What Your Hospital Needs to Know to Comply with 501(r) and Reduce the Risk of Costly IRS Penalties
By Colleen Ramires, CPA
Senior Manager, Moss Adams
By Mary Wright, CIA, CPA
Partner, Moss Adams
Original Publish Date: July 10, 2018
As the IRS turns its focus from educating not-for-profit hospitals about Section 501(r) of the Internal Revenue Code (IRC) to enforcing compliance, hospitals can help avoid costly penalties, exam costs, and reputational damage by taking time to verify compliance and build processes to remain compliant over time.
Recent examinations have highlighted errors, omissions, and failures, which can lead to excise tax assessments or possible loss of tax exemption. With final regulations in effect since 2016, it’s critical your company is aware of common exam findings so it can avoid similar issues.
Verifying your hospital’s compliance isn’t only about fixing current problems; it’s also about making sure your organization has the internal controls and processes in place to monitor compliance over time—including coordination of different departments that contribute to Section 501(r) compliance.
The FAQs below highlight common compliance questions and focus on critical ongoing issues hospitals face.
501(r) FAQs
How does the IRS verify 501(r) compliance?
The IRS verifies 501(r) compliance using various methods, including the following:
- Visiting a hospital’s website to see if the required reports and policies, including the Financial Assistance Policy (FAP) and Community Health Needs Assessment (CHNA), are readily available
- Checking Schedule H of a hospital’s Form 990 to verify compliance and compare with documents on the hospital’s website
- Sending agents into the field to verify hard copies of a hospital’s reports and policies are readily available
Which reports and polices are hospitals required to make publicly available?
- CHNA and related implementation plan
- FAP, plain language summary of the FAP, and FAP application
- Translations of the FAP, plain language summary, and application, if required
- Billing and Collection Policy, if separate from the FAP
- Determination of amounts generally billed, depending on method used and if separate from the policies listed above
How often does the CHNA need to be completed, and which years need to be posted on the website?
A charitable hospital must conduct a CHNA and adopt an implementation strategy every three years. A CHNA isn’t considered to be completed until it’s made widely available, which includes posting on the organizations website. The organization is also required to post the current report and two prior reports on its website. Documenting that the reports are posted on the website can help in case they are removed in the future.
Does the CHNA and implementation strategy need to be board approved?
Both the CHNA and implementation plan need to be adopted by an authorized body of the hospital. The organization needs to adopt the CHNA before the end of the tax year in which it should be considered complete. The implementation strategy needs to be adopted by the 15th day of the 5th month after the tax year end.
When is a joint venture subject to 501(r), and when is a CHNA required?
Joint ventures (JV) that are treated as partnerships for tax purposes and own a hospital facility may be required to comply with 501(r). However, this is only true when the 501(c)(3) hospital organization has an interest in the JV, has control over the JV, and doesn’t treat the income from the JV as unrelated business income. A hospital organization can have control even if it has less than a 51% interest in the JV.
When a hospital organization acquires a JV that meets the above criteria or gains control of the JV, it’s required to complete a CHNA within three years of acquisition or change in control. The year of acquisition or change in control is considered to be the first year of the three-year time frame.
Which types of care must be covered in a hospital’s FAP?
A hospital’s written FAP must apply to all emergency and medically necessary care provided in the hospital, but the hospital has flexibility in determining other services covered by its FAP.
Can providers be listed by department or practice in the FAP as opposed to by name?
Providers can be listed by name, practice group, department, or any other name used either to contract with the hospital or bill patients for care provided.
What is the language and population threshold for the need to translate?
Policy translations are required for groups with limited English proficiency (LEP) who make up the lesser of 1,000 people or 5% of the community the hospital serves or the population likely to be affected or encountered by the hospital facility.
What are the levels of noncompliance under Section 501(r)?
There are three levels of noncompliance under Section 501(r):
- Minor errors or omissions
- Errors or omissions
- Willful and egregious errors or omissions
Of these, only willful and egregious errors or omissions can prompt the IRS to revoke a hospital’s tax-exempt status.
Errors or omissions that aren’t minor should be disclosed on the organization’s Schedule H of the Form 990. A hospital organization that fails to meet the CHNA requirements is subject to a $50,000 excise tax.
If 501(r) only applies to hospitals with 501(c)(3) status, why do other types of hospitals—governmental and for-profit entities—end up facing charity-care compliance issues?
Many states have charity-care laws and regulations that may apply to all hospitals—not just hospitals with 501(c)(3) status.
Making things even more complicated, state-level regulations vary greatly between states. While very few states require hospitals provide unconditional, free, or discounted care, almost all states have a form of lesser, charity-care-related requirements. Both sets of regulations must be evaluated separately to ensure overall compliance.
Hospitals subject to 501(r) requirements need to be aware that those laws and regulations may be more stringent, less stringent, or simply different than state requirements.
Beyond accounting and finance representatives, who else should be part of an internal 501(r) compliance team?
Team structures vary depending on an organization’s specific situation, but there are typically five departments to include beyond finance:
- IT
- Revenue cycle
- Legal
- Public relations
- The department managing the CHNA
It’s also important to consider whether there are gaps in your resources or expertise. If so, your organization can bring in outside assistance—receiving resources such as policy development and review, current practice tests, and IRS examinations support.
What are the key steps to shore up compliance efforts?
Ultimately, the challenge of complying with 501(r) isn’t just understanding its requirements—it’s finding the time to complete everything that needs to be done. Given the ease with which the IRS can find a red flag that triggers an exam, it’s important to do everything you can to maintain compliance.
- Review policies and procedures. Review current 501(r) policies and procedures to verify they’re in accordance with the final regulations. This requires extensive time, energy, and resources because staff needs to compare the final regulations with what’s documented in current policies to determine necessary updates.
- Verify compliance with policies and procedures. Completing a CHNA and implementation strategy and having policies in place isn’t enough. Hospitals need to verify that all policies are being followed after implementation.
- Post documentation. Verify all required documents are posted and regularly updated on the hospital’s website. At the same time, have hard copies of these documents available upon request at physical locations.
Looking Forward
If your hospital has a well-designed 501(r) compliance plan that’s implemented by the right team, the FAQs here will likely only serve as good reminders. However, given the diversity compliance teams must have to be successful and the complexity of the related regulations, it’s often difficult to remain compliant over time.
Staying focused on critical regulation requirements, working backwards from the key due dates, and knowing what’s gone wrong for other organizations can help your hospital avoid issues and remain compliant.
Colleen Ramires has practiced public accounting since 2004. She works with not-for-profit entities, including hospitals, health care organizations, and foundations. Her experience includes 501(r) consulting, tax planning, tax-return compliance, and other tax services. She can be reached at (425) 551-5719 or colleen.ramires@mossadams.com.
Mary Wright has practiced public accounting since 1996. She specializes in providing integrated audit, interim accounting and finance, and consulting services to health care, not-for-profit, and government entities. She can be reached at (425) 303-3034 or mary.wright@mossadams.com.
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