative expenses. The EO cannot allow the use of employee time or resources for PAC activities. Instead, the PAC should pay its own third party administrator.

In addition, the registration and reporting requirements for a PAC are dependent on federal or state election law. Federal election law and many state laws prohibit corporate contributions to PACs that make contributions to candidates. One thing to keep in mind for EOs that may have made mistakes in the past and have not been caught by the IRS is they should not expect to “fly under the radar” if they violate campaign finance laws – the polarized political environment means an organization is likely to be reported to the election authorities and become subject to an investigation.

For a more comprehensive discussion of these rules the IRS has issued a training outline for its agents.

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