My last blog entry discussed how the final regulations issued last December under the Patient Protection and Affordable Care Act (“ACA”) were mostly good news for charitable hospitals that benefit from the issuance of 501(c)(3) bonds. For example, under these regulations, only egregious violations by a charitable hospital of the requirements imposed under the ACA should negatively affect the hospital’s 501(c)(3) status and, consequently, the tax-exempt status of the qualified 501(c)(3) bonds from which the hospital benefits.
Since that last post, the IRS has published Revenue Procedure 2015-21 (“2015-21”), which supplements the final regulations and is effective as of March 10, 2015. In general, 2015-21 provides procedures that charitable hospitals can follow so that certain mid-level failures under the ACA are excused. In order to be excused, however, the charitable hospital will be required to take corrective actions, make restitution and to wear a scarlet letter of sorts announcing to the public that it committed an ACA violation. (A scarlet “A” for “ACA violator.”) Although this may be somewhat painful, a charitable hospital should avail itself of these procedures so that one or more mid-level violations of the ACA do not collectively rise to the level of an egregious violation (which could result in the loss of a charitable hospital’s 501(c)(3) status and adversely affect the tax-exempt status of the qualified 501(c)(3) bonds that were issued for the hospital’s benefit).
As you may remember, the final regulations place ACA violations into three categories. The first category includes minor violations that were made inadvertently or due to reasonable cause. Under the final regulations, the charitable hospital may correct these failures without having to disclose them. The third category involves willful or egregious violations of the ACA. For this purpose, “willful” includes a violation resulting from gross negligence, reckless disregard, or willful neglect. An “egregious” violation results from a very serious failure after taking into account both the severity of the violation and the number of people affected by it. 2015-21 does not provide any relief for willful or egregious violations.
The second category of ACA violations under the final regulations are those that fall between the minor violations described above and the willful or egregious violations. 2015-21 applies to this mid-level category of ACA violations.
For a charitable hospital that has committed a mid-level ACA violation, 2015-21 provides procedures that will enable the charitable hospital to be excused – for a price. These procedures involve corrective action, restitution and a scarlet letter. In order to be valid, corrective action taken by the charitable hospital must be prompt, reasonable and appropriate. In addition, the charitable hospital must identify and correct any weaknesses in its practices and procedures. Finally, the charitable hospital must issue a refund to any individual that was negatively affected by a billing or collection violation (even if it was in a tax year that is now closed from an IRS audit standpoint).
In addition to correcting the problem, the charitable hospital must adequately disclose the ACA violation. Adequate disclosure of the ACA violation must be made on the charitable hospital’s Form 990 covering the tax year in which the violation was discovered. If the charitable hospital is not required to file a Form 990, it must disclose the violation on its website by the date that its Form 990 would have been required to have been filed if it had to file one. The disclosure must include an explanation of what caused the violation, the name of the specific hospital facility where the violation occurred, an estimate of the number of individuals who were negatively affected by the violation, and an estimate of the total number of dollars involved. In addition, the charitable hospital must disclose how it corrected the violation and any changes it made to its practices and procedures to ensure that such a violation will not happen again.
Finally, it should be noted that if a charitable hospital commits a mid-level violation of the Community Health Needs Assessment requirement, the $50,000 excise tax imposed by Section 4959 of the Internal Revenue Code will apply even if the charitable hospital follows the procedures set forth in 2015-21.
In sum, notwithstanding the public shaming of the scarlet letter, a charitable hospital with 501(c)(3) status should follow the procedures set forth in 2015-21 for all mid-level ACA violations in order to preserve both its 501(c)(3) status and the tax-exempt status of the qualified 501(c)(3) bonds from which the hospital benefits.