IRS Addresses Hospital Concerns Regarding Section 501(r)

October 6, 2010

The IRS is concerned about process, policing and transparency in reviewing compliance with the rules under section 501(r), according to IRS Commissioner of Tax Exempt and Governmental Entities Sarah Hall Ingram, who discussed exempt hospital requirements during a recent VHA Inc.-hosted panel.

The Patient Protection and Affordable Care Act, enacted March 23, 2010, requires hospitals to report to the IRS on their community benefit activity every three years. Chris Giosa, an IRS economist, said this requirement doesn’t necessarily mean that hospitals will be audited every three years. IRS Notice 2010-39 outlined the additional requirements for hospitals to remain exempt, and asked for comments on such requirements, including: completing a community health needs assessment; determining eligibility for assistance; limiting fees charged for emergency care; and abstaining from extraordinary collection actions.

While the reporting on community health needs assessment requirement is not effective until tax years beginning after March 23, 2012, the IRS expects that hospitals may begin reporting on the assessment even earlier. The other requirements of reporting compliance with section 501(r) are applicable to tax years beginning after March 23, 2010.

Based on more than 200 comments received by July 22, 2010, Ingram reassured hospitals that are government instrumentalities that are also recognized as exempt under section 501(c)(3), that they would be required to comply with section 501(r), but not required to file Form 990. She also expects that the 2010 Form 990 will ask for audited financial statements as required under section 6040 to be reported at the entity level, rather than on a facility-by-facility basis. The IRS expects to release the core form for the 2010 Form 990 soon, with an updated Schedule H to follow.

According to Ingram, making a community health needs assessment “widely available to the public” means that section 6104 rules on disclosure may be applied to fulfill this requirement. She also said existing rules under the Emergency Medical Treatment and Active Labor Act are different from the emergency medical care policy under section 501(r) because section 501(r) may extend beyond emergency room care, but that the issue is still under consideration.

Ingram also discussed the requirement that hospitals charge the “lowest paying commercial rate,” by noting that the new law requires amounts charged for emergency or other medically necessary care to individuals eligible for assistance must not be more than the amounts generally billed to individuals who have insurance. She noted three major challenges for the IRS: (1) incentivizing good hospital behavior; (2) dealing with minor infractions; and (3) avoiding putting a burden on compliant hospitals.

Further information about the new healthcare legislation can be found in our earlier news alert, Nonprofit Hospitals in Need of an Aspirin.

McGuireWoods Nonprofit & Tax-Exempt Organizations Group

Our nonprofit and tax-exempt organizations lawyers provide advice and guidance that enable charities and other nonprofits to operate more efficiently and effectively in today’s increasingly complicated, regulated and competitive environment.

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