United States: IRC Section 501(r): An ACA Provision That's Likely Here To Stay

For tax-exempt hospitals, the Section 501(r) Internal Revenue Code (IRC) requirements of the Affordable Care Act are "old news" by now. However, despite the recent focus on repeal of the ACA, it is worth noting that this provision is likely here to stay. Sen. Charles Grassley (R-IA), a long-time advocate for low-income, uninsured, and underinsured patients, co-authored this section of the ACA, which is the culmination of years of advocacy for transparency in hospital billing practices. And the Internal Revenue Service (IRS) has wasted no time with its enforcement of the 501(r) rules.

Section 501(r) sets forth detailed financial assistance and billing and collection practices that tax-exempt hospitals must comply with. And while the statutory language of Section 501(r) is fairly straightforward, the corresponding rules, finalized on December 31, 2014, and effective for a hospital's first taxable year beginning after December 29, 2015, establish a detailed and fairly complex legal framework that imposes numerous and stringent compliance obligations on 501(c)(3) hospitals. Failure to comply with the 501(r) rules may result in audits, investigation, corrections, public disclosure of violations and potential loss of tax-exempt status.

Recent IRS Enforcement

The IRS stated in its Tax Exempt and Government Entities FY 2017 Work Plan, published on September 28, 2016, that it had completed 692 reviews of tax-exempt hospitals for compliance with the 501(r) rules and referred 166 hospitals for field examinations as of June 30, 2016 – only six months after hospitals were required to be in compliance with the 501(r) rules. The reasons for referral include:

  • Lack of a Community Health Needs Assessment in violation of IRC Section 501(r)(3),
  • Failure to have Financial Assistance and/or Emergency Medical Care Policies as required by IRC Section 501(r)(4), and
  • Failure to comply with Billing and Collections requirements pursuant to IRC Section 501(r)(6).

It is worth noting that while the 501(r) rules apply to a tax-exempt hospital's first taxable year beginning after December 29, 2015, the IRS is ensuring hospitals are in compliance with Section 501(r) and previous IRS guidance going back as far as a hospital's first tax year beginning in 2012. Given the potential for IRS scrutiny of a hospital's compliance with Section 501(r), it is important to understand the agency's approach to compliance enforcement.

Understanding the Enforcement Framework

The 501(r) rules require hospitals to identify, correct and sometimes publicly disclose violations of Section 501(r) as a requirement for maintaining tax-exempt status. The IRS understands that errors can occur even when hospitals take all proper steps to ensure compliance. In light of this, not all failures to comply with Section 501(r) are treated the same. Instead, errors or omissions are grouped into one of three categories, each of which imposes a different requirement on the hospital:

  • Minor and inadvertent omissions or errors, due to reasonable cause, which must be promptly corrected, but not disclosed.
  • Failures that are not willful or egregious, which must be corrected and disclosed.
  • Willful or egregious failures, which must be corrected and disclosed, and could threaten the hospital's tax-exempt status.

Minor Omissions

If a violation is minor and either inadvertent or due to reasonable cause, and the hospital promptly corrects it after discovery, the IRS will treat it as not having occurred. This category is narrow, however. In the case of multiple omissions or errors, these failures are considered minor only if they are minor in the aggregate. Further, if the same omission or error has been made and corrected in the past, it may not be considered inadvertent and therefore could fall outside this category. To correct minor failures, a hospital must establish and review its practices and procedures aimed at Section 501(r) compliance.

Excusable Failures

These errors either (1) have a broader scope and greater impact on individuals in the community than Minor Omissions, or (2) would not be considered inadvertent or due to reasonable cause. However, because these failures do not rise to the level of being willful or egregious, a hospital may remedy an Excusable Failure by correcting and disclosing the error in accordance with procedures promulgated by the IRS in Revenue Procedure 2015-21 (which include disclosing the correction on a hospital's Form 990 for the taxable year in which the failure is discovered). Disclosure is not necessary for any Excusable Failures that occurred in tax years beginning before 2016 and did not reoccur or continue in 2016. Instead, a hospital should correct the failure and document its compliance or how it was complying with a reasonable, good-faith interpretation of the 501(r) rules.

Willful Failures

The 501(r) rules explain that a Willful Failure includes a (1) failure due to gross negligence, reckless disregard or willful negligence, or (2) egregious noncompliance, which the IRS has stated encompasses serious failures that undermine the intent of Section 501(r) as a whole. Although the IRS refused to adopt a proposed rebuttable presumption approach to gauging Willful Failure, a failure that is corrected and disclosed may still be deemed willful even though disclosure would tend to show otherwise. Like Excusable Failures, Willful Failures must be promptly corrected and disclosed in accordance with Revenue Procedure 2015-21.

Complying with the IRS's Enforcement Framework

Overall, a hospital's policies and procedures and good-faith practices are key to avoiding and possibly reducing the severity of the Section 501(r) violation. As explained above, the IRS's determination of whether a violation is minor or excusable hinges on the effectiveness of a hospital's approach to compliance. In the event of a more serious compliance deviation, self-correction and disclosure can help avoid referral to the IRS and reduce the degree of violation.

Accordingly, to help your organization ensure compliance with the 501(r) rules, consider the following:

  • Review your Financial Assistance, Emergency Medical Care, and Billing and Collections policies and practices for compliance with the 501(r) rules.
  • Be mindful of policy publication requirements. For example, the 501(r) rules require that a hospital's Financial Assistance Policy be widely publicized within the community served by the hospital, which includes making paper copies of the policy documents available upon request and without charge in public locations in the hospital.
  • Hospitals are responsible for the errors of their vendors; therefore, consider reviewing revenue cycle vendor and sub-vendor arrangements for compliance with the 501(r) rules and implementing internal procedures to monitor vendor compliance.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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