A few years ago, I wrote two blog posts (#1 and #2) regarding the likely penalties that a hospital qualifying for Section 501(c)(3) status (a “501(c)(3) hospital”) would incur if it failed to comply with the Patient Protection and Affordable Care Act (“ACA”) provisions set forth in Section 501(r) of the Internal Revenue Code of 1986, as amended. In sum, there are three levels of penalties for three levels of violations. Minor violations of the ACA made inadvertently or due to reasonable cause may be corrected by the 501(c)(3) hospital without any need to disclose them. Mid-level violations of the ACA require corrective action, restitution, and a public disclosure of the violation by the 501(c)(3) hospital. Willful or egregious violations may result in revocation of a 501(c)(3) hospital’s status as such.
Letter Ruling 201731014, which is dated February 14, 2017 but was not published until late summer, sheds some light on what the IRS considers a “willful or egregious” violation of the ACA. In this letter ruling, the IRS found willful and egregious violations of the ACA, and therefore revoked the hospital’s 501(c)(3) status. One of the requirements set forth in 501(r) is that the 501(c)(3) hospital must conduct a community health needs assessment (a “CHNA”) every three years and adopt an implementation strategy to meet the community needs set forth in the CHNA. The 501(c)(3) hospital in PLR 201731014 apparently completed a CHNA at some point in order to continue to receive Medicare funding. However, the report was never made widely available to the public via the 501(c)(3) hospital’s website, nor was an implementation strategy ever developed. In addition, the administrators of the 501(c)(3) hospital told the IRS that the hospital had neither the financial wherewithal nor the employees to conduct a CHNA every three years.
If you are admiring the honesty of the 501(c)(3) hospital administrators, your admiration may not be warranted. The 501(c)(3) hospital was also a governmental hospital, and thus exempt from federal taxation (and eligible to be the beneficiary of tax-exempt bonds) on that basis. Apparently, when the 501(c)(3) hospital had financial difficulties and was planning to shutter its doors, a governmental agency agreed to take over. Thus, when the IRS was auditing the 501(c)(3) hospital, the administrators thereof stated that the hospital did not need its 501(c)(3) status. In fact, the administrators went so far as to gratuitously tell the IRS that they found the hospital’s 501(c)(3) status to be bothersome at times, as it prevented the hospital from participating in certain Medicare reimbursement arrangements.
Accordingly, we can assume that the 501(c)(3) administrators did not offer up relevant evidence as to how they tried to comply with the CHNA requirement set forth in 501(r) but were not able to do so, despite their good intentions, due to a lack of resources. That plausible scenario would have provided a lot more insight for 501(c)(3) hospitals and their advisors. However, we do now know that if you are an entity with 501(c)(3) status, and would like to get rid of that status, just gratuitously tell the IRS that you find the 501(c)(3) status a nuisance, and the IRS might just take it away.