3 Key Takeaways On Finalized IRS Regulations for Tax Exempt Hospitals

Just days before the end of 2014, the IRS released long-awaited final regulations under Section 501(r) for charitable hospitals exempt under Section 501(c)3. These regulations are in response to requirements enacted under the Affordable Care Act and finalize regulations first proposed in June 2012 to hold tax exempt hospitals to a higher standard.

The final regulations not only clarify language but also make several significant changes that both increase and decrease the burden placed on tax exempt hospitals.

Here are 3 key takeaways from the finalized regulations:

Clarity on Government Hospitals and 501 (c)3 Status

Final regulations confirm government hospitals previously recognized as exempt under 501(c)3 are subject to all of the 501(r) regulations. The IRS notes these hospitals can request to voluntarily terminate their section 501(c)3 recognition to avoid being subject to the regulations.

As in the past, government hospitals wanting to maintain dual status will not be required to file a Form 990. However, to retain 501(c)3 status, these hospitals must still meet the 501(r) requirements that do not involve Form 990 disclosure, including making their Community Health Needs Assessments and Financial Assistance Policies widely available on a website.

Community Health Needs Assessment (CHNA)

Though changes were not huge, they are important to note to stay in compliance and, in some, cases, to avoid time and effort in areas that no longer require it. The finalized rules clarify hospitals may update a previous CHNA instead of being required to create a new one every three years. However, hospitals must include solicitation and consideration of input from persons representing the broad interest of the hospital's community with each CHNA. This would include taking into account written comments on the most recently conducted CHNA when updating the new CHNA.

Another change that reduces the burden is a hospital must solicit (not obtain) feedback from the same three required sources as in the proposed regulations. If feedback was not available to include, the hospital must describe reasonable efforts made to obtain the feedback for their CHNA.

A fairly significant change to the CHNA regulations is that implementation strategies must now be adopted on or before the 15^th day of the fifth month after the end of the hospital's taxable year in which the CHNA was conducted. This provides an additional four and half months to adopt the implementation strategy, aligning it with the initial due date of the hospital's Form 990. However, unlike Form 990, there are no extensions available for the implementation strategy.

Financial Assistance Policies (FAP)

There has been some fine-tuning to the FAP regulations that increase the burden on tax exempt hospitals. The proposed regulations required a hospital facility to translate its FAP, FAP application, and FAP plain language summary into the primary language of populations with limited English proficiency (LEP) that made up more than 10% of the community served by the hospital. The final regulations lowered the threshold to 5% or 1,000 (whichever is less) of the population likely to be encountered by the hospital.

The rule requiring a plain language summary to be attached to each bill issued during the 120 day notification period has been changed. Under the new regulations, each billing statement must include a "conspicuous written notice" informing patients about the availability of financial assistance under the FAP and including details on where information on the FAP can be found, including websites and phone numbers.

It's important to note that only discounts specified in a hospital's FAP may be reported as "financial assistance" on Schedule H of the Form 990. Discounts not described in the FAP will not be considered community benefit activities for calculations of community benefit on the Schedule H.

Additional Info to Note

Under Limitation on Charges, additional information was provided on the calculation of Amount Generally Billed (AGB) under the Look-Back Method and Prospective Method, along with discussion of Gross Charges, among other changes and clarifications. The final regulations also provided additional clarification on Extraordinary Collection Actions, including discussion of certain liens and the sale of an individual's debt.

These final regulations apply to a hospital facility's taxable years beginning after December 29, 2015 giving all hospital facilities at least a year to comply. For taxable years beginning on or before December 29, 2015, hospital facilities may rely on either the proposed 2012/2013 regulations or the final regulations.

The Bottom-Line

Ultimately, the net effect of these final regulations on the burden of tax exempt hospitals is essentially a wash. But tax exempt hospitals must start now to work the new rulings and deadlines into their workflow and schedules or risk penalties.