Section 501(r) Financial Assistance Requirements

January 15, 2015

Executive Summary

An IRS final rule on December 31, 2014 adds requirements for hospitals to maintain exemption from federal income tax under Section 501(c)(3), as required under the Affordable Care Act (ACA) and outlined in Section 501(r) of the Internal Revenue Code. The rule addresses:

The rule applies to governmental hospitals that also have Section 501(c)(3) status even though they are not required to file IRS Form 990. Failure to meet the requirements for conducting CHNAs could result in a $50,000 excise tax and failure to meet the requirements of the remaining sections could result in loss of exempt status.

Hospitals have had to comply with the CHNA provisions of Section 501(r) since 2012 and the remaining provisions since 2010. The new requirements apply to taxable years beginning after December 29, 2015. For periods before this date, hospitals may rely on a reasonable, good faith interpretation of section 501(r).

The requirements regarding financial assistance, charge limits and billing and collections are voluminous, detailed and have significant changes from the 2012 proposed rule. CHNA requirements remain mostly the same as the 2013 proposed rule, with the final rule providing further clarification and some changes in response to comments.

The rule specifically rejects IHA and others’ recommendations that states that have passed laws addressing many of the same issues be deemed in compliance with the federal law for those specific issues. The reasoning was:

  • State laws vary and would result in divergent rules for hospitals in different states;
  • IRS revenue agents would need to learn each state’s laws; and
  • State laws do not match the federal law.

The IRS notes that the federal regulations are minimum requirements. Hospitals can always be more generous and must comply with any state laws with additional or stricter requirements.

Organizations Subject to Rule

The ACA, enacted March 23, 2010, added a new Section 501(r) to the Internal Revenue
Code for hospital organizations to be treated as tax-exempt for purposes of federal income tax under Section 501(c)(3). A hospital organization is defined as an organization that operates one or more hospital facilities, defined as licensed by the state as a hospital. Multiple buildings operated by a hospital under a single state license are considered a single hospital facility, even if serving different geographic areas or populations.

Government Hospitals: Section 501(r) did not provide an exemption for government hospitals that also have section 501(c)(3) status, so these hospitals need to comply with the final rule, including making their CHNA reports and financial assistance policies widely available on a website, even though they are not required to file IRS Form 990. A government hospital that does not want to comply with the requirements may submit a request to voluntarily terminate their section 501(c)(3) recognition.

Hospital-Owned Physician Practices: The final rule provides clarification regarding organizations that own capital or profit interest in hospital facilities. In response to a question regarding applicability to hospital-owned physician practices, the final rule says it depends on how the entity is classified for federal tax purposes. If it is a separate taxable corporation, it would not need to comply. If it is not regarded as separate from the hospital for federal tax purposes, it is considered as part of the hospital and must comply.  

Hospital Partnerships: Compliance is also required if emergency or medically necessary care is provided in a hospital by a partnership which the hospital has a capital or profit interest, and it is not an unrelated trade or business with respect to the hospital organization.

The final rule provides clarification regarding organizations that own capital or profit interest in hospital facilities.

Various requirements need to be adopted by an “authorized body,” defined as the board, a committee of or one authorized by the board. The rule allows that a single individual may constitute either a committee of the governing body or a party authorized by the governing body to act on its behalf.

Failure to Satisfy Section 501(r) Requirements

The rule includes a discussion of errors that might occur even if appropriate policies and safeguards are in place. A hospital’s failure to meet one of the requirements that is neither willful nor egregious would be excused if the hospital makes the correction and then makes disclosure.  

An option for correction without disclosure will be available if the omission or error is minor and either inadvertent or due to reasonable cause. The IRS says all relevant facts and circumstances will be considered in determining whether to revoke a hospital’s tax-exempt status. If a hospital fails to meet the CHNA requirement and is assessed a tax, it would not, by itself, affect the status of tax-exempt bonds.