IRC Sec. 501(r) Update and Other Interesting Items

1. IRC Sec. 501(r) Update and Other Interesting Items October 19, 2012 Tricia M. Johnson, Executive Director, Ernst & Young LLP

2. Contact Information • Tricia M. Johnson • EY National Exempt Org Tax Practice • 513-612-1850 • Tricia.johnson1@ey.com

3. Circular 230 Notice • This content is for educational and discussion purposes only, and is not intended, and should not be relied upon, as accounting advice. • Any US tax advice contained herein is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.

4. Introduction • Affordable Care Act (ACA) enacted IRC Sec. 501(r) • U.S. Supreme Court upheld on June 28, 2012 • Sec. 501(r) – Added four new requirements for a hospital to qualify for exemption under Sec. 501(c)(3); affects existing exempt hospitals and new hospitals applying for exemption

5. Introduction (cont’d) • Proposed Regulations and 2011 Notice include: • Extensive detailed explanations • Many specific rules and definitions • Many helpful detailed examples • IRS requests comments on many items both included or not addressed • NOTE> In this presentation, terms defined in proposed regulations are in “italics”

6. New Requirements • Sec. 501(r)(2) – defines Hospital Facility • Sec. 501(r)(3) – Community Health Needs Assessment • Effective: Taxable years beginning after 3/23/12; see Notice 2011-52 for guidance • Sec. 501(r)(4) – Financial Assistance Policy • Sec. 501(r)(5) – Limitation on Charges • Sec. 501(r)(6) – Billing and Collection Requirements • These 3 effective: Taxable years beginning after 3/23/10; see Proposed regs issued June 2012 for guidance

7. Key Sec. 501(r) Principle • A hospital organization that operates more than one hospital facility must meet each Sec. 501(r) requirement separately for each hospital facility. • A hospital facility is defined as one being required by a state to be licensed, registered, or similarly recognized as a hospital. • A hospital organization may treat multiple buildings operated under a single state license as a single hospital facility. • Future IRS Guidance – Whether a hospital organization’s operations in a single building under more than one state license are treated as one or multiple hospital facilities.

8. Failure to Meet Sec. 501(r) Requirements • Proposed regulations do not address consequences and IRS noted that it will address in separate guidance • Possible consequences: • Revocation of Sec. 501(c)(3) exemption • Correction within specified period • Financial penalties • De minimis exception • Closing Agreement • Voluntary Disclosure Program • Some combination of above

9. Sec. 501(r)(2) - Hospital Organization(in June 2012 Proposed Regs) • An organization exempt under Sec. 501(c)(3) (or which has applied under Sec. 501(c)(3)) that operates one or more hospital facilities • Includes a hospital facility operated through a disregarded entity (e.g., a single-member LLC) • Includes those operated via a partnership (with comments requested for smaller % ownership) • Excludes government hospital organizations (unless they also have Sec. 501(c)(3) status), with comments requested regarding alternative methods for these to demonstrate they meet the Sec. 501(r) requirements • Any other organization that IRS determines that its principal function or purpose for Sec. 501(c)(3) exemption is the provision of hospital care

10. Sec. 501(r)(3) - Community Health Needs Assessment (per Notice 2011-52) • Must conduct every three years for each hospital facility • Effective first tax year beginning after 3/23/2012 • Must adopt implementation strategy (at the board level) to meet community needs identified • Study, plan to address, board adoption all occur during same tax year • Must be made widely available to public • Requires Form 990 disclosure on how addressing identified needs • Explain which ones addressed and which are not, and why hospital doesn’t intend to address certain needs identified • Failure to explain can result in penalties for failure to file complete and accurate return, or $50,000/facility

11. More Discussion of Proposed Regulations • Sec. 501(r)(4) – Financial Assistance Policy and Emergency Medical Care Policy • Sec. 501(r)(5) – Limitation on Charges • Sec. 501(r)(6) – Billing and Collection Requirements

12. Sec. 501(r)(4) – Financial Assistance Policy • Each facility must have a written and adopted FAP(s) that address emergency and other medically necessary care • An FAP must include five items: • Eligibility criteria for financial assistance and whether it includes free or discounted care • The basis for calculating amounts charged to patients • The method for applying for financial assistance • For hospital facilities that do not have a separate billing and collections policy that addresses such, the actions that may be taken in the event of non-payment • How the hospital facility will publicize the policy within the community it serves

13. Sec. 501(r)(4) – Financial Assistance Policy • Emergency Medical Care Policy must: • Prohibit the hospital facility from engaging in actions that discourage individuals from seeking emergency medical care • For example, a facility may not: • Demand that ER patients pay before receiving treatment for emergency medical conditions, or • Permit debt collection activities in the ER or anywhere that may interfere with the provision of non-discriminatory emergency medical care • Should reference EMTALA

14. Sec. 501(r)(5) – Limitation on Charges • A hospital facility must limit the amounts charged for the care it provides to any individual eligible for assistance under its FAP to Amounts Generally Billed (AGB) • Applies only to emergency or other medically necessary care to FAP-eligible individuals. • Not more than the AGB to individuals who have insurance covering such care

15. Sec. 501(r)(5) – Limitation on Charges • Two methods to determine AGB: • The Look-Back Method (using Medicare FFS and commercial payors) • The Prospective Medicare Method (using Medicare FFS only) • Determine a % and apply to gross charges • Calculate at least annually • A billing statement may state the gross charges as starting point for allowances, discounts and deductions, but gross charges are not permitted

16. Sec. 501(r)(5) – Limitation on Charges • Safe Harbor for Charges More Than AGB • Even if a hospital facility charges more than AGB, it will meet the Sec. 501(r)(5) requirements if: • FAP-eligible individual has not submitted a completed FAP application at the time of the charge, and • Hospital facility makes reasonable efforts to determine if the individual is FAP-eligible during the required time periods.

17. Sec. 501(r)(6) – Billing and Collection • A hospital facility may not engage in Extraordinary Collection Actions (ECAs) against an individual before the hospital facility has made reasonable efforts to determine whether the individual is FAP-eligible • NOTE> A patient waiver is NOT a reasonable effort • ECAs include actions against the patient or any other individual who is responsible for the hospital bills, and include those that: • Require a legal or judicial process, or • Involve selling an individual’s debt, or • Include reporting adverse information about the individual to consumer credit reporting agencies or credit bureaus

18. Sec. 501(r)(6) – Billing and Collection • Reasonable efforts to determine whether an individual is FAP-eligible: • The hospital facility notifies the individual about its FAP during its notification period; including, but not limited to: • Makes the FAP policy widely available • Distributes the FAP application while patient is in the hospital • Includes information on billing statements and other documentation • Applications for FAP • Must be monitored and/or accepted for 8 months (240 days) after first billing statement (the application period) • Required actions are defined for whether the application submits before or after collection activities have started

19. Other Interesting Items

20. Medical Device Excise Tax • Effective 1/1/2013 • 2.3% on all medical devices • Proposed regulations issued Feb 2012 • FDA listing has 5,800+ items, and includes • Supplies • Tools/implements • Large medical equipment • Taxable at first sale or use in the U.S. • Tax paid by “manufacturer” or “importer”

21. Election Year Activities • Political Campaigns • 501(c)(3) organizations absolutely prohibited • Directly or indirectly participating in, or intervening in, any political campaign on behalf of, or in opposition to, any candidate for elective public office • Allowable activities • Voter education - Education and registration carried out in a non-partisan manner • Lobbying - Organization may take positions on public policy issues, but must avoid any issue advocacy that functions as campaign intervention

22. Tax-Exempt Bonds – Focus on post-issuance compliance • New - 7 specific modifications that are considered significant and result in a “reissuance” are changes in: • Annual yield • Timing of payments • Obligor(s) • Security/credit enhancement • Priority of an obligation • Nature of debt instrument • Payment expectations • New 990 question may require policy change • Regarding correction procedures

23. Questions

24. Contact Information • Tricia M. Johnson • EY National Exempt Org Tax Practice • 513-612-1850 • Tricia.johnson1@ey.com