IRS Issues Final 501(r) Regulations Detailing Requirements for 501(c)(3) Charitable Hospitals

IRS Issues Final 501(r) Regulations Detailing Requirements for 501(c)(3) Charitable Hospitals


On December 29, 2014, the Internal Revenue Service (“IRS”) issued final regulations (“Final Regulations”) under new section 501(r) of the Internal Revenue Code (“Code”).  The Final Regulations contain numerous changes and clarifications of the proposed regulations issued in 2012 and 2013.


The Patient Protection and Affordable Care Act of 2010 added new section 501(r) to the Internal Revenue Code to provide additional requirements that charitable hospitals must meet to maintain their tax exempt status under section 501(c)(3) of the Code.

On June 26, 2012, the Treasury Department and the IRS issued proposed regulations (the “2012 Proposed Regulations”) addressing the requirements of sections 501(r)(4)-(6) covering financial assistance policies, limitations on charges, and billing and collections.  A link to our earlier analysis of the 2012 Proposed Regulations is available here.

On April 5, 2013, the Treasury Department and the IRS issued proposed regulations (the “2013 Proposed Regulations”) that addressed the requirements of section 501(c)(3) covering community health needs assessments (“CHNA”) and the consequences of failing to meet the requirements of 501(r).

In January 2014, the Treasury Department and the IRS issued Notice 2014-2 to confirm that hospital organizations could rely upon the 2012 and 2013 Proposed Regulations until Final Regulations were issued.  The Final Regulations provide that the 2012 and 2013 Regulations may both be relied upon until a hospital organization’s first taxable year beginning after December 29, 2015.

In addition, in January of 2014, the Treasury Department and the IRS published Notice 2014-3, which provided a proposed revenue procedure containing corrections and reporting procedures under which certain failure to meet the requirements of 501(r) will be excused.  A link to our analysis of Notice 2014-3 is available here.

The Final Regulations contain a number of changes to both the 2012 Proposed Regulations and the 2013 Proposed Regulations, including the following:

Billing and Collections

  • Hospital facilities must include with each billing statement a conspicuous written notice that describes the availability of financial assistance, including (i) a telephone number where information will be provided about the financial assistance policy (“FAP”) and the FAP process, and (ii) the website where copies of the FAP, FAP application form and plain language summary of the FAP can be obtained.
  • A plain language summary of the FAP only need be included with one post-discharge communication; the hospital facility must send this plain language summary only to patients against whom the hospital facility actually intends to engage in extraordinary collection actions.
  • With regard to translation of the FAP, FAP application form and plain language summary into the language of populations with limited English proficiency within the community served by the hospital facility, the Final Regulations lower the threshold to 5 percent or 1,000 people, whichever is less, of the individuals likely to be affected or encountered by the hospital facility.

Financial Assistance Policy (“FAP”)

  • The FAP must identify the providers, other than the hospital facility itself, that may deliver emergency or other medically necessary care in the hospital facility and must specify which providers are covered by the hospital facility’s FAP and which are not.
  • The Final Regulations require the FAP to describe discounts available under the FAP rather than all discounts available from the hospital facility, and only those in the FAP may be reported as “financial assistance” on Schedule H of Form 990. 

Emergency Medical Care Policy

  • The Final Regulations revise the 2012 Proposed Regulations to prohibit “debt collection activities that interfere with the provision, without discrimination, of emergency medical care,” regardless of where such activities occur.
  • The emergency medical care policy may be included in the same document with the FAP.

Limitation on Changes

  • Amounts charged to FAP-eligible patients for emergency or other medically necessary care must not exceed amounts generally billed (the look-back method is permitted).
  • For other services, an FAP-eligible patient must be charged an amount less than gross charges.

Community Health Needs Assessment (“CHNA”)

  • The Final Regulations closely follow the 2013 Proposed Regulations with respect to the requirements for CHNAs and Implementation Strategies.
  • A hospital facility may build upon previous CHNAs, but it must solicit and consider new input from persons representing the broad interests of the community for each new CHNA.

Errors and Omissions and Disclosure

  • An error or omission must be “minor” in order to not be considered as a failure under section 501(r), and the option to correct without disclosure is available only if the error or omission is minor and it is either (i) inadvertent or (ii) due to reasonable cause.
  • Disclosure is required for errors and omissions that do not qualify as “minor” and, in addition, those minor errors or omissions that are neither inadvertent nor due to reasonable cause.
  • In the case of multiple errors or omissions, they are minor only if they are “minor” when considered in the aggregate.
  • If the same error or omission reoccurs, it tends to indicate that it is not inadvertent.
  • Establishing practices and procedures reasonably designed to produce compliance with section 501(r) prior to an error or omission tends to show that the error or omission was due to reasonable cause.
  • Correction of minor errors or omissions must include establishment (or review and, if necessary, revision) of practices or procedures (formal or informal) that are reasonably designed to achieve overall compliance with the requirements of section 501(r).
  • A minor error or omission related to the CHNA that is corrected will not result in the excise tax under section 4959.

Taxation of Noncompliant Hospital Facilities

  • If one hospital facility within a hospital organization fails to meet the requirements of section 501(r), the hospital organization may continue to be tax exempt under section 501(c)(3) even though there is an income tax levied upon the income of the noncompliant hospital facility.

Effective Date

  • The Final Regulations apply to taxable years beginning after December 29, 2015.
  • For prior taxable years, a hospital facility may rely upon the provisions of the 2012 Proposed Regulations and/or the 2013 Proposed Regulations and/or the Final Regulations.

For more information on these matters, please contact the author or the attorney at the firm with whom you are regularly in contact.  

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