IRS Publishes Two Notices with Additional Guidance for Tax-Exempt Hospitals Regarding Section 501(r) Compliance

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By Neal N. Peterson, Esq., and Emily S. Pryor
Winton, Esq.

Dorsey & Whitney, Minneapolis, MN

On December 30, 2013, the Internal Revenue Service ("IRS")
released two notices related to §501(r) which should be of interest
to tax-exempt hospitals. The first notice addresses the ability of
tax-exempt hospitals to rely on two sets of previously published
proposed regulations. Perhaps more significantly, the second notice
proposes correction and disclosure procedures available to
tax-exempt hospitals that fail to meet the requirements of

Background to Section 501(r)  

In 2010, the Patient Protection and Affordable Care Act added
§§501(r) and 4959 to the Code and amended §6033(b).  Section
501(r)(1) provides that a hospital organization will not be treated
as tax exempt as described in §501(c)(3) unless the organization
meets the requirements of §501(r)(3) through (6) as follows:

  Section 501(r)(3) requires a tax-exempt hospital
organization to conduct a community health needs assessment
("CHNA") at least once every three years and to adopt an
implementation strategy to meet the community needs identified in
the assessment.

  Section 501(r)(4) requires a tax-exempt hospital
organization to maintain a qualified financial assistance policy
and an emergency medical care policy.

  Section 501(r)(5) requires a tax-exempt hospital
organization to limit the amounts it charges for emergency or
medically necessary care and prohibits a hospital from using its
gross charges in such cases.

  Section 501(r)(6) requires a tax-exempt hospital
organization to comply with certain billing and collection

The requirements of §501(r)(3) are effective for a hospital
organization's first tax reporting year beginning after March 23,
2012. The other requirements of §501(r) went into effect with a
hospital organization's first tax reporting year beginning after
March 23, 2010.

Notice 2014-2  

The primary purpose of Notice 2014-2 is to confirm that
tax-exempt hospital organizations can rely on all of
the provisions of the proposed regulations published on June 26,
2012, and April 5, 2013, regarding compliance with §501(r) until
final or temporary regulations are published or other applicable
guidance is provided.

On June 26, 2012, the IRS and the Treasury published proposed
regulations regarding the requirements of §501(r)(4), (5) and (6),
as well as proposed definitions of certain key terms used in the
proposed regulations (collectively, the "2012 Proposed
Regulations") .

On April 5, 2013, the IRS and the Treasury published proposed
regulations regarding (1) the CHNA requirements of §501(r)(3), (2)
the related excise tax set forth in §4959 and (3) the reporting
obligations set forth in §6033 (collectively, the "2013 Proposed
Regulations") . In addition to these three provisions, the 2013
Proposed Regulations also made some minor revisions to the
definitions of "hospital organization" and "hospital facility"
contained in the 2012 Proposed Regulations and it provided guidance
on the consequences of failing to satisfy any of the requirements
of §501(r).

In response to questions it received, the IRS issued Notice
2014-2 to confirm that it is appropriate to rely on
all of the provisions of both the 2012 Proposed
Regulations and the 2013 Proposed Regulations. Notice 2014-2 also
confirms that hospital organizations may rely on §1.501(r)(3) of
the 2013 Proposed Regulations for any CHNA-conducted implementation
strategy adopted on or before the date that is six months after
final or temporary regulations are published.

Notice 2014-3  

Notice 2014-3 sets forth the IRS's proposed correction and
disclosure procedures pursuant to which the IRS may excuse a
hospital's failure to meet certain §501(r) requirements. 
Specifically, the 2013 Proposed Regulations state that a tax-exempt
hospital organization's failure to meet one or more of the
requirements listed in §501(r) or §1.501(r)(3) through (r)(6) (of
the proposed regulations) will be excused if such failure is
neither willful nor egregious and if the hospital makes the
necessary correction and disclosure as described in Notice

Generally, Notice 2014-3 states that the IRS will excuse a
tax-exempt hospital organization's failure to meet a §501(r)
requirement if such failure (1) falls within the scope of §4 of
Notice 2014-3, (2) is corrected in accordance with §5 of Notice
2014-3, and (3) is disclosed as set forth in §6 of Notice
2014-3.  Notwithstanding the foregoing, the IRS notes that a
failure to meet §501(r)(3) may still subject a hospital to excise
tax as described in §4959.  Below is a summary of Sections 4
("Scope"), 5 ("Correction") and 6 ("Disclosure") of Notice

  Section 4 of Notice 2014-3: "Scope." A failure will only
be excused if the hospital has disclosed and begun correcting it
before the IRS first contacts such hospital about an
examination. The IRS stresses that while the foregoing does not
create the presumption that such failure was not egregious and
willful, it may serve as an indication that it was not egregious or

  Section 5 of Notice 2014-3: "Correction." The IRS
provides four correction "principles" that hospitals should follow
when correcting a failure to comply with §501(r): (1) the hospital
must strive to restore each person affected by the failure to the
position they would have occupied had the failure not occurred; (2)
the hospital should take all other "reasonable and appropriate"
corrective actions; (3) the hospital should make the correction as
quickly as possible after its discovery; and (4) the hospital
should create new or modify existing internal policies and
procedures to prevent similar failures from occurring in the
future. Section 5 concludes with some examples of hospitals
following these four correction principles.

  Section 6 of Notice 2014-3: "Disclosure." Here, the IRS
states that it will deem a failure to have been "disclosed" for
purposes of Notice 2014-3 if the hospital reports certain
information on Schedule H of its Form 990 for the tax year in which
it discovers such failure.  This information is as follows:
(1) a description of the failure (including its type, location,
number of occurrences, and so on); (2) a description of the
failure's discovery; (3) a description of the correction(s) made
(including the method and date of corrections, how the affected
persons were restored, etc.); and (4) a description of the
practices and procedures that were established (or if already in
existence, modified) to prevent future similar failures from

Notice 2014-3 provides a road map that tax-exempt hospital
organizations should follow when seeking to excuse one or more
failures to comply with §501(r). The IRS is currently seeking
comment on this relatively brief guidance. Comments must be
submitted by March 14, 2014.


Many hospital organizations have just completed their first tax
reporting year since the requirements of §501(r)(3) have gone into
effect. The publication of Notice 2014-2 and Notice 2014-3
highlights the need to review your compliance with all of the
requirements of §501(r).

For more information, in the Tax Management Portfolios, see
Webster, 451 T.M.
, Tax-Exempt Organizations: Operational
Requirements, Washlick, 873 T.M., Nonprofit Healthcare
Organizations: Federal Income Tax Issues,  and in Tax
Practice Series, see ¶7010, Procedural Aspects of Obtaining and
Maintaining Exemption.