IRC §501(r) regulations: 6 action steps to protect your tax-exempt status

6 action steps to protect your tax-exempt statusClarifying compliance with Financial Assistance Policy Regulations

All tax-exempt hospitals must comply with the Internal Revenue Code (IRC) §501(r) regulations, which apply to taxable years beginning after Dec. 29, 2015. The final regulations, published at the end of 2014 by the IRS and the U.S. Treasury, clarify the proposed regulations issued a few years ago.

In some cases the changes are minor tweaks, adding clarification and consistency, but other changes are more substantial. In any case, all charitable hospitals must comply or risk losing their tax-exempt status.

No matter the size of your hospital, new work streams and communication channels may be in order. There are stakeholders within multiple departments and teams that should be formed. There are serious consequences to those that get it wrong or do it late.

New IRC §501(r) regulations: How your hospital should prepare
Download the webcast presentation for an examination of the regulations and to determine if your organization is on the right path.
The new regulations will drive protocols and knowledge sharing that may not currently exist within your organization. We recommend you take a closer look at these regulations, and do it sooner rather than later. There is time to comply but a lot to cover.

We recommend these 6 steps, with details provided in our full article (PDF):

1.  Form a compliance team, and assign a project manager
We recommend forming a compliance team that consists of a team leader from the corporate compliance, internal audit or legal departments. Ideally, one of these departments should be charged with the responsibility of ensuring compliance with final IRC §501(r) regulations by maintaining oversight of the process, including identifying the changes needed to existing hospital policies and procedures, educating hospital staff on the impact of the new changes to existing hospital operations, and developing and implementing safeguards to ensure ongoing compliance with the IRS mandate.  

2. Draft or redraft policies, and assign reviews to team members The final regulations include numerous specific items and additional procedural actions that must be detailed in the required policies. Policies to be concerned with include the FAP, and the related billing and collections policy. And don’t forget about the emergency medical care policy. Even if you are already subject to and complying with the Emergency Medical Treatment & Labor Act (EMTALA), IRC §501(r) and the regulations require additional specific policy points that must be in a written policy.

Under the new regulations, a bare-bones policy won’t be acceptable. There are numerous items to include in the new policies, which are likely to be lengthy.

3. Consider getting help If you are struggling with any of these steps, or simply want an independent review, consider engaging an outside tax consultant for assistance. Grant Thornton LLP can assist with team development, serve with your team, assist with board education, conduct a gap analysis of your existing policies, and provide commentary and advice. We have developed an IRC §501(r) review template to identify gaps and other areas of potential noncompliance. Perhaps a third-party review is in order even if you have already completed these steps. Grant Thornton has the experience, resources and the tools to assist you through this difficult maze.

4. Submit the draft to the board or authorized committee for review/approval The board or committee should be notified of the key points in the requirements and educated before approval is requested. This will ensure the approval process goes more smoothly and save time in the end. Provide copies of all drafted policies well before the due date to allow time for discussion, potential revisions, and completion of required translations and postings. Allow time for multiple drafts, questions, editing and finalizing the document as you work toward final approval.

5. Research demographics, and translate the FAP as required If the population served by your hospital facility consists of 1,000 individuals who speak a language other than English (or 5% of the population if that is less), the FAP, plain language summary, application form and any other related documents must be translated into those languages. Providers in highly diverse communities may find it challenging to comply and should allow ample time for this step. Consider collaborating with regional health departments and governments to ensure the needs of the community are being addressed; engage translators to develop the communication. Consult census data. And remember that all future updates to the policies and related documents will also require translation.

6. Update your website(s), and provide paper copies Community access is a focus of the new regulations; citizens are to be provided access to policies and application forms in multiple ways, such as PDF and paper versions. In addition to posting the policies and related forms on your website and offering to mail paper copies upon request, hospital facilities must have printed forms available to offer to patients while in the hospital. Specifically, they must be available in public locations including the emergency room and admissions area, and hospital staff must actively offer the plain language summary version during intake or discharge.

Consequences of insufficient compliance Failure to comply with IRC §501(r) could result in penalties, or worse, a review by the IRS. Minor or inadvertent errors or omissions or those due to reasonable cause may not result in failure or public disclosure of the error, but only if the facility has established the proper practices and procedures required and promptly corrects the error as outlined in the regulations. Failures that rise to a higher level could at best require both correction and disclosure on the organization’s Form 990 (assuming the error is neither willful nor egregious), and at worst lead to loss of tax-exempt status. The IRS commissioner has the authority to make this determination based on the facts and circumstances.
The time to act is now, to be compliant by the applicable date of Dec. 29, 2015. Begin now with these six steps and avoid penalties, negative publicity and threats to your tax-exempt status. The reward of protecting your tax-exempt status is well worth the effort.

Download the PDF.
To whom does IRC §501(r) apply? Any hospital with IRC §501(c)(3) exemption from tax1
Any facility licensed, registered or similarly recognized as a hospital under state law
Each hospital-licensed facility must comply separately.
Consider all operations under the hospital license, e.g., specialty services and departments, cancer center, ambulatory surgery center, separate campuses.
Any organization as determined by the IRS to provide hospital care as its primary exempt function
Hospitals operated through a joint venture agreement
Failure to comply may result in an excise tax of $50,000, as well as potential loss of exempt status.2
1 Governmental hospitals are generally not required to comply with IRC §501(r); however, hospitals that have both governmental and IRC §501(c)(3) exemptions (“dual status entities”) are required to comply with IRC §501(r).
2 Excise tax penalty applies only to failure to comply with the community health needs assessment portion of IRC §501(r).
Learn more about how we can help you take steps to comply with IRC §501(r):
Michele Melchior Director Not-for-Profit Health Care
T +1 704 926 0337

Frank Giardini
Not-for-Profit Health Care
T +1 215 656 3060