Tax-Exempt Hospitals Must Comply with Section 501(r) Regulations

Section 501(r) regulations provide guidelines on how hospitals retain their tax-exempt status. These requirements were implemented to the Internal Revenue Code by the Patient Protection and Affordable Care Act back in 2010. Failing to comply with the following rules will cause hospitals to lose their tax exemption:

  • Meeting the Community Health Needs Assessment (CHNA) conditions of Section 501(r)(3)
  • Following the Financial Assistance Policy (FAP) necessities of Section 501(r)(4)
  • Ensuring that charges for emergency and other medical care for patients with FAP don’t surpass amounts typically billed to patients with insurance
  • Preventing any outstanding payment collections before making rational efforts to determine if the patient qualifies for assistance under FAP

Other penalties include a $50,000 excise tax towards hospital organizations failing to meet the Community Health Needs Assessment for the filing year.

Regulations imposed by Section 501(r) went into effect for the taxable year starting after December 31, 2015, and applies to hospital organizations – including government hospital organizations – seeking tax-exempt recognition under Section 501(c)(3). Some government hospitals aren’t responsible for filing IRS Form 990 or submit CHNA information with a 990 form; however, they are still required to make their CHNA and FAP reports publicly available.

Even though failure to comply with Section 501(r) regulations may cause the IRS to revoke tax-exempt status from a hospital, federal officials consider the following facts before revocation:

  • The primary reason for failure
  • The importance and nature of the failure
  • Whether or not the hospital failed requirements in the past
  • The number, extent, and significance of facilities that failed if applicable
  • Whether the hospital had practices and procedures in place to ensure overall compliance before failing
  • Whether the hospital quickly corrected the failure and enforced any safeguards to prevent future failures
  • Whether staff regularly followed compliance practices and procedures and the failure happened from some mistake or oversight
Overall, any omissions from a report or errors in operational requirements that are minor, or otherwise accidental due to reasonable causes, are not seen as failing to meet regulations.

An Accountable Care Organization (ACO) is exempt from following Section 501(r) guidelines, but multiple medical facilities are allowed to duplicate the same FAP and other policies as long as it’s the same for each facility. Furthermore, separate hospitals within the same community can perform a joint community health needs assessment and create a joint strategy meeting those goals.

If a health system operates multiple hospitals and one facility fails to meet requirements, that failure will not affect the exemption status of the overall health organization. The IRS may impose a corporate hospital facility tax towards the non-compliant facility for the year it failed compliance. Operations from the failed facility are not seen as unrelated trade or business nor will finances for the non-compliant hospital be affected.

Experts recommend board members of nonprofit hospitals to review regulations from Section 501(r) and carefully examine their healthcare policies to ensure compliance. And remember to file the required 990 form, if applicable, along with the Schedule H.

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