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Medical Staff Seated in Circle

On April 3, 2013, the IRS issued new and updated proposed regulations, giving 501(c)(3) hospitals additional guidance on the section 501(r) requirements for community health needs assessments (CHNA), the consequences of noncompliance, and reporting on Form 990.

IRS Publishes Regulations on Community Health Needs Assessments

  • 4/19/2013

IRS Publishes Regulations on Community Health Needs Assessments

On April 3, 2013, the IRS issued new and updated proposed regulations, giving 501(c)(3) hospitals additional guidance on the section 501(r) requirements for community health needs assessments (CHNA), the consequences of noncompliance, and reporting on Form 990.

Although proposed regulations do not carry the weight of law, they provide safe harbor protections for those who comply. They also offer guidance about what will likely appear in the final regulations. However, an organization could choose to comply now in hopes of getting an early start on implementing necessary changes. Perhaps most significantly, a U.S. Treasury official indicated that they expect very little to change between these proposed regulations and the final regulations that will follow.

“The IRS is offering considerable flexibility in the short term, but compliance is still a serious issue and the penalties for noncompliance are significant,” says Kurt Bennion, Health Care Engagement Director with CliftonLarsonAllen.

Penalties for noncompliance

The proposed regulations provide more detailed guidance on the penalties that may be imposed on a hospital that fails to comply with section 501(r). These penalties include a $50,000 excise tax for failure to complete the CHNA and/or loss of 501(c)(3) status for failure in any area of 501(r).

First, the IRS clarified what would happen to a health organization that operates multiple hospitals, and some of its hospitals are compliant with 501(r) but at least one fails to comply. In this situation, the overall organization and each hospital will maintain their 501(c)(3) status, but the noncompliant hospital’s activities will become fully taxable under the same rules and be taxed at rates that apply to for-profit C Corporations. The IRS addressed likely concerns about tax-exempt bonds by indicating that “the application of this [rule] shall not, by itself, affect the tax-exempt status of bonds issued to finance the noncompliant hospital facility.”

Second, the IRS stated it will decide whether to revoke a hospital’s 501(c)(3) status based on the relevant facts and circumstances, including:

  • The size, scope, nature, and significance of the failure;
  • Whether the failure is a repeat offense;
  • Whether the organization had followed procedures to facilitate overall compliance;
  • Whether the failure was corrected as promptly;
  • Whether the organization adjusted its procedures to avoid the failure in the future; and
  • Whether the hospital took corrective actions before the failure was caught by the IRS.

“Although we don’t yet know how the IRS will use each of the facts and circumstances in making their determination, the overall message is if an organization tries to comply, monitors for compliance, promptly corrects any failures, and is transparent in its actions, it should not worry about its tax-exempt status,” says Bennion.

Third, the IRS lightened its stance on failures by providing two safe harbors for which a failure does not trigger consequences. First, an error or omission that is minor, inadvertent, and due to reasonable cause, will not be considered a failure if the hospital corrects it promptly. Second, if a failure was neither willful nor egregious, if the hospital corrects the failure promptly, and if the hospital discloses the issue, it will not be considered a failure.

“Although the proposed regulations don’t indicate how a hospital is expected to disclose failures, it seems reasonable that it would include them on the Form 990, Schedule H. These safe harbors should ease hospitals’ fears about the threat of losing exempt status,” says Bennion.

Despite the IRS’ slightly relaxed stance on failures, it clearly expects transparency in disclosing problems. Because disclosures may be noticed and broadcast by state or local media and result in negative public perception, it is important to comply on the front-end, rather than correct problems on the back-end.

CHNA changes

The proposed regulations provide several important changes to the CHNA.

First, hospitals now only need to identify, prioritize, and respond to significant community health needs. Each hospital is free to determine significance based on its relevant facts and circumstances, although the hospital must explain its process in the CHNA Report. Under previous guidance, hospitals were required to address every identified health need. For example, a hospital may receive input that a significant portion of the population is uninsured or underinsured, that diabetes is significantly higher in the area than across the state or nation, and that people should be eating more raw fruits and vegetables. Under the old guidance, a hospital would be required to address the fruits and vegetables, even though most would consider that to be far less significant than the other two issues. The proposed regulations empower hospitals to focus on the issues they consider of utmost important without requiring disclosure of insignificant issues.

Second, previous guidance required the implementation strategy be approved by an authorized body, but the proposed regulations require that the CHNA report also be approved by an authorized body. For these purposes, an authorized body is the hospital’s governing body, a committee, or an individual that has been authorized by the governing body.

“Even if a governing body only meets quarterly or annually, advance planning will allow the proper individual(s) to accept or approve each document in a timely manner. However, regardless of the authorized body utilized, we recommend that every member of the governing body be given a copy of each document, even if they aren’t required to approve it,” says Bennion.

Third, the IRS addressed the popular approach of joint CHNAs. While joint efforts are generally considered an effective way to share costs and increase cooperation, previous guidance indicated that every hospital would be required to produce its own CHNA report and implementation strategy. The proposed regulations changed this stance by allowing a joint CHNA report if:

  • The hospitals collaborate in conducting their CHNAs;
  • The hospitals define their communities as the same;
  • The joint CHNA report is clearly identified as applying to each hospital; and
  • The joint CHNA report is approved by an authorized body of each hospital.

While this gives health systems and geographically close hospitals more flexibility in collaborating, it is worth noting that the proposed regulations do not address the possibility of conducting a joint CHNA with non-hospital organizations, such as health departments and other nonprofits. Therefore, based on the current regulations, those hospitals would still be expected to develop their own documents to meet the requirements of section 501(r).

A joint implementation strategy is also allowed, based on similar requirements. However, the strategy also must include a summary or other tool that helps the reader easily locate those portions of the document that relate to each hospital. Depending on the perceived difficulty of preparing the “summary or other tool,” hospitals that collaborate through the rest of the process may agree it would be easier to develop separate implementation strategy documents that look extremely similar and use common language wherever appropriate. This would allow each hospital to address its own responses without worrying about differentiating other hospitals’ responses.

Fourth, the proposed regulations require significantly more detail in the implementation strategy. Prior guidance required that for each health need, the hospital must either describe its response or explain why it doesn’t plan to address a health need. The proposed regulations add that a hospital must describe:

  • The programs and resources the hospital plans to commit to addressing the health need;
  • The anticipated impact of the responses;
  • A plan to evaluate such impact; and
  • Any planned collaboration with other hospitals or organizations.

Apparently the IRS recognized the additional burden created here because it allows an extension of time for a hospital to complete its first implementation strategy. Although the CHNA report and implementation strategy must generally be completed within the same fiscal year, a hospital’s first implementation strategy is considered compliant if it is approved by an authorized body within 4.5 months of its year-end (the same day the hospital’s Form 990 is initially due).

Fifth, although previous guidance required hospitals to include input from medically underserved populations, the IRS failed to define who that is. That has now been corrected, with medically underserved defined as “populations experiencing health disparities or at risk of not receiving adequate medical care as a result of being uninsured, underinsured, or due to geographic, language, financial, or other barriers.” This definition agrees with basic logic that medically underserved populations are those individuals who are least likely to utilize available health care, for whatever reason.

Sixth, the proposed regulations will require hospitals to make their CHNA reports and implementation strategies widely available to the public until the next two CHNA processes are completed — approximately six years — while previous guidance only indicated a time period of approximately three years.

Finally, the IRS addressed hospitals that recently have become subject to section 501(r), indicating they have until the end of the second tax year (after the status change) to complete their first CHNA.

Reliance, feedback, and final regulations

A hospital has a six-month window in which it can choose whether to rely on the prior guidance (in IRS Notice 2011-52) or the proposed regulations in completing its CHNA. In other words, CHNA reports and implementation strategies that are completed by October 5, 2013, will be considered compliant as long as they meet either set of requirements, but CHNA reports and implementation strategies completed after October 5, 2013, can no longer rely on the prior guidance.

The purpose of proposed regulations is to encourage public feedback. Send any comments or questions concerning these proposed regulations to the IRS by July 5, 2013.

On March 21, 2013, Ruth Madrigal, attorney advisor to the U.S. Treasury Department’s Office of Tax Policy, indicated that the IRS and the Treasury Department expect a short turn-around time between the publication of these proposed regulations and the issuance of final regulations for all of section 501(r). Based on her comments, it appears likely that the final regulations — including those related to financial assistance policies, limitations on charges, and debt collection practices — will be issued between August and December of 2013. Publication of the final regulations will be significant because those regulations will carry the weight of law, requiring every 501(c)(3) hospital to re-evaluate its policies and procedures for compliance with section 501(r).

How we can help

Compliance with section 501(r) is and will continue to be a moving target in the foreseeable future. While the most recent guidance clarifies compliance expectations, the evolution of these requirements will continue to create some uncertainty and confusion among hospitals trying to comply. CLA has health care professionals with significant experience in this area that can help reduce the uncertainty. Contact your CLA advisor to put your hospital on the best possible path for success in complying with these new and complex regulations.

Kurt Bennion, Health Care Engagement Director or 612-397-3072