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IRS Publishes Two Notices Pertaining to Tax-Exempt Hospitals
January 7, 2014

Pursuant to Section 501(r) of the Internal Revenue Code,[1] added as part of the Affordable Care Act, tax-exempt hospital organizations face additional requirements to obtain and maintain their federal tax-exempt status.  The Internal Revenue Service (IRS) has issued proposed regulations[2] and recently provided two related notices.  The first, Notice 2014-2,[3] confirms that hospital organizations may continue to rely on the previously issued proposed regulations, pending the publication of final or temporary regulations or other applicable guidance.  The second, Notice 2014-3,[4] contains a proposed revenue procedure under which certain failures to meet Section 501(r) requirements will be excused.  A summary of each notice is provided below.

Notice 2014-2

On June 26, 2012, the IRS published proposed regulations regarding the requirements of Sections 501(r)(4)-(6), which address the establishment of a financial assistance policy (FAP) and a policy relating to emergency medical care, the limit on amounts charged to FAP-eligible individuals, and the requirement to determine whether an individual is FAP-eligible before engaging in extraordinary collection actions (2012 Proposed Regulations).  On April 5, 2013, the IRS published additional proposed regulations to address the community health needs assessment (CHNA) requirements of Section 501(r)(3), along with the related reporting requirements under Section 6033 and a related excise tax under Section 4959 (2013 Proposed Regulations).

A tax-exempt hospital organization must comply with the statutory requirements of Section 501(r), which are already in effect, and the IRS views the 2012 and 2013 Proposed Regulations as a reasonable interpretation of the statute, although hospital organizations are not required to comply with the proposed regulations until published as final or temporary regulations.

Notice 2014-2 confirms that hospital organizations may rely on the 2012 and 2013 Proposed Regulations pending the publication of other guidance, or final or temporary regulations.  In addition, hospital organizations may rely on the 2013 Proposed Regulations for any CHNA conducted (or any related implementation strategy adopted) up to six months after final or temporary regulations are published.  Notice 2014-2 also notes that there are some differences in the definitions of "hospital organization" and "hospital facility" between the 2012 and 2013 Proposed Regulations, and states that hospital organizations may rely on the definitions in either of the Proposed Regulations pending further guidance, or final or temporary regulations.  Lastly, Notice 2014-2 notes that hospital organizations may rely on the 2013 Proposed Regulations regarding what it means to be "operating a hospital facility," including the proposed exceptions for certain tax-exempt organizations that are partners in partnerships that operate hospital facilities, although the instructions to the 2013 Form 990 (Return for Organization Exempt from Income Tax) Schedule H do not mention those exceptions.

Notice 2014-3

Pursuant to the 2013 Proposed Regulations, a hospital organization's failure to meet Section 501(r) requirements that is neither willful nor egregious will be excused for purposes of Section 501(r)(1) and Section 501(r)(2)(B)[5], so long as the hospital facility corrects and discloses the failure in accordance with a revenue procedure or other guidance to be published.

Notice 2014-3 contains such a proposed revenue procedure.  Specifically, if the hospital organization complies with the correction and disclosure requirements before it is first contacted by the IRS concerning an examination of the organization (audit), the failure to meet Section 501(r) requirements will be excused for purposes of Section 501(r)(1) and Section 501(r)(2)(B).  However, the hospital organization may still be subject to an excise tax.  Notice 2014-3 also provides further clarification of what types of failures would be considered willful and egregious, and not subject to excuse upon correction and disclosure. 

Correction of the Failure

Notice 2014-3 provides that corrections should be made in accordance with the following principles: (1) the correction should restore the affected person(s) to the position they would have been in had the failure not occurred, (2) the correction should be reasonable and appropriate for the failure, (3) the correction should be made as promptly after discovery as is reasonable given the nature of the failure, and (4) the hospital should establish or appropriately modify its practices and procedures (whether informal or formal) that are reasonably designed to achieve compliance with the requirements of Section 501(r).  Notice 2014-3 provides examples of appropriate corrective action.

Disclosure of the Failure

Notice 2014-3 also provides proposed requirements for appropriate disclosure.  Specifically, the hospital organization will be considered to have disclosed the failure if it reports the following information on its Form 990 Schedule H: (1) a description of the failure; (2) a description of the discovery; (3) a description of the correction made; and (4) a description of any new or revised practices and procedures or, if none were needed, an explanation of why none were needed. 

The IRS has requested comments regarding Notice 2014-3, which should be submitted by March 14, 2014.  In particular, the IRS has requested comments regarding what additional examples may be helpful to include, and whether a hospital organization should be required to disclose the failure in ways other than on the Form 990, such as on the hospital organization's website.

For further information, please contact David HatchAmy Joseph, or Todd Swanson

in our Los Angeles office at 310.551.8111; Paul Smith or Steve Lipton in our San Francisco office at 415.875.8500; Stephen Treadgold or Mary Norvell in our San Diego office at 619.744.7300; orRobert Roth or Alex Brill (a non-lawyer professional, member of the firm's government relations and public policy practice) in our Washington D.C. office at 202.580.7700. 

[1] All statutory references are to the Internal Revenue Code unless otherwise indicated.

[2] Additional Requirements for Charitable Hospitals, 77 Fed.Reg. 38148 (June 26, 2012); Community Health Needs Assessments for Charitable Hospitals, 78 Fed.Reg. 20523 (Apr. 5, 2013).

[3] Reliance on Proposed Regulations for Tax-exempt Hospitals, IRS Notice 2014-2, available at

[4] Proposed Procedures for Charitable Hospitals to Correct and Disclose Failures to Meet § 501(r), IRS Notice 2014-3, available at

[5] Section 501(r)(1) and Section 501(r)(2)(B) address whether a hospital organization will be treated as tax-exempt pursuant to Section 501(c)(3).

For media assistance, please contact Maura Fisher at 202-580-7714.