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January 9, 2018

How Hospitals Qualify for Not-for-Profit Tax-Exempt Status

To qualify as a not-for-profit, tax-exempt hospital, there are a number of requirements that must be followed under IRS section 501(c)(3). The Affordable Care Act added even more requirements through section 501(r), stating that hospitals must be able to show the benefit it brings to the community through a community health needs assessment.

Section 501(r) requires tax-exempt hospitals to satisfy the following requirements:

  • Conduct a community health needs assessment (CHNA) – A CHNA must be conducted every three years and include an implementation strategy to meet the community health needs listed in the assessment. This information must be publicly available.
  • Establish a financial assistance policy (FAP) – A written FAP must include
    • Eligibility criteria for financial assistance and free or discounted care
    • Basis for calculating amounts charged to patients
    • Method for applying for financial assistance
    • Actions the hospital may take in the event of non-payment
    • Measures to widely publicize the policy in the community served
  • Implement limitations on charges – The hospital must implement limits on charges for emergency or other medically necessary care provided to individuals eligible under its FAP. These limits cannot be more than those charged to patients with insurance.
  • Enforce a collection policy – The collection policy must require the hospital to make “reasonable efforts” to determine if the patient is eligible for financial assistance before taking “extraordinary collection actions”.

Not satisfying the above requirements provides grounds for the IRS to revoke the organization’s tax-exempt status under section 501(c)(3).  The IRS is currently auditing hospitals for compliance and has already revoked one organization’s tax-exempt status for not fully complying. For questions on how your organization can apply or comply to section 501(c)(3), contact an Anders advisor. Learn more about the Anders Health Care Group or Not-for-Profit Group.

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