On April 5, 2013, the IRS published a proposed rule in the Federal Register (the Proposed Rule) interpreting Internal Revenue Code section 501(r)’s community health needs assessment (CHNA) requirements applicable to tax-exempt hospitals described by section 501(c)(3) and providing guidance regarding the consequences for failure to meet the requirements of section 501(r). The Proposed Rule also provides guidance regarding when a section 501(c)(3) hospital organization will be treated for purposes of section 501(r) as "operating" a hospital held in a joint venture.

The Affordable Care Act created a new Internal Revenue Code section 501(r) requiring charitable hospital organizations to comply with new requirements in order to be treated as tax-exempt organizations under section 501(c)(3). The Proposed Rule provides guidance on one such requirement that a hospital organization conduct a CHNA at least once every three years and adopt an implementation strategy to meet identified community health needs. The Treasury Department and the IRS previously published proposed rules defining, among other terms, “hospital organization” and “hospital facility,” and providing guidance on the other requirements related to financial assistance and billing and collection efforts. Other than making minor revisions to the definitions of “hospital facility” and “hospital organization,” the Proposed Rule generally does not address these other requirements.

With respect to CHNA requirements, the IRS had previously issued guidance addressing the CHNA requirements in July 2011 in Notice 2011-52 (the Notice), and the IRS believes that the Proposed Rule is generally consistent with the anticipated rules described in the Notice taking into account comments received in response to the Notice. Among other provisions, the Proposed Rule provides a hospital with flexibility to take into account all relevant facts and circumstances when defining the community it serves and defines the persons who represent the broad interests of the community that the hospital must take into account when conducting its CHNA. Notably, the Proposed Rule only requires a CHNA to identify, prioritize and assess significant health needs rather than all of the community health needs. Accordingly, an implementation strategy must only address the significant health needs identified through the CHNA. A hospital is not required to develop a strategy or plan to address each identified significant health need. Rather, with respect to each significant health need identified, the hospital must either describe how it plans to address the health need or identify the health need as one the hospital does not intend to address and explain why.

The IRS’ prior Notice informed hospitals that they could rely on the provisions in the Notice until six months after the date that further guidance is issued on the CHNA requirements. As this Proposed Rule was published on April 5, 2013, the IRS reminds hospital organizations that they may continue to rely on the guidance in Notice 2011-52 addressing the CHNA requirements “for any CHNA made widely available to the public, and any implementation strategy adopted, on or before October 5, 2013.”

The Proposed Rule also addresses the consequences for failing to meet the 501(r) requirements, including the requirements relating to financial assistance policies, and billing and collection activities. If an omission or error is “minor, inadvertent, and due to reasonable cause, and the hospital facility corrects such omission or error as promptly after discovery as is reasonable given the nature of the omission or error,” then the omission or error will not be considered a failure to meet the section 501(r) requirements. With respect to omissions or errors that rise above the level of minor and inadvertent, but are not willful or egregious, “prompt discovery and correction of such omissions or errors” will be excused if the hospital corrects and provides reasonable and appropriate disclosure. It is expected that revocation of tax-exempt status for failure to meet section 501(r) will only occur if a hospital’s failures to do so are willful or egregious, based on the facts and circumstances. The Proposed Rule also addresses the consequences if a hospital organization that operates more than one hospital facility fails to satisfy one or more of the requirements of section 501(r) separately with respect to one hospital facility.

The IRS intends to finalize this most recent Proposed Rule in conjunction with its finalization of the prior proposed regulations issued last summer interpreting section 501(r)’s requirements regarding financial assistance policies, and billing and collection activities. The IRS continues to review comments received with respect to the prior proposed regulations, and the IRS will accept comments regarding the new Proposed Rule until July 5, 2013. Click here to view the Proposed Rule.