Practical 501(r) Compliance: Why Hospital Organizations Should Comply Now with the Proposed Regulations

This Health Care Tax News article is Part I in a series discussing the proposed regulations under Code Section 501(r).

Since the Affordable Care Act (“ACA”) imposed four significant new requirements on tax-exempt Hospital Organizations, the IRS has offered various forms of guidance for complying with the new law, including two detailed sets of proposed regulations. As the IRS moves toward finalizing these regulations, Hall Render strongly recommends that Hospital Organizations likewise move forward now to comply with the proposed regulations.

As a refresher, the ACA added Section 501(r) to the Internal Revenue Code in 2010. Under this new Code section, every Hospital Organization (meaning any Code Section 501(c)(3) organization that operates one or more Hospital Facilities) must periodically conduct a community health needs assessment (“CHNA”), establish policies for financial assistance and emergency care, limit the amount it charges to individuals eligible for financial assistance and follow specific steps before initiating certain collection actions against individuals eligible for financial assistance. The IRS subsequently released two sets of proposed regulations to address the various elements of the statute. The first set, issued June 26, 2012, offered detail regarding the requirements for the financial assistance policy, the limitation on charges and the billing and collection restrictions. The second set, issued April 5, 2013, clarified the standards for CHNAs and discussed remedial steps and consequences for non-compliance. Hall Render previously published articles discussing Code Section 501(r) generally and offering detail about the 2012 proposed Regulations and the 2013 proposed Regulations.

The best information available suggests that the IRS has made significant progress toward developing a combined package of regulations to finalize both sets of proposed regulations, but neither the IRS nor the Treasury Department has offered any official indication of when these final regulations will be released. Informally, however, IRS and Treasury officials have stated that they hope to publish the final regulations this year. Completing this step is a major focus for the IRS, which has included these regulations on the Priority Guidance Plan for 2012-13 and for 2013-14. External pressure to finalize the regulations is also mounting, and Senator Charles Grassley recently sent a letter to IRS Commissioner John Koskinen requesting an update on the status of the Code Section 501(r) regulations. More ominously, the Senator’s letter asserts that the IRS’s failure to complete its responsibilities under the ACA “raises serious concerns both about the oversight of nonprofit hospitals and the government’s ability to faithfully execute laws passed by Congress.”

Aside from the CHNA, the requirements of Code Section 501(r) took effect for Hospital Organizations by 2011 (at latest), and all Hospital Organizations must ensure that they comply fully with all mandates of the statute. Hall Render strongly recommends that Hospital Organizations come into compliance now with the proposed regulations. As a significant benefit to such compliance, the IRS confirmed in Notice 2014-2 that Hospital Organizations can rely upon both sets of proposed regulations “pending the publication of final regulations or other applicable guidance.” In effect, this creates a “safe harbor” for Code Section 501(r) compliance. If a Hospital Organization elects not to comply with the proposed regulations, the IRS may determine that the Hospital Organization is out of compliance with Code Section 501(r), which can jeopardize the Hospital Organization’s tax-exempt status. Like the safe harbors under other federal statutes, such as the Stark law, the proposed regulations allow Hospital Organizations to be certain that their tax exemption will not be placed at risk.

Additionally, Hospital Organizations can reasonably anticipate that the final regulations will track the proposed regulations – particularly with respect to provisions addressing financial assistance policies and CHNAs, which were less controversial than other aspects of the proposed regulations. Moving forward now will allow a Hospital Organization to follow a deliberate process toward compliance. The proposed regulations are extremely detailed and, in many places, quite complex. Full compliance will demand a significant investment of time and personnel – especially if (as we recommend) the Hospital Organization wishes to ensure that all levels of its administration and operations have an appropriate understanding of the new requirements. The board of directors and hospital leadership need a general awareness of Code Section 501(r) mandates, particularly with respect to areas like the CHNAs that significantly drive hospital programs. Rank and file employees, on the other hand, will require much more extensive education about the new requirements and the policy and procedure changes that will be necessary to satisfy those requirements.

In principle, the IRS has recognized the need for “transition relief,” but Hospital Organizations should expect that they will have a limited window of time to update their policies and procedures if they wait until the regulations are finalized before taking action. Implementing changes now will provide Hospital Organizations a longer lead time and thus greater flexibility for compliance with both the proposed and the anticipated final regulations, including the opportunity to focus on internal education and development of strong policies and procedures. Moving into compliance sooner than strictly required may also garner favorable public relations, particularly from providing additional protections for individuals in need of financial assistance.

Hospital Organizations continue to face significant challenges in meeting the many demands imposed by Code Section 501(r) and the corresponding regulations. The best path to meeting these demands is to move forward now. Over the remainder of this week, Hall Render will publish three additional articles discussing the various facets of Code Section 501(r) and offering practical suggestions for how Hospital Organizations can best ensure that their facilities comply with the law.

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