On August 4, 2017, the Internal Revenue Service (IRS) released its first revocation of a hospital’s tax exemption under Internal Revenue Code (IRC) Section 501(c)(3) for failure to comply with Section 501(r) of the Affordable Care Act.
Background. Section 501(r) and its regulations imposed new requirements on 501(c)(3) organizations that operate one or more hospital facilities. Among others, the law and regulations require each hospital organization to conduct a community health needs assessment (CHNA) to assess the health needs of the community it serves, including financial and other barriers to care. In that context, each hospital facility is required to meet a variety of requirements, including:
- Conducting a CHNA at least once every three years
- Making the CHNA publicly available on a website
- Adopting an implementation strategy to meet the needs identified in the CHNA
The written implementation strategy must describe how the facility plans to address the health need or, if it does not intend to address the need, explain the facility’s decision. Failure to comply with these requirements may result in revocation of the hospital’s 501(c)(3) status and a $50,000 excise tax on the hospital. The IRS has indicated that minor errors or omissions that are inadvertent, and even ones that are more than minor but not willful or egregious, will be excused if the hospital corrects them and discloses the errors.
The final rule interpreting these requirements for tax-exempt hospitals was published in the Federal Register on December 31, 2014, and became effective for tax years beginning after December 29, 2015.
Facts. In the recent case, the hospital in question had “dual status.” As a formerly private, nonprofit organization, it had received confirmation from the IRS that it was tax-exempt under Section 501(c)(3), but it had later been taken over by a county agency and became a tax-exempt governmental unit. The hospital had a CHNA prepared in order to keep its Medicare designation as a “critical care access facility.” The hospital prepared an implementation strategy report but never made it widely available to the public via a website, claiming it had a paper document available to the public upon request. Although the hospital administrators stated that they may have acted on several of the recommendations in the report, no separate implementation strategy was ever developed as the regulations required In their interview with the IRS, administrators said that they did not need or want their tax-exempt status under Section 501(c)(3), and as a small, rural facility, they did not have the financial ability or staffing to devote to the requirements of the CHNA.
Ruling. The IRS concluded that the hospital had failed to comply with the portions of Section 501(r) that required adopting an implementation strategy to meet the community needs identified through its CHNA and making its CHNA report widely available to the public. The IRS considered these failures to be not minor but “egregious.” Because the hospital’s administrators indicated they had neither the will nor the financial resources to complete the CHNA process, the IRS considered the hospital’s actions to be willful. Consequently, the IRS concluded the hospital had failed to comply with the requirements of Section 501(r), and its tax-exempt status should be revoked.
Although this ruling was based on a unique set of facts, it indicates that the IRS considers a hospital’s failure to complete and adopt an implementation strategy and to post the CHNA on a website to be egregious failures, which are sufficient grounds for revocation of the hospital’s Section 501(c)(3) exemption.
The law requires the IRS to review the community benefit activities of each Section 501(c)(3) hospital every three years, which includes a review of the hospital’s Form 990, its website and other publicly available information. If the IRS finds evidence of noncompliance, this will likely cause the hospital to be referred for examination. In light of this ruling, hospitals should carefully review their own compliance with the requirements of Section 501(r), including implementation strategy and posting of the CHNA to a website.