United States: Creeping Normality: IRS Releases Final Regulations Under Section 501(r)

On December 31, 2014, the U.S. Department of the Treasury and the Internal Revenue Service (collectively, IRS) released 64 pages of regulations1 (Final Regulations) finalizing a number of requirements with which charitable hospitals must comply in order to avoid significant fines or the loss of their tax-exempt status. Despite their length, the Final Regulations do not contain any dramatic surprises (positive or negative) or onerous new requirements compared to the various proposed rules under Section 501(r) issued over the past few years.

Instead, the Final Regulations contain dozens of small changes to the previously issued proposed rules that will become mandatory for compliance with Section 501(r) of the Internal Revenue Code for tax years beginning after December 29, 2015. The multitude of various requirements will make for important (but tedious) reviews of existing financial assistance and billing and collection policies to ensure full compliance with the Section 501(r) and the new regulations. For those hospitals that previously drafted financial assistance and collection and billing policies to satisfy the requirements set forth in the proposed rules, numerous small revisions will still be required to such policies. For those hospitals that did not revise their policies to rely on the proposed rules, the ability to rely solely on the statute for reasonable interpretations of Section 501(r) for tax years beginning after December 29, 2015, will be gone, and significant revisions to their existing policies will be required.

Failure to comply with Section 501(r) (other than minor omissions and errors) can result in the imposition of a $50,000 fine per hospital and/or loss of tax-exempt status. In addition, failure to have "bullet-proof" policies under Section 501(r) could be a meaningful impediment to hospitals seeking new or refunding bonds when such hospitals must demonstrate, on an unqualified basis, that they are described in Section 501(c)(3) of the Code as a condition of financing.

Below are just some of the changes set forth in the Final Regulations as they apply to each subsection under Section 501(r).


Under Section 501(r)(3), a charitable hospital is required to conduct a community health needs assessment (CHNA) every three years and to adopt an implementation strategy to meet the community needs identified in such CHNA. The proposed regulations focused on how to define the "community" served by the hospital, how to assess the needs of such community, how to solicit the requisite input from persons representing the broad interests of the hospital's community, how to document in writing the results, how such CHNA must be approved by an authorized body, and how a hospital must make both the CHNA and implementation strategy widely available to the public. The proposed regulations also provided guidance on how multiple hospitals may work together to prepare a joint CHNA.

For the most part, the Final Regulations follow the guidance provided by the proposed regulations, but they also include important clarifications and additional guidance regarding the requirements for satisfaction of Section 501(r)(3).

Expanding The Scope Of A Community's Needs

In the Final Regulations, the IRS expanded the scope of "health needs" a hospital could assess for purposes of the CHNA beyond just financial and barriers to care. The rules now include the need to prevent illness; to ensure adequate nutrition; and to address social, behavioral and environmental factors that influence health in the community. The Preamble to the Final Regulations notes that the list of possible health needs in the Final Regulations is only a list of examples and that a hospital is not required to identify all such types of health needs in its CHNA report if such types of needs are not determined to be significant health needs in the community.2 Treas. Reg. § 1.501(r)-3(b)(4).

Defining A Hospital's "Community"

The Final Regulations continue to provide great flexibility to hospitals with respect to determining what constitutes a hospital's "community" for purposes of the CHNA requirement, provided that the community is not defined in a manner to exclude medically underserved, low-income or minority populations. Treas. Reg. § 1.501(r)-3(b)(3).


Hospitals are required to define their communities in a variety of contexts for tax purposes, including Section 501(r) and unrelated business income tax compliance. Especially with accountable care organizations (ACOs) and health information exchanges (HIEs) redefining the community of a hospital for Section 501(c)(3) purposes, it is imperative for a hospital to have consistent definitions of its community throughout its tax positions, or have reasonable arguments as to why it uses the term differently in different contexts.

Joint CHNAs With Other Hospitals

The Final Regulations permit unrelated hospitals that identically define their communities to prepare a joint CHNA and a joint implementation strategy. For hospitals participating in a common ACO, this strategy may achieve cost efficiencies. Further, the Final Regulations permit hospitals that have overlapping but not identical communities to jointly prepare parts of their CHNAs, and provide procedures that should be followed by such hospitals in such instance. Treas. Reg. §§ 1.501(r)-3(b)(6)(v) and 1.501(r)-3(c)(4).

Inability To Get Input For CHNA From All Requisite Stakeholders

The Final Regulations recognize that there may be times where a hospital, despite reasonable efforts, may not be able to secure input on its CHNA from all the required categories of persons listed in the regulations. Accordingly, the Final Regulations clarify that failure to secure input from all required categories of persons will not cause a hospital's CHNA to fail compliance with Section 501(r)(3) provided that the hospital has made and has documented that it has made reasonable efforts to secure the input from such persons. The CHNA report must describe such reasonable efforts made by the hospital. Treas. Reg. § 1.501(r)-3(b)(6)(iii).

Required Components Of Implementation Strategy

In the proposed regulations, hospitals were required to include in their implementation strategy a plan to evaluate the impact made by such strategy. In the Final Regulations, this requirement has been replaced with a new requirement that a hospital's CHNA include an impact evaluation of the actions taken by the hospital on significant health care needs it identified in its previous CHNA. Treas. Reg. § 1.501(r)-3(b)(6)(i)(F).

Extension Of Time To Adopt Implementation Strategy

One source of controversy in the proposed regulations was the requirement that the authorized body of the hospital adopt an implementation strategy by the end of the same taxable year in which the hospital finished conducting the CHNA. The Final Regulations provide additional flexibility by extending the due date for implementation strategy adoption to a date on or before the 15th day of the fifth month after the end of the taxable year in which the CHNA was conducted. Accordingly, the authorized body must adopt the implementation strategy by the initial (non-extended) due date of the hospital's Form 990. Treas. Reg. § 1.501(r)-3(c)(5).

CHNA Due Date For Acquired Or Transferred Hospital Facilities

The Final Regulations contain an assortment of rules regarding the transfer or acquisition of hospital facilities and the effect that the timing of such events has on the CHNA requirements. With respect to hospitals that are transferred during any given year, the Final Regulations expressly state that such transferred hospital facility is not required to meet the requirements of Section 501(r) in the year of transfer. The IRS declined, however, to exempt newly acquired hospitals (along with new or newly subject to Section 501(r) hospitals, for that matter) altogether, explaining that the proposed regulations were intended to give such entities the standard three tax periods (albeit less than three full calendar years) to comply with Section 501(r)(3). Because of how short-periods function during the year of acquisition or placement into service, the CHNA clock resets as a short taxable year of less than 12 months and is considered a full taxable year for Section 501(r) purposes. Treas. Reg. §1.501(r)-3(d)(4).

Read the full Special Report here.


1 Department of the Treasury, Internal Revenue Service, "Additional Requirements for Charitable Hospitals; Community Health Needs Assessments for Charitable Hospitals; Requirement of a Section 4959 Excise Tax Return and Time for Filing the Return," 79 Fed. Reg. 78954, available at https://federalregister.gov/a/2014-30525.

2 Id. at 78963.

Creeping Normality: IRS Releases Final Regulations Under Section 501(r)

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