Proposed Regulations On Federal Income Tax Exemption For Hospitals

As previously reported, the Treasury Department released proposed regulations on June 22, 2012 interpreting and implementing specific requirements for hospitals to maintain their Section 501(c)(3) tax-exempt status under Section 501(r) of the Code. Section 501(r) was enacted as part of the 2010 Health Care Reform Act (the "Act").

The proposed regulations provide guidance for the following requirements of Section 501(r): required financial assistance policies, required emergency care policy, amounts that may be charged to patients eligible for financial assistance, and the requirement that hospitals make reasonable efforts to determine whether individuals are eligible for financial assistance before initiating extraordinary collection actions. The other Section 501(r) requirements, that hospitals conduct community health needs assessments, has been addressed by the IRS in separate guidance. The Supreme Court's decision in National Federation of Independent Businesses v. Sebelius upholding the Act in its entirety on June 28, 2012 eliminates any lingering uncertainty on whether the requirements of Section 501(r) will continue to remain in effect, and tax-exempt hospitals should review the proposed regulations and their existing policies and procedures carefully to ensure that they will be in compliance with these new, detailed requirements when effective.

Hospitals should keep in mind that the provisions addressed by the proposed regulations have been the law since 2010. A hospital that does not comply with one of the requirements is theoretically subject to revocation of tax exemption. The regulations are only proposed, not final, but can be relied upon, and hospitals would be well advised to comply with these specific requirements of the proposed regulations.

Required Financial Assistance Policies

Section 501(r)(4) requires a hospital organization to establish a written financial assistance policy. The statute specifies that the financial assistance policy must include: (1) eligibility criteria for financial assistance, and whether such assistance includes free or discounted care; (2) the basis for calculating amounts charged to patients; (3) the method for applying for financial assistance; (4) in the case of an organization that does not have a separate billings and collections policy, the actions the hospital organization may take in the event of nonpayment; and (5) measures to widely publicize the policy within the community served by...