HIGHLIGHTS:

  • The Affordable Care Act (ACA) imposed significant new requirements on charitable hospitals by adding Section 501(r) to the Internal Revenue Code.
  • Although the new requirements have been in effect for several years, the Internal Revenue Service (IRS) has allowed charitable hospitals to rely on a reasonable, good faith interpretation of the law. For taxable years beginning after Dec. 29, 2015, however, charitable hospitals are bound by the final regulations issued by the IRS in 2014.
  • Charitable hospitals need to ensure they are in compliance with these final regulations because a failure to do so could result in an excise tax or loss of tax-exempt status.

Section 501(r) of the Internal Revenue Code was added by the Affordable Care Act (ACA) and imposes significant new requirements on charitable hospitals. At a very summary level, this section requires charitable hospitals to:

  1. conduct a Community Health Needs Assessment (CHNA) every three years and adopt an implementation strategy to meet the needs identified
  2. establish a written Financial Assistance Policy (FAP) and a policy relating to emergency medical care
  3. limit the amounts it can charge individuals eligible for financial assistance under the FAP
  4. limit the way it collects outstanding charges prior to making a reasonable effort to determine whether an individual is eligible for financial assistance under the FAP

Section 501(r) provides that a charitable hospital will not be treated as a tax-exempt organization as described in Section 501(c)(3) if it fails to meet these new requirements. In addition, a charitable hospital that fails to meet requirements around conducting a CHNA must pay an excise tax of $50,000.

Although the law became effective in 2010 (with the CHNA requirements taking effect slightly later in 2012), final regulations were not issued by the Internal Revenue Service (IRS) until 2014. In light of this delay, the IRS allowed hospitals to rely on a reasonable, good faith interpretation of the law until now. However, the final regulations will be effective for taxable years beginning after Dec. 29, 2015.

Now that the final regulations are effective, charitable hospitals should review their policies and procedures to ensure compliance with the final regulations. The IRS was very prescriptive in its guidance, and therefore, there are many pitfalls for the uninformed. For example, a charitable hospital must have a plain language summary of its FAP that includes information on how to apply for financial assistance. In addition, the charitable hospital must translate this plain language summary and the FAP itself into the language of any significant populations with limited English proficiency affected or encountered by the hospital.