Perhaps providing some much needed breathing room for tax-exempt hospitals, the Treasury Department (the “Department”) and the Internal Revenue Service (the “IRS”) issued proposed regulations (“Proposed Regulations”) on April 5, 2013 that appear to offer tax-exempt hospitals proposed new flexibility on meeting the community health needs assessment (the “CHNA”) requirements of Section 501(r) of the Internal Revenue Code (the “Code”). As background, the Affordable Care Act targeted tax-exempt hospitals in a number of ways including the adoption of the CHNA requirement. The CHNA requirement requires that hospital organizations conduct, every three years and on a facility-by-facility basis, an assessment of community health needs and formulate an Implementation Strategy for addressing these needs utilizing both hospital and community resources. The Proposed Regulations specifically provide new details on how the IRS may enforce penalties against hospitals for failing to comply with Section 501(r), including excise taxes and revocation of tax-exempt status. The originally proposed compliance deadline was scheduled for the close of the first full fiscal year following March 23, 2012.
The Department and IRS first issued guidance on Section 501(r) with the publication of Notice 2011-52 (“the Notice”) on July 7, 2011. The Notice clarified that a tax-exempt hospital will be deemed to meet the CHNA requirements with respect to individual taxable years only if the organization has (a) conducted a CHNA that meets the requirements of Section 501(r)(3)(B) in the taxable year in question or in the previous two taxable years and (b) has adopted an “implementation strategy” to meet the community health needs identified through the CHNA. Importantly, the Notice confirmed that Section 501(r) compliance would be determined on a hospital by hospital basis regardless of the corporate structure of the tax-exempt entity. See Code Section 501(r)(2)(B). Finally, the Notice specified that an organization that fails to properly complete a CHNA and to adopt an implementation strategy may have its tax-exempt status revoked (which may lead to, among other negative ramifications, impairment of bond financing), and is subject to an annual excise tax per non-compliant hospital of $50,000. The Notice left open the issue of what additional penalties the Department and IRS could assess for failing to comply with Section 501(r).
In the Proposed Regulations that are ultimately intended to supersede the Notice, the Department and IRS provide a measure of leniency to tax-exempt hospitals failing to comply with Section 501(r) due to inadvertent or technical errors, provided the errors are disclosed and corrected. Specifically, in response to concerns voiced by the tax-exempt hospital community, the Proposed Regulations provide that a hospital organization will not automatically jeopardize its tax-exemption or risk the exempt status of any bonds used to finance its hospitals because of minor or inadvertent errors in completing the CHNA. Instead, the Proposed Regulations specifically provide that the requirements of Section 501(r) (i.e., CHNA, Implementation Strategy) will not be deemed to have been violated “if the omission or error was minor, inadvertent, and due to reasonable cause, and the hospital facility corrects such omission or error as promptly after discovery as is reasonable given the nature of the omission or error.” In addition, the Proposed Regulations provide that a hospital’s failure to meet a Section 501(r) requirement that is neither “willful nor egregious” also will be excused if the hospital promptly discloses and corrects the violation. According to the Proposed Regulations, the Department and IRS intend to issue further guidance regarding the correction and disclosure of errors in the CHNA process.
The Proposed Regulations also address the issue of how penalties for noncompliance with Section 501(r) may be applied to hospital organizations that operate multiple facilities. Specifically, the Proposed Regulations delineate that, where a hospital organization operates multiple facilities, the failure of one facility to satisfy its Section 501(r) requirements will not result in the entire hospital organization losing its tax-exempt status. In other words, the revocation of tax-exempt status is determined on a facility-by-facility basis. Hospital organizations would continue to face an excise tax penalty of $50,000, however, for each facility’s failure to meet the requirements, in addition to the potential revocation of a facility’s tax-exempt status. The Proposed Regulations instruct that “in applying the [excise] tax, the income derived from a noncompliant hospital facility during a taxable year will be the gross income derived from that hospital facility during the taxable year, less the deductions allowed by… the Code that are directly connected to the operation of that hospital facility during the taxable year.” Importantly, the Proposed Regulations state that the imposition of a facility-level excise tax will not cause the interest on such bonds to be taxable and will not affect the tax-exempt status of bonds issued to finance the facility.
If adopted, the Proposed Regulations will provide significant relief to tax-exempt organizations fearful of losing 501(c)(3) status, and the potential for extraordinary consequences, such as loss of tax-exempt bonds, as a result of inadvertent and/or technical failures. Comments regarding CHNA requirements will be accepted by the Department and the IRS until July 5, 2013. Comments should be forwarded to Internal Revenue Service, CC:PA:LPD:PR (REG-106499-12), Courier’s Desk, P.O. Box 7604, Ben Franklin Station, Washington, DC 20044 or by e-mail through www.regulations.gov.
Dan Silverboard is a health care attorney with Balch & Bingham LLP and can be reached at (404) 962-3586 or dsilverboard@balch.com