Section 501(r) was added to the Internal Revenue Code by the Patient Protection and Affordable Care Act in order to expand and clarify the federal requirements for tax-exempt hospitals by establishing new standards relating to community health needs assessments; financial assistance policies; and hospital charges, billing, and collection practices. The IRS has issued proposed regulations on the requirement that tax-exempt hospitals conduct community health needs assessments (the “CHNA”) and adopt implementation strategies at least once every three years. A hospital that fails to meet the CHNA requirements for any taxable year is subject to a $50,000 excise tax. The proposed regulations, which were formally published last Friday, also provide long-awaited detail on the penalties hospitals may face for failing to meet any of the requirements in Section 501(r).
The proposed regulations are largely consistent with earlier guidance provided in IRS Notice 2011-52; however, the nonprofit hospital community will likely be pleased with the regulations because they allow hospitals some discretion in determining how best to satisfy the CHNA requirements. For example, if hospitals define their communities to be the same and meet certain other requirements, the regulations permit hospitals to collaborate in conducting a CHNA and to adopt a joint CHNA report as well as a joint implementation strategy.
The most anticipated news offered by the proposed regulations is that an organization will not automatically jeopardize its tax exemption due to minor compliance issues. While the regulations provide that a hospital that fails to meet one or more of the requirements of Section 501(r) may have its section 501(c)(3) status revoked depending on the facts and circumstances, the regulations state that minor errors that are due to reasonable cause and are corrected within a reasonable time upon discovery will not be considered a failure to meet a Section 501(r) requirement. In addition, a hospital’s failure to meet a Section 501(r) requirement that is neither willful nor egregious also will be excused if the hospital promptly discloses and corrects such failure.
The IRS said it continues to welcome public input on the new requirements. Comments and requests for a public hearing must be received by July 5, 2013.