On April 5th, the IRS officially released proposed regulations providing tax-exempt hospitals new guidance on meeting the community health needs assessment (the “CHNA”) requirements of Section 501(r)(3) of the Internal Revenue Code (the “Code”). The regulations also provide long awaited detail on the penalties hospitals may face for failing to meet any of the requirements in Section 501(r), added to the Code by the Patient Protection and Affordable Care Act, including the requirements in the June 2012 proposed regulations implementing the financial assistance policy, charge limitation, and billing and collection requirements imposed by Sections 501(r)(4)-(6) (the “2012 Regulations”).
The nonprofit hospital community likely will be pleased with the regulations because they allow hospitals some discretion in determining how best to satisfy the CHNA requirements and emphasize transparency rather than prescriptive rules.
Failure to Satisfy Section 501(r)
The most anticipated and likely most welcome news offered by the regulations is that an organization will not automatically jeopardize its exemption or risk the exempt status of any bonds used to finance its hospitals because of 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 and inadvertent omissions and 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 requirement in these CHNA regulations or the 2012 Regulations that is neither willful nor egregious also will be excused if the hospital promptly discloses and corrects such failure.
Where an organization operates more than one hospital facility, the failure of one facility to meet the requirements of Section 501(r) will not necessarily result in loss of exemption for the entire organization. Rather, such noncompliant facility’s income will be subject to tax as if it were a taxable corporation. Moreover, the regulations state that imposition of such a facility-level tax will not, by itself, affect the tax-exempt status of bonds issued to finance the facility.
The Community Health Needs Assessment
In implementing the CHNA requirements, the regulations largely are consistent with earlier guidance in Notice 2011-52 (the “Notice”). Highlighted below are a few of the important changes and clarifications made by the regulations. Failure to satisfy the CHNA requirements can result in a $50,000 excise tax for each noncompliant facility an organization operates.
First, the regulations require hospital facilities conducting a CHNA to identify and prioritize only the significant health needs of the community (rather than all health needs as suggested by the Notice). In addition, if they define their communities to be the same and meet certain other requirements, the regulations permit hospitals that collaborate in conducting a CHNA process to adopt a joint CHNA report as well as a joint implementation strategy. Also, CHNA reports must now be posted on a hospital’s website until at least two subsequent CHNA reports have been posted (rather than just until the next CHNA report is posted as was required in the Notice).
The regulations clarify how a hospital facility can satisfy the requirement that it take into account input from persons representing the broad interests of the community when assessing community health needs. The regulations require that the hospital take into account, at a minimum, input from (i) at least one state, local, or regional governmental public health department; (ii) members of medically underserved, low-income, and minority populations in the community, or individuals or organizations serving or representing their interests; and (iii) written comments received on the hospital’s most recently conducted CHNA and most recently adopted implementation strategy. Unlike the Notice, the regulations do not require CHNA reports to specifically name individuals providing input.
Finally, the regulations offer some transition relief extending the period within which certain hospitals that have conducted or are now conducting their first CHNAs must adopt their implementation strategies. While the regulations retain the unpopular general rule that an implementation strategy must be adopted in the same taxable year that the CHNA is conducted, they provide some limited flexibility for new hospitals and first CHNAs, and importantly, the regulations make it easier for a hospital facility to control the date on which it is considered to have “conducted” its CHNA.