The IRS released guidance at the end of 2013 that is helpful for tax-exempt hospitals in complying with the detailed additional federal tax requirements set forth in section 501(r) of the Internal Revenue Code. The guidance (1) sets forth specific proposed procedures for correcting and disclosing instances of failure to comply with the requirements and (2) clarifies that organizations can use alternative provisions in proposed regulations as safe harbors until final guidance is published.
Section 501(r) was enacted along with other related provisions of the Internal Revenue Code in the Patient Protection and Affordable Care Act. It sets forth several specific requirements for hospital organizations that are section 501(c)(3) organizations relating to conducting and implementing community health needs assessments and adopting and implementing written policies on financial assistance, limitations on charges, and billings and collections. Failure to comply can result in subjecting hospital revenues to income tax and, in certain cases, loss of tax-exempt status of the organization.
IRS proposed regulations published in 2012 mostly concern requirements relating to financial assistance, limitations on charges, and billings and collections. IRS proposed regulations published in 2013 mostly concern requirements relating to community health needs assessments and consequences of failure to comply. The proposed regulations set forth extremely detailed and specific requirements. Although the specific requirements of section 501(r) have been effective for some time, few organizations currently comply with all of the detailed interpretations of the requirements set forth in the proposed regulations.
Although final regulations will likely respond to the many public comments submitted, and be more flexible in some respects than the proposed regulations, it is also likely that the final regulations will continue to set forth very detailed and specific requirements. In light of the specific and detailed nature of the requirements in both the Code and interpretive regulations, there may be situations where organizations fail to comply with all of the technical requirements. The 2013 proposed regulations accordingly provide that violations that are not “willful or egregious” may comply by correcting and disclosing the failure.
IRS Notice 2014-3
IRS Notice 2014-3 sets forth proposed procedures for making such correction and disclosure. The requirements for correction particularly emphasize the adoption of practices and procedures to prevent future noncompliance of the same type, as well as requirements relating to prompt action and to reversing the harm suffered by affected persons.
The requirements relating to disclosure are notable in particular because they generally permit disclosure of the failure to be made in the next Form 990, Schedule H filed by the organization. “Off-cycle” disclosure between filing dates is not generally required. Although Notice 2014-3 is generally helpful, it leaves many important questions unanswered. In particular, it provides little further guidance on how to determine whether a failure to comply is “willful or egregious” or what an organization should do in the case of such a failure.
The 2012 and 2013 proposed regulations contain somewhat different definitions of “hospital facility” and “hospital organization” and “operating a hospital facility.” Notice 2014-2 permits an organization to use definitions in either of the proposed regulations as a safe harbor, including for purposes of reporting in Form 990, Schedule H.
Publication of Final Guidance Is a Priority in 2014
The IRS has announced that publication of final guidance is a priority project for publication this year. That final guidance will likely consist of one large package including final regulations and a final revenue procedure replacing the proposed guidance published in 2012 and 2013, including the December 2013 notices. At that time, it is likely that most tax-exempt hospital organizations will need to act to revise their policies and procedures to reflect the final guidance. It is also likely that the reporting requirements in Schedule H of Form 990 will continue to be revised to reflect these developments.