April Wilson, RevSpring

April Wilson, RevSpring

On January 13, 2014, the IRS released another memo about 501(r) for not-for-profit hospitals entitled “Notice 2014-3.” The purpose of this notice is to give tax-exempt hospitals guidelines on how to correct and disclose any failures to comply with all sections of 501(r).

As a refresher, there are several key sections that comprise 501(r):

  • 501(r) Section 1: All tax-exempt hospitals that want to be considered as not-for-profit under 501(c)(3) must comply with all sections of 501(r).

  • 501(r) Section 2: All locations of a hospital organization are treated as one entity under 501(r). If one location does not comply, the entire organization cannot be considered compliant.

  • 501(r) Section 3: Requirements of Community Health Needs Assessment (CHNA)

  • 501(r) Section 4: What elements are required in a Financial Assistance Policy and how it must be promoted

  • 501(r) Section 5: How to set limits on charges for those patients that qualify for financial assistance under hospital policy

  • 501(r) Section 6: How Extraordinary Collections Actions are applied to all populations; includes new notification period and application period for financial assistance

This memo outlines recommended processes and procedures for hospitals that fail to comply with all sections of 501(r), whether this failure is egregious and wilful or due to filing omissions. If your hospital fails to comply with any of 501(r) sections 3 through 6, you are expected to make corrections immediately.

Specifically, corrections should include four key components:

  1. Restore any affected parties

  2. Take reasonable actions on those affected

  3. Demonstrate a prompt response (no time limits are outlined, however all examples show corrections made within the subsequent time period, whether that is a billing period or filing year)

  4. Outline safeguards that have been implemented to prevent similar errors from occurring

In addition to taking corrective actions, hospitals are also required to disclose all aspects of the failure. While the minimum disclosure is on the IRS 990 form, Schedule H, the IRS is currently taking comments from all interested parties on whether or not additional disclosure should be required in the event of a 501(r) failure.

At the bare minimum, on the IRS 990 filing, hospitals that discover a violation need to include the following four elements with their filing for each incidence disclosed:

  1. Give a full description of the failure – what happened, where it happened, the date of the failure, total patient affected, and the dollar amounts involved. If there were processes already in place to prevent this kind of problem, please explain what they are.

  2. Give a detailed report on how the violation was discovered.

  3. Explain how you are making restoration or how you are correcting the violation – the method, the dates of the correction(s), and proof that those affected were restored.

  4. A description of all practices and procedures your hospital is putting in place (whether they are new or existing policies you have revised based on the events) to prevent future violations of this type.


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