CHA News Article

AHA Issues Legal Advisory Regarding IRS, Treasury Guidance for Tax-Exempt Hospitals

The American Hospital Association (AHA) has issued a legal advisory regarding two notices that the Internal Revenue Service (IRS) and Department of Treasury issued on Dec. 30, 2013, related to Section 501(r) requirements under the Affordable Care Act. The advisory explains notices 2014-2 and 2014-3, and notes that comments on the proposed procedures are due March 14.

Notice 2014-2 confirms that hospitals may continue to rely on all of the provisions of the 2012 and 2013 proposed regulations (addressing the requirements for financial assistance policy (FAP), limitation on charges, limitation on collection practices, and community health needs assessments, as well as the consequences for failing to satisfy any of the requirements), pending the publication of final regulations or other applicable guidance. The IRS commented that, while the 2012 proposed regulations explicitly said hospitals may rely on the proposed regulations pending the issuance of final regulations or other applicable guidance, the 2013 proposed regulations included that statement only with respect to community health needs assessment (CHNA) provisions. The agencies noted that hospitals will not be required to comply with the proposed regulations until they are finalized. The agencies gave no indication of when final regulations will be issued. In this notice, the IRS also confirms that the 2013 provisions regarding the consequences for failure to comply with Section 501(r) requirements may also be relied on for guidance pending final regulations or other applicable guidance. Regarding the minor modifications to the definitions of “hospital facility” and “hospital organization” that were made in the 2013 proposed regulations, the IRS states that a hospital may rely on either the modified definitions or the original definitions in the 2012 proposed regulations.

Notice 2014-3 is a follow-up to the 2013 proposed regulations regarding the consequences for noncompliance with Section 501(r) requirements. The 2013 proposed regulations addressed for the first time how the IRS would use its enforcement authority if a hospital failed to meet a Section 501(r) requirement. The proposed regulations responded to the concerns of hospitals that revocation of exemption is an extraordinary remedy and, consequently, the loss of exemption should be reserved for extreme circumstances. Under the proposed regulations, an error or omission that is minor, inadvertent and due to reasonable cause (“tier 1”) will be excused, provided it is corrected as promptly after discovery as is reasonable given the nature of the infraction. Infractions that are more than minor or inadvertent but are not willful or egregious (“tier 2”) will be excused only if the hospital corrects and discloses the noncompliance pursuant to certain procedures. The notice describes the proposed correction and disclosure procedures that must be followed for tier 2-type noncompliance to be excused, as well as offers some examples of this type of noncompliance.

The IRS offers some examples to illustrate corrective actions. For each, the IRS assumes that the failure was corrected with respect to all affected persons as promptly after discovery as is reasonable given the nature of the failure, and that the hospital put in place any needed revisions to existing procedures or established new ones to minimize the likelihood of the failure recurring. Some examples include:

  • Failure to adopt a CHNA report with all of the required elements may be corrected by preparing and adopting a report containing the required elements and making it widely available on a website consistent with the 2013 proposed regulations.
  • Failure to adopt a financial assistance policy (FAP) with all of the required elements may be corrected by establishing a FAP containing all of the required elements and making the FAP widely available on a website consistent with the 2012 proposed regulations.
  • Charging FAP-eligible individuals more than an amount permitted, due to processing errors that are discovered during the month-end accounting period closing, may be corrected by providing all affected individuals with an explanation of the error, a corrected billing statement and a refund of any payments the individuals made to the hospital (or third party) in excess of the amount they are determined to owe as FAP-eligible individuals.
  • Failing to properly implement a FAP that does not involve over-charging a FAP-eligible individual or engaging in an extraordinary collection action (e.g., failing to widely publicize the FAP), may be corrected by beginning to implement the policy correctly and taking reasonable action to compensate for such failure (e.g., conducting additional outreach or advertising the FAP in local media).

In its legal advisory, AHA states it will urge the IRS to include additional examples — in particular, to address more complex factual situations to assist hospitals in determining when a situation may be remedied through these procedures. AHA will also continue to urge that, when a hospital has followed the correction and disclosure procedures, there should be a rebuttable presumption that the failure was not willful and egregious.

The IRS and Department of Treasury request comments on the proposed procedures as well as potential need for additional examples. Comments are due March 14.