Complying with ACA tax-exempt hospital requirements

Editor: Christine M. Turgeon, CPA

Organizations exempt from tax under Sec. 501(c)(3) that operate one or more hospital facilities must comply with the additional requirements outlined in Sec. 501(r), which was enacted as part of the Patient Protection and Affordable Care Act (ACA), P.L. 111–148, on March 23, 2010, to maintain their tax–exempt status. For this purpose, a tax–exempt hospital organization generally is defined in Sec. 501(r)(2)(A) as “(i) an organization which operates a facility which is required by a State to be licensed, registered, or similarly recognized as a hospital, and (ii) any other organization which the [IRS] determines has the provision of hospital care as its principal function or purpose constituting the basis for its exemption.”

Requirements for tax-exempt hospital facilities

The following items are required by Sec. 501(r) for hospital facilities to maintain their Sec. 501(c)(3) tax–exempt status:

• Community health needs assessment (CHNA) (Sec. 501(r)(3)): A hospital facility must complete a CHNA every three years, and an authorized body of the hospital facility must have adopted an implementation strategy on or before the 15th day of the fifth month after the tax year the CHNA was completed, which is also the due date of Form 990, Return of Organization Exempt From Income Tax (Regs. Sec. 1.501(r)-3(c)(5)). The CHNA must take into account input from persons representing the facility community’s broad interests and be made widely available (Sec. 501(r)(3)(B)).
• Financial assistance policy (FAP) and emergency medical care policy (EMCP) (Sec. 501(r)(4) and Regs. Sec. 1.501(r)-4(b)): A hospital facility must prepare and widely publicize a FAP and EMCP that generally include (1) criteria for financial assistance and whether the assistance includes free or discounted care; (2) how the amounts charged to patients are calculated; (3) how a patient can apply for financial assistance; (4) the actions the hospital facility may take in the event of nonpayment, whether any information is obtained from sources other than a patient seeking financial assistance, and whether the tax-exempt organization uses prior FAP eligibility determinations to make a determination on a new FAP application; and (5) a list of any providers who deliver emergency and other medically necessary care in the hospital facility, including which providers are covered by the FAP.
• Limitation on charges (Sec. 501(r)(5)): A hospital facility must limit the amount charged for any emergency or other medically necessary care it provides. For FAP-eligible patients, the hospital facility may not charge more than the amount generally billed to patients who have insurance coverage for the same care. Additionally, the amounts charged to FAP-eligible patients for all other medical care under the FAP are limited to less than the gross charges for that care.
• Billing and collections (Sec. 501(r)(6)): A hospital facility must make reasonable efforts to determine whether a patient is eligible for assistance prior to using extraordinary collection actions (defined in Regs. Sec. 501(r)-6(b)).

Hospital facilities that are not compliant with these requirements could have penalties imposed or lose their tax–exempt status, depending on the severity of the violation.

Renewed interest in tax-exempt hospitals

There has been a renewed interest in tax–exempt hospitals and health care organizations in the last two years, as demonstrated by the following developments:

• March 2024: The IRS Tax-Exempt & Government Entities division added a new compliance strategy for “Exempt Organizations: Tax-Exempt Hospitals” to its “Compliance Program and Priorities” webpage. “The focus of this strategy is on compliance with the [ACA],” the site states. “We will verify whether tax-exempt hospitals are complying with their statutory obligations under Internal Revenue Code Section 501(c)(3), including the community benefit standard, and Section 501(r). The treatment stream for this strategy is examinations.”
• March 2024: The Lown Institute Hospital Index, which evaluates and ranks hospitals on their social-responsibility measures, focused in its annual Fair Share Spending report on the amount spent for certain types of financial assistance and community benefits relative to the estimated value of certain tax benefits hospitals receive.
• April 4, 2024: Nine members of Congress sent a letter to the Treasury secretary and IRS commissioner urging stronger regulation of tax-exempt hospitals.
• Summer 2024: The IRS announced an intent to audit compliance with Sec. 501(r) at 35 hospital organizations (Schilling, “IRS Plans More Nonprofit Hospital Audits as Scrutiny Heats Up,” Daily Tax Report (June 7, 2024)).
• 2025: The current Congress indicated it is focusing on tax-exempt hospitals, with potential courses of action for noncompliance to revoke their tax-exempt status.

Sec. 501(r) audit experiences

In summer 2024, the IRS selected for audit 35 hospital organizations across many categories, including multi–entity hospital systems, community hospitals, academic medical centers, and children’s hospitals.

Many of these audits are in the information document request (IDR) phase. The IDRs generally have been more extensive and less standardized than previous IRS audit and compliance checks of the tax–exempt sector. For example, the IRS has requested general ledgers; copies of policies and manuals; copies of internal processes regarding patient interaction; Form 990, Schedule H, Hospitals; workpapers; and to tour facilities, conduct interviews, and review board and/or committee meeting minutes.

Once a tax–exempt hospital receives notice of an audit and an initial IDR from the IRS, the hospital’s response generally is due within three weeks, with a possible three–week extension. Hospitals often experience the IRS requesting a significant amount of information to be provided in a short period. Hospitals’ overall expectations are for audits to last longer than a year, with multiple IDRs, multiple agents assigned to them, and the involvement of multiple departments of the hospital.

In addition, the IRS’s audit scope has grown beyond only Sec. 501(r) compliance. For example, community–benefit questions have been posed. Since general ledgers are being provided during the Sec. 501(r) audits, the IRS is looking to open audits on Form 990–T, Exempt Organization Business Income Tax Return, based on findings from the general ledger. Summons also have been issued for patient account data (i.e., name, charges, charity care, and completion of FAP). Requests from the IRS for patient data can include tens of thousands of samples. In some audits, the IRS plans to review the hospital’s data on–site. The IRS is experiencing a reduction in its workforce, which may complicate current audits by creating delays or unexpected audit closures and could result in fewer new audits being opened.

Observations

Hospital facilities need to continue to follow all the requirements under Sec. 501(r) to protect their tax–exempt status. Given the increase in audit activity in this sector, hospital facilities may want to perform mock audits to inform the organization where improvements with Sec. 501(r) compliance may be needed. In addition, hospital facilities need to stay up to date with current policies, regulations, and proposed legislative changes so they can continue to satisfy all compliance requirements.

Editor

Christine M. Turgeon, CPA, is a partner with PwC US Tax LLP, Washington National Tax Services, in New York City.

For additional information about these items, contact Turgeon at christine.turgeon@pwc.com.

Contributors are members of or associated with PwC US Tax LLP.