Health Care Reform Blog : Health Care Law Reform : McDermott Will & Emery Law Firm

by Michael N. Fine

Yesterday, the Internal Revenue Service (IRS) announced that tax-exempt hospitals need not answer certain questions related to the Patient Protection and Affordable Care Act's (PPACA) requirements for their continued tax exemption. 

As you may recall, the PPACA added exemption requirements for tax-exempt hospitals through new Section 501(r) to the Internal Revenue Code.  Earlier this year, the IRS released a redesigned Schedule H, Hospitals,to the Form 990 that included Section 501(r)-related questions focusing on each facility's (i) community health needs assessment practices, (ii) financial assistance policies, (iii) billing and collection practices, and (iv) charges for medical care. 

Today's announcement makes answering these questions optional for the 2010 reporting year.  This gives tax-exempt hospitals more time to analyze the schedule's new questions and better prepare for future disclosures.  No penalties will be assessed against tax-exempt hospitals that choose to leave blank this Schedule H subpart.

Key Takeaways

• Tax-exempt hospitals must still wait until at least July 1, 2011, to file their 2010 returns.  In February, the IRS directed tax-exempt hospitals to delay filing their Forms 990.  The stated purpose for this unusual delay was to give the IRS additional time to implement changes to the IRS forms and systems to accommodate the additional requirements for charitable hospitals.  Today's announcement does not effect the July 1st delay.
• While the new Schedule H questions are optional, tax-exempt hospitals must still demonstrate that they comply with Section 501(r)'s requirements or else risk losing their exempt status.  The announcement does not alter Section 501(r)'s effectiveness, just the reporting disclosure timeframe.
• A tax-exempt hospital must still attach a copy of its most recent audited financial statements to its 2010 Form 990 if its reporting period began after March 23, 2010.  This requirement reflects another Affordable Care Act requirement.
• The announcement encourages the tax-exempt hospital community to provide comments on how to improve the clarity and reduce the reporting burden of the Form 990 and Schedule H.

A copy of IRS Announcement 2011-37 is attached and available at: http://www.irs.gov/pub/irs-drop/a-11-37.pdf

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The Facts
On June 19, 2009, Democrats from three key House committees released a draft health reform bill that sheds light on plans to use the Internal Revenue Code to incentivize individuals to obtain, and employers to provide, adequate health care. The bill, however, leaves out details on the major sources of revenue needed to finance the health care expansion. Key tax provisions in the bill to date include:

• Imposing 2 percent tax on the income of individuals without “acceptable coverage,” with tax limited to national average premium
• Providing limited exceptions to 2 percent tax on individuals (e.g., nonresident aliens, religious conscience)
• Requiring providers of acceptable coverage to provide annual information reports to the IRS describing the names and types of coverage of each covered individual and other information that the IRS requires
• Imposing excise tax on employers that elect to help satisfy the health coverage participation requirement but that later fail to meet the requirement
• Imposing excise tax equal to 8 percent of wages paid on employers that elect not to help satisfy the health coverage participation requirement
• Providing 50 percent tax credit for employee health coverage expenses of small businesses providing employee coverage, with phaseouts for average employee compensation (greater than $20,000) and employee headcount (more than 10)
• Authorizing IRS disclosure of taxpayer information to determine whether individuals are eligible for affordability credits

What’s at Stake
With a promise by President Obama and key members of Congress to fully fund health care reform, which is anticipated to cost $1 to 2 trillion or more over 10 years, progress will require filling in the details on the revenue-raising provisions. Approximately half of the money needed to pay for health care reform is expected to come from changes in the tax law.

Steps to Consider

• Stay tuned for revenue-raising tax proposals, which may include significant amendments to the international tax rules
• Continue to monitor any additional guidance on required information reporting by employers to show they meet the health coverage participation requirements

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