Tax-Exempt Hospitals: IRS Issues Proposed Regs Under IRC 501(r) Regarding Community Health Needs Assessments

In response to Congressional concerns that there was little to distinguish a for-profit hospital from a tax-exempt nonprofit hospital, Congress enacted IRC 501(r) which mandates that tax-exempt nonprofit hospitals:

1.        Conduct community health needs assessments;

2.        Establish and disclose financial assistance policies;

3.        Limit charges to needy individuals; and

4.        Follow reasonable billing and collection practices.

Treasury has issued proposed regulations under IRC 501(r).  The proposed regulations are in addition to Notice 2011-52 which sunsets October 5, 2013.  As noted above, among the requirements of IRC 501(r) is the requirement that the hospital conduct a community health needs assessment once every three years, and to have adopted an implementation strategy to meet the community health needs identified in the assessment.  IRC 501(r) carries some serious teeth.  Failure to comply with IRC 501(r) potentially jeopardizes a hospital’s tax-exempt status.  Also, hospitals that fail to conduct and implement a community health needs assessment may be liable for a $50,000 excise tax under IRC 4959.

The proposed regulations provide a flexible facts and circumstances regulatory scheme and a good roadmap as to how a hospital conducts a community health needs assessment.   More importantly, the proposed regs may be relied upon by a tax-exempt hospital until final or temporary regs replace them.  Some of the highlights from the Regs are:

1.        Hospitals may collaborate with other facilities in conducting a community health needs assessment, and facilities that serve all the same communities may issue a joint report;

2.        Facilities that collaborate with one another may duplicate portions of their reports;

3.        Each hospital must define the community it serves.  However, there is flexibility in the definition.  A hospital may define its community by geography, target populations, and principal functions;

4.        The community health needs assessment must assess and address the needs of medically underserved, lower-income and minority populations in the area it serves;

5.        The community health needs assessment must identify significant health needs, prioritize those needs, and identify measures and resources to address those needs;

6.        The proposed regs require that the facility obtain input from state, regional or local public health departments, and members of medically underserved populations; and

7.        The community health needs assessment must be widely available to the public, e.g. posted on the hospital’s website and making printed copies available.

Once the community health needs assessment is issued, the hospital has until the end of the year in which the needs assessment is issued to issue an implementation strategy which either explains how the hospital intends to address the need, or explain why it does not intend to address the need.

The proposed regulations also provide penalty relief where the error is inadvertent and due to reasonable cause, if it is corrected promptly upon discovery.  More serious errors  that are not willful or egregious may be excused if the facility corrects and provides disclosure.

For more information about these proposed rules or tax law generally please contact Leslie Pesterfield.

State Insurance Exchanges & Employer Tax Penalties

IRS Provides Safe-Harbor Guidance to employers under the Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 (“PPACA”).

Background:  Under PPACA, beginning January 1, 2014, each state has been tasked with establishing an American Health Benefit Exchange and Small Business Health Options Program.  The purpose of the mandated exchange and options program is to provide qualified individuals and qualified small business employers access to qualified health plans.  Individuals who are eligible to participate in a qualified health plan through a state established exchange may also be eligible for a Federal income tax credit and cost sharing subsidy in order to help defray the cost of the premiums under the state established exchange.

“Large employers” are required to offer their full-time employees (and their dependents) health insurance meeting minimum essential coverage.  Full-time employees are those that average at least 30 hours of service a week.  Under PPACA a large employer is one who employees at least 50 full-time employees on business days during the preceding calendar year.  Hours of service by part-time employees are taken into account in determining full-time equivalent employees for purposes of 50 full-time employees.

If the employer fails to offer health insurance providing minimum essential coverage to its full-time employees (and their dependents), the employee may be eligible to participate in one of the state exchange programs.  If full-time employees of “large employers” participate in one of the state exchange programs and receive a Federal income tax credit or subsidy, the employer faces a potential excise tax penalty.  Under IRC 4980H, the penalty is equal to the product of:

1.         $2,000 adjusted for inflation (prorated based on number of months in the year); x

2.         The number of full-time employees over 30.

Example:  In 2014, ACME, Inc. fails to provide minimum essential coverage to its 60 full-time employees, 1 of which receives a Federal income tax credit to help defray the cost of enrolling in a Washington state exchange plan.  ACME, Inc. may be liable for a penalty equal to $2,000 x 30 (60 full-time employees – 30), or $60,000 prorated on a monthly basis.

The Notice:  In Notice 2012-58, 2012-41 IRB, the IRS has provided helpful guidance to employers in determining who must be offered minimum essential coverage, or risk assessment of a penalty.  Helpful guidance includes:

1.         Employers may use a look-back measurement of between 3-12 months (as chosen by the employer) in order to determine whether the employee averaged at least 30 hours of service per week.

2.         If under the look back period the employee is a full-time employee, the employee is treated as a full-time employee during the prospective six calendar months, or the look back period, whichever is longer;

3.         Employers may impose a waiting period of 3 months before offering minimum essential coverage if the employer maintains a group health plan that meets certain minimum requirements without being subject to the penalty under IRC 4980H;

4.         An employer will not be subject to the penalty under IRC 4980H, if it offers to its employees health insurance coverage that is deemed affordable based on the employee’s IRS Form W-2 wages as reported in box 1 of the IRS Form W-2.

If you have any questions regarding this article please contact Leslie Pesterfield.