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Angie Fidler, CPA, CGMA Senior Manager, Not-for-Profit and Health Care Consulting Practices, Moss Adams LLP

IRC Section 501(r) Requires Tax-Exempt Hospitals Make Modifications by December 29, 2015

By Angie Fidler, CPA, CGMA
Senior Manager, Not-for-Profit and Health Care Consulting Practices
Moss Adams LLP

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Original Publish Date: August 10, 2015

The largest change to tax exemption for hospitals in more than 40 years—under Section 501(r) of the Internal Revenue Code—will become mandatory for hospitals for tax years beginning after December 29, 2015.

The long-awaited final regulations, which took nearly five years to complete, largely mirror and clarify the proposed regulations, with minor modifications, and are consistent with changes affecting the health care industry overall.

In short, this change puts an increased emphasis on preventative care and encourages hospitals to adopt a holistic approach in providing community services, all the while evaluating their impact on the community. Hospitals will be required to be more transparent with their patient populations by detailing their fees, their financial assistance policies, and their billing and collections policies. This information also will need to be provided in multiple languages to reflect their community populations.

While the final regulations largely resemble the proposed regulations, there are differences and clarifications pertinent to tax-exempt hospitals. Here are some of the key differences:

501(r)(3): Community Health Needs Assessment

The scope of the community health needs assessment (CHNA) was expanded to include a need to prevent illness; ensure adequate nutrition; and address social, behavioral, and environmental factors that influence health in the community. Highlights of other CHNA requirements and changes include:

501(r)(4): Financial Assistance Policies

The final statutes for hospital financial assistance polices (FAPs) were loosened a bit compared with the strict requirements in the proposed regulations. Hospitals will likely want to include as many discounts as possible in the FAP unless it’s impractical or improbable. Details for FAPs include:

501(r)(5): Limitation on Charges

Hospitals must discount the amounts they charge patients eligible for assistance under their FAP, according to 501(r)(5). FAP-eligible individuals must pay no more than the amounts generally billed (AGB) to insured patients for emergency or other medically necessary care, and must pay less than gross charges for other medical care covered by the FAP.

Two options are provided for calculating AGB:

Under the final regulations, hospitals are able to:

501(r)(6): Billing and Collection Policies

Hospitals are allowed to employ extraordinary collection actions (ECAs) to protect the use of its charitable assets, but only after it determines, using “reasonable efforts,” an individual’s FAP-eligibility, according to 501(r)(6). If a hospital never intends to initiate ECAs, then there’s no need to satisfy reasonable efforts requirements.

While hospitals may still provide the most generous assistance to presumptive FAP-eligible individuals, hospitals are allowed flexibility in determining if an individual qualifies for less than the most generous assistance under its FAP, which is based on information other than provided by the individual or based on a prior determination.

The final regulations allow FAP-eligibility determinations to be postponed to give hospitals time for Medicaid applications and determinations. Hospitals must create ECA Initiation Notices and provide them to patients against whom they intend to engage in ECAs, whether or not a completed FAP application has been received.


In order to be compliant with the new regulations, hospitals are required to adjust their practices and policies. Those organizations that didn’t revise existing policies in preparation when these changes were first proposed five years ago will require significant updating, particularly when it comes to billing and collection policies. Fortunately, most tax-exempt hospitals have prepared for these changes and will only need to make slight modifications to fully comply for tax years after December 29, 2015.

Tax-exempt hospital facilities that fail to comply with Section 501(r) requirements risk revocation of its tax-exempt status. If a hospital fails to properly conduct and implement CHNA, the facility is subject to an excise tax of $50,000.

However, the IRS clarified that minor omissions and errors with respect to 501(r) won’t be considered a failure to meet the requirements of 501(r) if it’s inadvertent or due to reasonable cause, and the hospital facility corrects the omission or error promptly after its discovery.

The final regulations are effective for tax years beginning after December 29, 2015. All tax-exempt hospitals will be required to be compliant and therefore have some level of changes that need to be implemented in the next year. Additionally, hospitals that last conducted their CHNA in fiscal year 2012 and will be conducting their second during 2015 will need to determine whether to rely on the proposed regulations, the final regulations, or another reasonable interpretation.

Angie Fidler has worked in public accounting since 2008. She focuses on not-for-profit tax compliance, research, and planning, including specialty issues, such as excess benefit transactions, unrelated business income, and employee benefits. You can reach her at (206) 302-6385 or angie.fidler@mossadams.com.

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