Internal Revenue Code ("IRC") §501(c)(3) tax-exempt hospital organizations that operate one or more hospital facilities received some much anticipated guidance from the Internal Revenue Service ("IRS"), on April 5, 2013, with the issuance of the proposed regulations on new IRC §501(r)(3) with respect to community health needs assessments ("CHNA").
Previously, interim guidance with respect to CHNAs was issued in July 2011 via IRS Notice 2011-52. These proposed regulations will supersede IRS Notice 2011-52. The IRS has stated that hospital facilities can rely on IRS Notice 2011-52 until October 5, 2013, at which time it will be rendered obsolete.
This tax tip outlines certain changes, guidance and clarifications provided in the proposed regulations as compared to the previously issued interim guidance in IRS Notice 2011-52. Please note that this is not an all-inclusive list.
The Patient Protection and Affordable Care Act, enacted March 23, 2010, introduced new IRC §501(r) which contains four provisions that apply specifically to tax-exempt hospital organizations and their operation of one or more hospital facilities. One of the four new requirements, IRC §501(r)(3), requires all tax-exempt hospital organizations to conduct a community health needs assessment, on a hospital facility by facility basis, once every three years for all tax years beginning after March 23, 2012.
Any hospital organization failing to meet this requirement is subject, under IRC §4959, to the imposition of a hospital facility level $50,000 excise tax and potential revocation of tax-exempt status. If an excise tax is imposed, the hospital organization will be required to file a Form 990-T, Exempt Organization Business Income Tax Return, to report and pay the tax. Please note that the payment of this tax is also required to be reported on the hospital organization's Form 990, Return of Organization Exempt From Income Tax. It is important for hospital organizations which operate more than one hospital facility to be aware that the CHNA requirements apply separately with respect to each hospital facility. Accordingly, the $50,000 excise tax can potentially be imposed separately on each hospital facility failing to meet the CHNA requirements outlined in IRC §501(r)(3). In addition, the excise tax will be assessed on an annual basis for each year the hospital facility fails to meet these requirements. Please note that the IRS intends to issue a Revenue Procedure to address the failure to meet the requirements outlined in IRC §501(r)(3) in the future.
Multiple Buildings Under A Single Hospital License
The proposed regulations provide that "multiple buildings operated by a hospital organization under a single state license are considered a single hospital facility".
Operating A Hospital Through A Joint Venture
Consistent with the guidance noted in IRS Notice 2011-52, the proposed regulations provide that "as a general rule, a hospital organization 'operates' a hospital facility if it is a partner in a joint venture, limited liability company, or other entity treated as a partnership for federal income tax purposes that operates the hospital facility". However, the proposed regulations provide the following two exceptions to the above noted general rule.
- If the investment in the hospital organization and operation of a hospital facility treated as a joint venture, limited liability company or other entity treated as a partnership does not meet control requirements and is being treated by the hospital organization as unrelated business income, the hospital organization will not be considered to "operate" the hospital facility and it will not be subject to the requirements under IRC §501(r)(3).
- A hospital organization is not considered to "operate" a hospital facility if (1) at all times, since March 23, 2010, the hospital organization was organized and operated primarily for educational or scientific purposes and was not engaged primarily in the operation of one or more hospital facilities, and (2) pursuant to a partnership arrangement entered into before March 23, 2010, the hospital organization did not own more than 35% of the capital or profits interest in the partnership, did not own a general partner or similar interest, and did not have sufficient control over the operation of the hospital facility to ensure that the hospital facility complies with the requirements of IRC §501(r).
New Hospital Facilities
In accordance with the proposed regulations, a newly acquired or "placed into service" hospital facility has until the last day of its second tax year to conduct a CHNA and adopt a written implementation strategy. It is important to note that, for purposes of the CHNA, any short tax year consisting of less than twelve months is considered a tax year.
Collaboration with Others
Another noted departure in the guidance provided under the proposed regulations v. IRS Notice 2011-52 relates to collaboration with others. IRS Notice 2011-52 specifically addresses whether or not a hospital facility collaborated with other facilities, that each hospital facility would be required to document its CHNA in a separate written report. The proposed regulations address that, if the collaborators define the community served in an identical fashion, a joint CHNA report may be issued.
Making the CHNA Report Widely Available to the Public
The proposed regulations are consistent with IRS Notice 2011-52 in providing that a CHNA is considered to have been conducted when it is made widely available to the public. The proposed regulations also provide the following with respect to making a CHNA widely available to the public:
- A complete version of the CHNA is "conspicuously" posted on a website; either the hospital facility's website, the hospital organization's website if the hospital facility does not have its own separate website or a website maintained by another entity.
- The CHNA report remains posted on the website until two subsequent CHNA reports have been posted;
- An individual is not required to create an account or provide any personal information in order to access the CHNA report; and
- The hospital facility makes a paper copy of the CHNA report available for public inspection, at no charge, at the hospital facility until at least the date that the hospital facility makes its two subsequent CHNA reports available, free of charge, for public inspection.
The proposed regulations provide that the written implementation strategy must be attached to the hospital organization's Form 990 on an annual basis or, alternatively, the hospital organization can provide on its Form 990 the website address(es) on which the document is posted including a description of the actions taken during the taxable year to address the significant health needs identified in the CHNA or, if no action is taken, reasons why no action was taken.
The proposed regulations provide transitional relief in that a hospital facility will be deemed as to have satisfied the requirement to adopt an implementation strategy if it is adopted on or before the 15th day of the fifth calendar month following the close of the hospital organization's first taxable year beginning after March 23, 2012.
Minor and Inadvertent Omissions and Errors
Finally, the proposed regulations provide that minor, inadvertent omissions or errors due to reasonable cause that are corrected promptly after discovery will not be considered to be a failure to meet the requirements under IRC §501(r)(3).
As outlined above, the above list is not intended to be an all-inclusive list of the proposed regulations as compared to IRS Notice 2011-52.
A copy of the CHNA proposed regulations and IRS Notice 2011-52 may be accessed on our IRS Resource Center.
Please contact a member of WS+B's Healthcare Services Group for further questions or assistance.