AHLA's Speaking of Health Law

Section 501(r)

November 05, 2019 AHLA Podcasts
AHLA's Speaking of Health Law
Section 501(r)
Show Notes Transcript

Preston Quesenberry, a Managing Director in KPMG’s Washington National Tax Exempt Organizations group, interviews Andrew D. Kloeckner, Partner at Baird Holm LLC, about his presentation at AHLA’s Tax Issues for Health Care Organizations conference in Arlington, VA, on compliance with section 501(r). Sponsored by KPMG LLP.

To learn more about AHLA and the educational resources available to the health law community, visit americanhealthlaw.org.

Speaker 1:

Support for A H L A And the following message comes from KPMG's Healthcare and Life Sciences practice helping clients comply with regulatory change, adopt effective tax strategies, improve outcomes through data analytics and advanced technologies, and more. For more information, visit kpmg.us.

Speaker 2:

Hello, this is Preston Quesenberry with KPMG Washington National Tax, and I'm here today at the A H L A Tax Issues for Healthcare Organization's Conference. Uh, and with me is Andy Co Kaner from, uh, Baird Home, uh, l l p in, in Omaha, Nebraska. And Andy, it's been presenting, he actually did the, uh, session twice, but presenting on 5 0 1 R in particular, the, the title of the panel was called Common 5 0 1 R Misses. Uh, Sandy, I wanted to ask you some questions about, you know, what you've been seeing as far as common 5 0 1 R misses and also, uh, maybe to the degree you can touch on and what you think, uh, some of the consequences of, of those misses might be. Um, so, uh, for those in the audience that aren't, uh, intimately familiar with 5 0 1 R, it's, it's essentially a provision that applies to tax exempt hospitals and it requires them to, uh, to, to do certain things in order to maintain their tax exemption. And there are, there are four basic requirements. Um, it's 5 0 1 R 3, 4 5, and six. And I'm going to just kind of run through each of them and talk through what some of the, the common that footfalls are errors that, um, that Andy's been seeing in each of those areas. So the first one is 5 0 1 R three, and that's a requirement that a hospital conduct a community health needs assessment at least once every three years. Um, and so to start with that, Andy, can you talk a little bit about the common foot faults are errors you see with the CHNAs as they're called? Sure. Uh, I'd say, uh, this is, uh, one of the areas where I've seen the most action here recently. Uh, and it's not necessarily, uh, strictly from IRS enforcement. It's from, uh, kind of self audits and, and walking clients through, uh, the Community Health Needs Assessment, uh, process. Um, I'd say, and, and for the most part, uh, most clients I think have all the information that they need, uh, have done all the things that they need to do. It's just a question of, of has it made it to the report, uh, and have they appropriately documented it so that, uh, they kind of check off all the boxes. Um, some of the things that I think, uh, common misses that we see in terms of, of the report itself are, number one, making sure that you've included and detailed how you've included the required categories of individuals or represent, uh, bodies that represent, uh, those types of individuals. Uh, public health departments are typically always involved, uh, you know, minorities and lower income individuals as well. Uh, but like I said, I think most, uh, organizations that, that are doing the community health needs assessment are doing those things. That's just appropriately, uh, those, those activities making it through, uh, to the reports themselves. Um, I think the other area that we see a lot of, uh, activity in the community health needs assessment world is kind of, I think a misunderstanding, uh, about the adoption process and approval process from a board standpoint. Uh, in terms of what you have to do and when you have to do it by, I think we see one of two things typically happen. One is that, uh, they either, uh, adopt the community health Needs Assessment report and they don't do anything about an implementation strategy by the end of their, uh, their tax year. And kind of they move on to other things or, uh, they have misread, uh, the regulations or don't understand the regulations and they wait until the four and a half months after the end of the tax year to do everything thinking that that grace period, if you will, applies to everything. Whereas it actually requires that you do the report by the end of the tax year and approve the report by the end of the tax year and publish it, and then it gives you a four and a half month gra grace period to, uh, adopt the implementation strategy. And so I think those are kind of the two things that we see, uh, a lot of activity on or failures on, if you will, uh, is in the adoption process as well. Uh, I think, uh, in terms of going forward, the difficulty as, as outside counsel in a lot of these cases is applying the, uh, the various silos of the, the, the remedial silos to these things. Cuz this is really the only area of 5 0 1[inaudible] where there's a, a financial penalty associated with, with a particular failure if you're, uh, in the correct and disclose. I think, uh, a lot of hospitals believe that if you correct, mistakenly believe that if you just correct and disclose that they don't owe the, the excise tax, which is clearly, uh, incorrect. Uh, and so if you correct and disclose, while it will not lead necessarily to, uh, the loss of exemption, uh, it does result in, in the payment to the excise tax. And so, uh, having to deal with, with, uh, situations in the community health needs assessment realm specifically, uh, where you have multiple failures, if you're well, that, that take in individually, uh, would seem minor and inadvertent or due to reasonable cause when you put'em all together, if you're a outside council having a draft, some sort of opinion or given opinion on that. Uh, in terms of are we still in the minor in an inadvertent or due to reasonable cause silo, if you will, versus are we in correct and disclose land where, uh, the excise taxes due? Um, that's very difficult to do, uh, in this, uh, situation given the guides that we have. I mean, we have very limited guidance here right now. Uh, the revenue procedure gives two very basic examples of what they believe is minor and inadvertent. Uh, and none of the errors or failures that I've seen, uh, come close to that level of, of, uh, minor, uh, you know, the falling behind the, the sign falling behind the couch or the, the, uh, community health needs assessment being off of the website. Cause the website was down for a couple hours. Um, that being said, I don't know that I would necessarily take, uh, an opinion that that, uh, an approach that that's, that is that narrow, but it's just difficult to, to give an opinion that a tax is not owed. Uh, and so it's, it's kind of left up to the client as to what kind of risk that they're want that they want to take in that, that particular area. Um, so community health needs assessments, I think is, is where, in terms of as a practitioner going forward, uh, a lot of the, uh, advice and is gonna be given just because of that particular implication. You know, if, if something gets, gets caught in an, in an internal audited client on a financial assistance side of things, uh, I think even if you're in a realm where you have to correct and disclose and you go down that route and aren't able to kind of come up with the, the argument that it is minor and inadvertent or due to reasonable cause, you know, again, there's really no financial penalty. So, uh, there, there could be no, and really is no harm to disclose it other than, you know, concern about whether or not that's gonna be some sort of yellow flag or red flag for, to bring you up for actual exam. And I would have to imagine, or at least hope that it might in fact have the opposite effect to show the IRS that you actually are, uh, preemptively finding things and fixing things and, you know, give them some level of comfort going forward that, uh, you're complying with the law. So, yeah. Yeah. And, and, and just to, to bring the audience up, up to speed a little bit in, in case they're not that familiar with the correction regime, there is a, a three-tiered correction regime mm-hmm.<affirmative> or really a two-tiered with the third tier being correction, you're out isn't really a possibility. Yeah. But the first tier being, if an error or mission is minor and inadvertent, you can correct it and move on and it's like you've never had a failure. Right. And that's important for purposes of CHNAs, uh, because as, as you note, there is an excise tax with CH and a's a$50,000 excise tax that mm-hmm.<affirmative>, If there's never been a failure, you don't have to worry about the excise tax. But if you're above minor and inadvertent, which as you pointed out, um, can be determined looking at errors in the aggregate, not just an isolated instance, um, then you can still correct and disclose the purposes of tax exemption, but you're still potentially subject to this$50,000 excise tax and the CH and a of the 4 5 0 1 requirements. That's the only one where the excise tax applies. And, and for that reason, it may be like, I, I've heard the IRS talk about five one R three was the one area that they thought audits were actually productive. Mm-hmm.<affirmative>, uh, or the one area that they've noted, they mentioned 5 0 1 R four s, the financial assistance policy requirements, that's being, it was more productive to just send out these compliance check letters mm-hmm.<affirmative>, but they said audits were productive for CHNAs. And I'm assuming that means cuz they could actually collect revenue in the form of these$50,000 taxes. Mm-hmm.<affirmative>. And one thing I'm curious about o on the exam side is if you've seen, what I've mostly seen so far in my experience has been exam agents looking at, okay, well did you do the CH and a, the implementation strategy? Did you adopt it? Did you do it on time? Did you put on your website? What I've not seen thus far, and I'm curious to see whether this changes as the final regs have gotten into effect mm-hmm.<affirmative> is whether or not an exam agent actually opens the CH and a or the implementation strategy and says, Hey, is this include, does this include all the required elements? I know on your panel yesterday you mentioned, for example, the, uh, evaluation of the impact of the actions that were taken mm-hmm.<affirmative>, Uh, you know, since the last, the, and a and if, if an agent happened to see that was missing, have you seen them actually noting that or potentially applying$50,000 excise tax in that case for missing elements? Yeah, I have not seen that, but I think we might be going there. I, I know from my conversations with my, my co-presenter and such that, that the view, uh, at least right now at the, at the service is, uh, still did you do it and did you adopt it? But given some comments from the floor, even, uh, some questions from the floor. And, and I think this goes to kind of some of the preliminary comments that I, that I have and observations that I have as well, which is, you know, uh, the variation amongst, uh, the examining agents, I think very, it, it's why it, it's a gap. Uh, some are very well versed and, and know what they're doing and know what they're looking for. Others I think kind of sometimes focus on little issues and get into things that are, uh, a little more detailed than one would expect. And so while I think you have, uh, nationally kind of this, uh, thought process that they're more cons, they're not concerned about the content or the results of the community health needs assessment, they're just concerned with checking off the boxes. I think you do on a case by case basis, run into agents that, uh, when they review and exam things, uh, particularly the community Health needs assessment, but also other areas as well, five one[inaudible], uh, sometimes get into the, to the weeds and ask questions about things. Have I seen an excise tax be applied because of missing something like, uh, uh, or, or not necessarily putting in your report that you reviewed prior responses from community health needs assessment? Uh, probably not. Or no, I haven't. But I would say that, um, my biggest concern is the minor in the aggregate. You know, I think that, that the chances of any particular community health needs assessment report, given the, the detail of the regulations checking off every box, there's probably a chance, a greater chance that that one of, one of the boxes may and might not be checked. Uh, probably also a chance that, that it's not checked cuz it's not in the report, but the data exists and they talked about it, just didn't make it in, which in that case, I probably wouldn't have a problem getting to a minor inadvertent type of conclusion. Yeah. It's, I think the, when, when, and if they get to reports that have more than one of those items or have some of those items coupled with adoption issues Yeah. Um, that I think the, the real action's gonna happen. I, you know, I've had to counsel a few clients and just say, I, you know, I can't go there from an opinion standpoint, so I'd recommend paying the excise tax. Um, whether or not they have, I, I don't know, um, uh, but I have to imagine that that, that some others have as well in terms of, you know, voluntarily disclosed and paid the excise tax. So, yeah. And, and your co-panelists, just to, to tell the audience was was from the irs, it was Jeff Campbell, correct? Correct. So he's presumably been working with exam agents on, some of this is on some of these issues. So, um, I'm gonna move on to, to 5 0 1 R four, which is, uh, requires hospitals to, um, to establish a, a financial assistance policy and, and there's certain required elements in those financial assistance policies. So, um, you know, I think there, there's two types of errors that you could have. One is you could have errors in the, uh, financial assistance policy itself and not including some of the required elements. Uh, and you could also have errors, um, in widely publicizing that financial assistance policy, which is another requirement. Mm-hmm.<affirmative>, uh, can you talk a little bit about the, the most common error you see in each one of those? Yeah, I would say the, the most common error that I see in terms of publication, I'll start on the backside and, and work forward, is the, uh, the, the failure to go beyond just putting it on your website and happening available at your facility in the various required locations, admissions, and at the emergency room, uh, you know, the regs very clearly say that you have to, you have to widely publicize it, uh, to those who, who may need and, and may need financial assistance or may, may take advantage of financial assistance. And I think that, uh, particularly because of the grace, uh, period, or not grace period, but, but changes that we got from the proposed regs to the final regs where if you recall the proposed regs said you had to have all of these particular publication elements actually in the policy itself since those got dropped, when the final regs came about, I think, uh, that there was an increase in terms of, uh, kind of forgetting that there were additional steps. Um, you know, I agree it didn't really make a whole lot of sense to have that type of information in the policy itself cuz it's not really policy driven, uh, or, or something that would typically be in a hospital policy. But the fact of the matter remains that I think a lot of, at least clients that I've seen don't go that extra step or voluntarily go that extra step. They have to be reeducated that, you know, you need to go further, you need to, uh, go to your local charities that might touch individuals who need financial assistance and somehow publicize it through them. I mean, there's no right way to do it, but you have to do something and I think you have to show that you've thought it out, uh, as these are the most appropriate ways and, and best ways to reach folks that, that may need financial assistance, uh, to do nothing is, is, is not enough. Uh, and I still think that some are probably there and they don't realize it. Um, and so that's, that's a, the most common myth in terms of publication that, that I've seen. Um, in terms of the, the contents of the policy itself, uh, I would say that the next, uh, biggest issue would be, uh, the disclosure of practitioners and the accuracy of that. Mm-hmm.<affirmative>, um, you know, I think that that most know that there's the guidance that exists that you have to be, uh, or that you can publish that list outside of the policy and refer to it. Uh, I think most know that it has to be updated. I think I still see gaps in what has to be on the list in terms of, I think most if, if there's a common error, it's that they just list the providers that are part of the policy and they leave the po the providers that aren't pol part of the policy out of the list, uh, in which it has to be both. It has to be both the providers that are and then the providers that are not. And you can do that by department or by group, which was also, I is also something I think that's not necessarily widely known. I think it's widely known amongst practitioners whether or not that's gotten through to facilities. I, I don't know. And I, I don't think it has all across the board. Uh, but that's a, that's a another common failure. Uh, and I would just say that the third thing that I see just from a, a case by case basis is not necessarily an issue with the policy itself per se, missing something, it's kind of, I would say definitional regret in terms of the eligibility criteria. Mm-hmm.<affirmative>, you know, the, the service, the regulations, the statute don't tell you what your eligibility criteria has to be, uh, just says you have to have it. And essentially you have to uniformly apply it, uh, in order to, uh, comply with the, the regs and statute. And so I think that some facilities just focus in on the income based test, uh, and, and neglect maybe a net worth kind of, uh, standard or exception. Likewise, kind of the medical indigent, and, and I'm not saying every provider does does it this way, but there are some that do, they just focus on, on, uh, income and there are plenty of individuals out there in various industries and such that, uh, maybe have low income in a particular year but are very high net worth. And so when that person comes in and applies for financial assistance, you get calls from hospital administrators that say, this person should not receive financial assistance. But if you look at the, you know, the four corners of the document that they have, the person does, and you're kind of left, uh, stuck between a rock and a hard place there where they technically need to get that individual financial assistance or, you know, so it's, it's kind of more of an application of the rules, uh, issue than it is the, the document itself. So it's a good reminder that that facilities, when they set their eligibility criteria should think critically about all potential, uh, individuals or classes of individuals that might need FI or seek financial assistance. And how do they wanna structure that so that they can get the people that they believe from a missional standpoint, uh, need financial assistance versus those that maybe, uh, don't. Yeah. Um, alright. Well we could probably go on talking for a while, but I know we're running<laugh>, we're running short on time, so I'll, I'll just ask you one final question and that, uh, relates to enforcement. Um, as I mentioned with 5 0 1 R four, the financial assistance policy requirement, I've heard the IRS say that they're sending out compliance letters. Um, and at least my experience has been, you know, usually if you, even if you have mistakes, if you reply to say, oh yeah, we had this mistake, but we fixed it, the IRS goes away mm-hmm.<affirmative>. Um, so I was curious to see if that's been your experience or if you've, you've seen further follow up from those compliance. But then the other question I wanted to ask was the final two requirements, 5 0 1 R five, which is the amounts generally billed requirement and 5 0 1 R six, which is the, um, that you can't do extraordinary collection actions before doing reasonable efforts to determine mm-hmm.<affirmative>, uh, eligibility under the fact that seems to have kind of dropped off the IRS discussion points, at least when they're talking about IRS enforcement mm-hmm.<affirmative>. So I'm curious particularly since the regs have been in place, if you've seen any enforcement of those two provisions. So, uh, I have, I have not seen, I would say I saw more enforcement of those provisions back when, uh, we were in tax years or, or the IRS was looking at tax years that, uh, that were not subject to the final regulations. I think, uh, now that we're in those tax years, uh, and because of the fact that there's really, uh, very little that the IRS can do once the audit has started in terms of giving you grace, you know, in those areas because there's no excise tax. It's either, you know, loss of exemption or you're good. I think we're still seeing the compliance checks. I think that's kind of their way of, of getting to, uh, I wouldn't say getting around, but getting to a point where they can assure compliance without having to, uh, go down the road of, uh, revoking exemption from a facility that maybe wasn't dotting all their I and crossing all their T's from a R four, five or six Yeah. Perspective, uh, in terms of enforcement activity. And I, and I think that's partially why I would, I would agree with you that some of the efforts around R six, uh, haven't been as intense as they were previously, but, uh, I also, you know, as, as we heard in, in other programs here, uh, I think that that congressional focus is definitely on our six. Yeah. And I think that's where the PR aspect comes in, into it as well, because quite frankly, uh, a facility can comply very easily with our six and do a whole lot of things that if in the newspaper look bad. Yeah. And, uh, and draw do things like draw congressional, uh, scrutiny, uh, and, and you know, connecting the dots with the public about yes, we complied with the law, but it looks bad and why are we getting investigated by congress are two very different things. Yeah. Uh, and so I think that that R six is more of a PR issue right now, uh, and insur, you know, as well as ensuring compliance. But, uh, I think that's where, uh, I'm seeing it right now is kind of counseling clients of yes, you could do that, but should you do that. Yeah. Yeah. All right. Well thank you very much Andy. And, um, I think that's a wrap.