On April 3, the U.S. Treasury Department released proposed regulations that provide guidance on the community health needs assessment (CHNA) requirements for charitable hospitals under § 501(r)(3) of the Internal Revenue Code, which was enacted as part of the Patient Protection and Affordable Care Act. The proposed regulations also address the consequences of failing to meet the requirements of Code § 501(r).

Code § 501(r) requires "hospital organizations" to have specific policies and procedures for each "hospital facility." Failure to comply with applicable rules can result in loss of tax-exempt status. Proposed regulations issued in 2012 provided guidance under Code §§ 501(r)(4), (5) and (6) relating to financial assistance and emergency medical care policies, charges for emergency or medically necessary care provided to individuals eligible for financial assistance and billing and collections, but did not address the CHNA requirements.

Community Health Needs Assessment

The proposed regulations provide guidance to charitable hospitals conducting a CHNA, which applies to taxable years beginning after March 23, 2012. Therefore, all charitable hospitals must already have completed a CHNA under the guidance issued in Notice 2011-52, which described CHNAs in broad terms, or must act promptly to do so.

A charitable hospital meets the CHNA requirement of Code § 501(r)(3) in any taxable year with respect to a hospital facility it operates only if (1) the facility has conducted a CHNA in such taxable year or in either of the two immediately preceding taxable years, and (2) an authorized body of the facility has adopted, by the end of the taxable year in which the facility conducts the CHNA, an implementation strategy to meet the community health needs identified through the CHNA.

In conducting a CHNA, a hospital facility must complete each of the following steps:

• The facility must define the community it serves.
• The facility must assess the health needs of the community served.
• In assessing the health needs of the community, the hospital facility must take into account input from persons who represent the broad interests of its community, including those with special knowledge or expertise in public health.
• The facility must document the CHNA in a written report that is adopted by an authorized body of the facility.
• The CHNA report must be made widely available to the public.

The proposed regulations provide considerable detail regarding each of the steps noted above. Such details include how a hospital facility defines the community it serves, specified persons who must provide input regarding the CHNA and how a CHNA is made widely available to the public. The proposed regulations also describe how CHNA reports may be done on a collaborative basis in certain circumstances.

Each significant health need identified through a CHNA is required to be the subject of an "implementation strategy." Such an implementation strategy must (1) describe how a hospital facility plans to meet the health need or (2) identify the health need as one the facility does not intend to meet and explain why the facility does not intend to do so. The proposed regulations also describe how an implementation strategy may be executed on a collaborative basis in certain situations.

The proposed regulations set out reporting requirements regarding implementation strategies. A charitable hospital must attach to its Form 990 a copy of the most recently adopted implementation strategy for each hospital facility or provide the web address on which it has made each implementation strategy widely available to the public. In addition, the Form 990 must disclose actions taken during the tax year to address the significant health needs identified through the most recently conducted CHNA or, if no actions were taken, the reason(s) for such inaction.

As noted above, a charitable hospital must, with respect to each hospital facility operated, conduct a CHNA and adopt an implementation strategy by the end of its taxable year beginning after March 23, 2012. The proposed regulations provide transition relief with respect to the requirement that an implementation strategy be adopted in the same year the CHNA is conducted. Such transition relief applies to hospital facilities that conducted a CHNA in one of their first two taxable years beginning after March 23, 2010, and to facilities that have conducted a CHNA in their first taxable year beginning after March 23, 2012. The proposed regulations provide a hospital facility will be treated as satisfying the implementation strategy adoption requirement if the strategy is adopted by an authorized body of the facility on or before the fifteenth day of the fifth month following the close of its first taxable year beginning after March 23, 2012.

Code § 4959 imposes a $50,000 excise tax on charitable hospitals with respect to each hospital facility that does not satisfy the CHNA requirements. The proposed regulations address the excise tax and indicate that a hospital will continue to be subject to the excise tax for each successive year in which the hospital does not satisfy the CHNA requirements.

Consequences of Failing to Meet Code § 501(r) Requirements

A charitable hospital that fails to meet one or more requirements of Code § 501(r) with respect to one or more hospital facilities it operates can have its Code § 501(c)(3) status revoked as of the first day of the taxable year in which the failure occurs. The proposed regulations indicate, in considering whether to revoke Code § 501(c)(3) status, that the Internal Revenue Service (IRS) will consider all relevant facts and circumstances, including whether the organization has previously failed to meet the requirements of Code § 501(r), the size, scope, nature and significance of the failure, the reason for the failure and whether the organization has implemented safeguards that are intended to prevent similar failures from occurring in the future.

Relief from penalties in certain situations is provided by the proposed regulations. Specifically, when a hospital facility omits required information from a policy or report or makes an error with respect to the implementation or operational requirements of Code § 501(r), such an omission or error will not be considered a failure to meet the requirements of Code § 501(r) if it is minor, inadvertent and due to reasonable cause and the facility corrects such omission or error as promptly after discovery as is reasonable. In addition, the proposed regulations indicate the IRS intends to publish additional guidance regarding correction and disclosure of omissions or errors that are not willful or egregious, but are more than minor and inadvertent.

Situations in which a charitable hospital that operates more than one hospital facility fails to meet one or more of the Code § 501(r) requirements with respect to a particular hospital facility are also addressed. The net income from such a hospital facility will be subject to tax at the corporate or trust income tax rates, as the case may be, which will be reported on Form 990-T. Such tax is imposed if, assuming the hospital facility at issue were the charitable hospital's only facility, the charitable hospital would not continue to be described in Code § 501(c)(3). In addition, gross income and deductions from a noncompliant facility cannot be aggregated with the gross income and deductions from other noncompliant facilities. The proposed regulations specifically note that a charitable hospital operating a noncompliant facility subject to tax will continue to be treated as tax-exempt under Code § 501(c)(3) for all purposes of the Code, including tax-exempt bonds issued to finance the noncompliant facility.

The proposed regulations will be effective for purposes of Code § 501(r) requirements as of the date they are published in final or temporary form and, with respect to any filing requirements, will be effective for returns filed on or after the date the rules are published in final or temporary form. A charitable hospital may rely on the proposed regulations for any CHNA conducted or implementation strategy adopted on or before the date that is six months after the proposed regulations are published in final or temporary form and may continue to rely on Notice 2011-52 until October 5, 2013.