On April 3, 2013, the Internal Revenue Service (IRS) announced a proposed rule pursuant to § 501(r) of the Internal Revenue Code (Code), which was enacted as part of the Patient Protection and Affordable Care Act (PPACA). The proposed rule provides guidance to charitable hospitals on the community health needs assessment (CHNA) requirements, which mandates charitable hospitals to conduct a CHNA at least once every three years and to adopt an implementation strategy to meet the community health needs it identified through the assessment. Additionally, the proposed rules address related excise tax and reporting obligations. The proposed rule was published in the Federal Register on April 5, 2013.
These proposed regulations provide guidance on the CHNA requirements of Code section 501(r)(3), and on the related reporting obligations of section 6033. Additionally, the proposed regulations provide guidance on the consequences described in sections 501(r)(1), 501(r)(2)(B) and 4959 for failing to satisfy any requirements listed in section 501(r), including the section 501(r)(4) through 501(r)(6) requirements addressed in the 2012 proposed regulations. Under the proposed rules, whether a hospital will lose its tax-exempt status if it fails to meet the requirements of section (r) depends on the facts and circumstances. If the errors or omissions are neither willful nor egregious, they will be excused if the hospital facility corrects and discloses them. The definition of willful or egregious will be left for future guidance through a notice, revenue procedures or other guidance. Income derived from noncompliant hospitals also will be subject to unrelated business income tax, using a facts and circumstances approach regarding minor and nonegregious cases.
In general, the proposed rules do not provide further guidance regarding sections 501(r)(4) through 501(r)(6) requirements. The proposed rules do, however, make minor amendments to the definitions of “hospital facility” and “hospital organization” contained in the 2012 proposed regulations and also provide a new definition of “operating” a hospital facility that is applicable for purposes of all the section 501(r) requirements.
The proposed rules also provide some clarity regarding the role of hospital facilities in this process. Under these rules, if one hospital in a hospital system loses its tax-exempt status, it does not necessarily affect the tax-exempt status of all the hospitals in the hospital system. Moreover, if a hospital fails to meet one or more requirements of section 501(r) but continues to be exempt under 501(c)(3), the noncompliance itself will not cause the interest of bonds issued to the facility to be taxable.
After the IRS reviews comments it will publish a final rule. The IRS is seeking comments until July 5, 2013.
McGuireWoods is available to assist clients with drafting and submitting comments to the IRS regarding the proposed rule. Our healthcare and nonprofit and tax-exempt organizations groups are well versed in servicing nonprofit clients on an array of legal and business issues in this increasingly complicated, regulated and competitive environment. If you have any questions about the proposed rule or submitting comments to the IRS regarding the proposed rule, please contact one of the authors.