Tax-exempt hospitals will be subject to increased checks of Schedule H, which reports compliance with 501(r), and to examinations, as required by the Affordable Care Act. The IRS confirmed at the Tax Exempt and Government Entities Joint Council meeting on Feb. 26, 2016, that 1,000 such compliance reviews have been performed each year since the act’s implementation and that about 30 IRS agents have been redeployed from the Exempt Organizations Determinations division to the Examinations division to facilitate an increase in the number of 501(r) compliance reviews.1
Increased IRS scrutiny escalates the need for hospitals to be ready to demonstrate 501(r) compliance, not just by establishing appropriate policies, but by documenting evidence of operational compliance with the many substantive requirements of the 501(r) final regulations.
Failing to comply with the requirements of 501(r) can lead to penalties, including loss of tax-exempt status, so it is critical that compliance efforts not be taken lightly. Steps an organization must take to improve and validate its compliance position include:
- Set the tone at the top and ensure senior leadership understands the importance of compliance.
- Enlist the appropriate expertise to assess and test compliance.
- Document actions taken to maintain and achieve compliance.
Get Senior Leadership on Board
High-level hospital finance executives often delegate the task of 501(r) compliance to others within the organization – perhaps even individuals outside the finance department. A certain level of delegation makes sense because 501(r) compliance involves so many departments – finance, tax, patient financial services, compliance, revenue cycle, legal, community relations, and others.
This delegation of 501(r) compliance efforts must be accompanied by sufficient resources to get the job done – and done well. That means senior leadership must commit to devoting appropriate resources, whether internal or external, to support those charged with 501(r) compliance. It may not be reasonable, for example, to expect already-stretched employees to read and digest more than 100 pages of tax law, preamble, and final regulations; lead the organization through initial 501(r) compliance; devise a comprehensive audit plan and compliance assessment; and monitor compliance with 501(r) on an ongoing basis. Undoubtedly, when 501(r) compliance is supported by senior leadership, it will have priority within the organization at all levels.
Enlist the Appropriate Expertise to Assess and Test Compliance
Once an organization’s initial 501(r) compliance efforts have been completed, its work is not done. Assessing and testing 501(r) compliance is a crucial step in minimizing risks.
With just a core group of individuals within the hospital leading compliance efforts, how does the organization gain assurance that compliance is being carried out as planned? Some methods include observation, interviews, “secret shopper” encounters, document review, sampling, and testing. It may sound like work solely for internal auditors, but 501(r) audit compliance extends beyond traditional internal audit reviews and should be viewed as a broader effort. Experienced tax professionals should be involved in assessing compliance not only with policies but also with the many detailed requirements of the 501(r) final regulations that are not typically reflected in hospital policies.
Document, Document, Document
Being able to show the steps the hospital has taken to reach and maintain compliance is important to avoid potential violations and protect reputation. Written records supporting 501(r) compliance should include documentation of initial implementation efforts as well as ongoing efforts. To verify that all aspects of compliance are addressed properly, a comprehensive implementation checklist is a valuable tool for the hospital’s internal 501(r) compliance team or external advisers. The checklist may include the following:
- An itemized listing of the 50-plus substantive provisions of the 501(r) regulations
- Action steps designed to test compliance with the detailed requirements
- A listing of persons responsible for respective areas
- Time frame for testing
- Detailed IRC 501(r) statutory references and supporting documentation of findings while conducting testing
To help monitor 501(r) compliance once it has been implemented, documentation should list the parties involved in the process and summarize the work performed by the hospital’s internal audit department, tax professionals, and legal counsel. An outside provider to assist with periodic 501(r) mock audits can provide independent tax expertise that includes experience gained from conducting similar audits for other hospitals and health systems.
Implementing and maintaining the 501(r) regulations can be overwhelming. Being ready with a plan to show compliance with all aspects of 501(r) is critical.
1 Transcripts of a panel discussion with Margaret Von Lienen, director, EO Examinations, can be found in EO Tax Journal 2016-50.