May 17, 2019

Community Benefit Requirements of Nonprofit Hospitals

By Gina Lucibello, Supervisor, Tax & Business Services

Community Benefit Requirements of Nonprofit Hospitals

The Patient Protection and Affordable Care Act (ACA), enacted in March 2010, included the addition of Section 501(r) to the Internal Revenue Code. Section 501(r) included additional requirements that hospital organizations must meet in order to continue to qualify for tax exemption under Section 501(c)(3). The IRS is currently conducting compliance checks on hospital facilities and there are significant consequences if a hospital facility within the organization fails to meet the requirements of Section 501(r). These additional requirements are:

1. Community Health Needs Assessment (CHNA) – Section 501(r)(3)

Hospitals must conduct a CHNA at least once every three years and adopt an implementation strategy to meet the community health needs identified in the CHNA by the 15th day of the fifth month after the end of the taxable year in which the CHNA was conducted.

The CHNAs provide hospital facilities with the information they need about their community’s current health status and needs. This information gives hospitals an opportunity to develop outreach programs, education efforts, health screenings, and various other wellness and prevention activities that will make their communities healthier. There is an expectation that, in exchange for tax exemption, a nonprofit hospital is providing these benefits to its local community.

2. Financial Assistance Policy and Emergency Medical Care Policy – Section 501(r)(4)

A written financial assistance policy and a written emergency medical care policy that complies with certain statutory criteria must to be adopted by each hospital facility. Per the Internal Revenue Code, the written financial assistance policy must include the following:

  1. Eligibility for criteria for financial assistance, and whether such assistance includes free or discounted care;
  2. The basis for calculating amounts charged to patients;
  3. The method for applying for financial assistance;
  4. In the case of an organization which does not have a separate billing and collections policy, the actions the organization may take in the event of non-payment, including collections action and reporting to credit agencies; and
  5. Measures to widely publicize the policy within the community to be served by the organization.

3. Limitation on Charges – Section 501(r)(5)

Patients who are eligible for financial assistance must not be charged more than amounts generally billed to insured patients.

4. Billing and Collections – Section 501(r)(6)

Before making any extraordinary collection actions, it is necessary that the hospital facility make reasonable efforts to determine if the patient is eligible for financial assistance.

Hospital organizations use Schedule H of the Form 990 to provide information on the activities and policies of, and community benefit provided by, their hospital facilities and other non-hospital health care facilities that they operated during the tax year. Schedule H, Part V, Section B is where hospital organizations report information on policies and practices specifically addressed in Section 501(r). A separate Section B must be completed for each hospital facility.

The CHNA requirement is effective for tax years beginning after March 23, 2012. The other requirements are effective for tax years beginning after March 23, 2010. Final regulations were released on December 29, 2014, and apply to tax years beginning after December 29, 2015. For tax years beginning on or before December 29, 2015, the final regulations provide that a hospital facility may rely on a reasonable, good faith interpretation of Section 501(r).

It is possible for a hospital organization’s tax-exempt status to be revoked if they are found to not to be in compliance. Additionally, a $50,000 excise tax is possible in any tax year that a hospital facility is noncompliant with the CHNA and implementation strategy requirements. The tax applies even if the hospital organization loses its tax exempt status due to failure. A hospital facility’s failure to meet one or more of the requirements that is neither willful nor egregious shall be excused if the hospital facility corrects the error and makes disclosures in accordance with Rev. Proc. 2015-21.

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