501(r) Penalties Depend on Response to Mistakes

There has been significant discussion this year about new provisions outlined in Section 501(r) of the Internal Revenue Code that nonprofit hospitals must meet to retain their tax-exempt status. The key components are detailed in a newsletter article I wrote earlier this year. Less frequently discussed are the consequences of being non-compliant, whether intentional or unintentional, and the corrections that can be made.

First, let’s address the unintentional.

Compliance mistakes happen. It can be as simple as having a web site that’s down, which prevents your community health needs assessment (CHNA) from being fully accessible to the public. These are things that can be easily and quickly corrected—and as long as they are acknowledged and addressed in a timely manner—trouble can be avoided.

Then, there is intentional non-compliance, defined as “willful and egregious.” Essentially this would involve blatant disregard for any of the 501(r) provisions and/or fixing problem areas that surface.

More likely, compliance problems fall into a grey area, or occur without a hospital being aware they are at risk. These include issues such as:
  • joint ventures and other alliances between nonprofit hospitals and for-profit entities, blurring the line on how to stay compliant;
  • hospitals doing community benefit reports for state reporting requirements and assuming that the same compliance rules apply under 501(r);
  • failure to update CHNAs issued after the first one to demonstrate progress and/or enhanced programs to create meaningful improvement in outcomes; or
  • over-charging a patient who was eligible for the hospital’s financial assistance policy (FAP).
One of the keys to avoiding penalties in this grey zone is to show action was taken to correct an issue once it was discovered, and to disclose any mistakes that were made on the Form 990. For example, in the case of an FAP-eligible patient that was charged too much, the hospital must disclose the error and show that they refunded the charge as soon as the problem was recognized.

The consequences of non-compliance can be significant, and possibly disastrous if an organization’s tax-exempt status is revoked. To minimize the risks, nonprofit hospitals must examine their compliance procedures now to identify where there may be gaps, and quickly address their mistakes and oversights.

Section 501(r) Webinar Invitation

To better understand how to avoid the pitfalls of Section 501(r), we invite you to join a complimentary webinar on September 17.

Internal Revenue Service Materials