Home » Blog » The Comprehensive Guide to IRS Section 501(r)


From senior management professionals to CEOs to financial planners, staying on top of IRS regulations is critical for hospital organizations with tax-exempt status. It can also be a serious time constraint for many executives in the healthcare industry. Regulations change or are added frequently, and they often come with a list of new tasks to accomplish, like implementing new policies and putting together extensive reports.

Recent updates to the Affordable Care Act – IRS Section 501(r) – have made it more tedious for 501(c)(3) healthcare organizations to retain their tax-exempt status. While the regulations help provide financial security to low-income patients, they add a layer of complexity to hospital guidelines. They can, however, make hospital financial policies more efficient when used correctly.

How IRS Section 501(r) Impacts 501(c)(3) Healthcare Organizations

IRS section 501(r) Medical Paperwork

The Affordable Care Act (ACA) went into effect on March 23, 2010. As part of ongoing efforts to make the ACA more effective for low-income patients, updates to the regulations were made on December 29, 2014.

There are several key dates associated with the ACA updates:

  • 501(r) provisions: All of the 501(r) provisions, except the CHNA requirements, are applicable to tax years beginning after the ACA was enacted in 2010.
  • 501(r) regulations: All of the 501(r) regulations apply to the tax years that begin after December 29, 2015. Prior tax years need to have a “reasonable, good-faith interpretation of Section 501(r)[.]”
  • CHNA requirements: The CHNA requirements apply to tax years that begin after March 23, 2012.

These requirements apply to any facility in the United States (50 states and Washington D.C. only) that is licensed or registered as a hospital organization. Organizations that operate multiple buildings in the same state are considered one facility, but out-of-state buildings will likely be considered separate facilities.

Failure to follow the ACA regulations can pose a serious risk to 501(c)(3) healthcare organizations. The biggest threat to a tax-exempt hospital that doesn’t adhere to these new requirements is losing their 501(c)(3) eligibility – losing their tax-exempt status puts an entire organization in danger. Fortunately, the requirements aren’t difficult to adopt.

The Comprehensive Guide to IRS Section 501(r) Requirements

In addition to the IRS 501(c)(3) requirements, IRS Section 501(r) enhances the minimum financial and emergency medical care requirements of hospital facilities that maintain tax-exempt status.

Section 501(r)(3): Community Health Needs Assessment

Section 501(r)(3) focuses on the Community Health Needs Assessment. This may include everything from preventing illnesses to addressing the behavioral, environmental, and social factors that impact the community.

There are two components of Section 501(r)(3):

  • 501(r)(3)(A): The first requirement of Section 501(r)(3) is that every hospital must conduct a community health needs assessment (CHNA) once every three years. The organization must also implement a strategy that meets the needs identified in the CHNA.
  • 501(r)(3)(B): The second requirement of Section 501(r)(3) governs the CHNA. It mandates that the CHNA allow for input from people “who represent the broad interests of the community”, and that the CHNA be made available to the public and widely distributed.

Every hospital organization is required to document its CHNA in a comprehensive report that includes a definition of the community the hospital serves, how the CHNA was conducted, and a thorough description of the interests and needs of the community. The report also needs to cover all efforts made to encourage feedback from low-income, medically underserved, and minority populations.

Section 501(r)(4): Financial Assistance Policy and Emergency Medical Care Policy

To ensure that hospitals offer emergency medical care and medically-necessary care, the ACA requires stringent financial standards around those services.

Section 501(r)(4) requires hospital facilities to establish two different types of policy for financial assistance in emergency situations:

  • Financial assistance policy: The FAP needs to cover all medically-necessary care, including emergency services. It needs to establish criteria for any financial assistance, how to apply for assistance, and how patients are charged.
  • Emergency medical care policy: To qualify what counts as emergency care, hospital facilities must establish a policy that defines emergency medical conditions they treat. Generally, if a hospital accepts Medicaid, they cover the appropriate medical conditions.

The FAP must include information about all discounts and free healthcare they offer, and anyone that is FAP-eligible cannot be charged more than the Amounts Generally Billed (AGB.) The AGB policy should be outlined in the FAP, as well.

Section 501(r)(5): Limitation on Charges

Expanding on the financial assistance policy, Section 501(r)(5) covers the limitations on charges a hospital can bill its FAP-eligible patients.

The limitations on charges are determined based on whether or not care is considered medically necessary by the hospital’s policies:

  • Medically-necessary care: Hospital facilities can choose to define medically-necessary care by using the Medicaid standards, other standards required by state law, or a generally-accepted standard of care in the community.
  • All other medical care: For medical care that isn’t considered necessary, the limitations on charges mandate that FAP-eligible patients receive care that is less than the standard gross charges for the care.

Both of these situations rely on the AGB calculation. However, every hospital facility can choose how it wants to calculate AGB. The two acceptable ways to determine AGB are with the look-back method or the prospective method. Each hospital must choose one, and organizations with multiple facilities can choose different options for each facility.

Section 501(r)(6): Billings and Collections

Section 501(r)(6) exclusively deals with how hospital facilities engage in billing and collection activities concerning FAP-eligible patients.

To ensure patients have sufficient time to see if they qualify for financial assistance, hospitals must make a reasonable effort to determine eligibility during the:

  • Notification period: After a billing statement is sent post-discharge, the 120-day notification period begins. Hospitals should provide written notification of financial assistance options, as well as make reasonable efforts to verbally notify patients of their options.
  • Application period: The application period, which begins at the same time as the notification period, is 240 days long. Patients are eligible to apply for financial assistance during this period and can apply for assistance for multiple episodes of care.

Before engaging in “extraordinary collection actions”, or ECAs – this includes activities like selling the debt to a third-party or reporting negative information to credit bureaus – hospitals must make reasonable efforts to notify people of their financial assistance options.

IRS Section 501(r) Reporting Requirements for 501(c)(3) Healthcare Organizations

In an effort to streamline financial reporting for ACA guidelines, IRS Section 501(r) requires every hospital facility to use Form 990, Schedule H, Hospitals.

Hospitals can use this form to list out the community benefits it provides during the tax year, including its:

  • Community Health Needs Assessment
  • Financial Assistance Policy
  • Emergency Medical Care Policy
  • Billing and Collection Policy

If a hospital has more than one facility, they must also complete Section B for each of the facilities listed in Schedule H, Section A. Each hospital must also submit an audited copy of their financial statements. Any hospital that wants to obtain or retain its 501(c)(3) tax-exempt status must submit the required reports and statements every year.

How to Create an IRS Section 501(r) Compliance Checklist

Staying in compliance is a top concern of most healthcare professionals. Whether someone is putting together policies for a new hospital facility or trying to salvage policies of an existing organization, an IRS Section 501(r) compliance checklist is the most efficient way to ensure every detail is covered.

1. Schedule the Community Health Needs Assessment

A CHNA needs to have been performed within the last two taxable years for it to qualify. There are five required steps to conducting a CHNA that should go in a compliance checklist:

  • Define the hospital’s community
  • Assess the healthcare needs of the community
  • Solicit input from members of the community
  • Document the CHNA process in a report
  • Provide the CHNA report to the public

For this step to be considered complete, a hospital facility must perform all of these steps, including the distribution of the CHNA report to the public. The report must be considered widely available to the public, as well.

2. Set Amounts Generally Billed

Section 501(r) requirements base several performance indicators on how a hospital sets its AGB. The look-back method should include claims from a prior 12-month period by:

  • Only Medicare fee-for-service
  • Medicare fee-for-service and private insurers that paid claims to the facility
  • Medicaid, either by itself or with Medicare and private insurers

Hospitals that choose the look-back method of calculating AGB should provide the AGB percentage the facility uses plus describe how they were calculated. For the prospective method, hospitals can use:

  • Medicare fee-for-service
  • Medicaid
  • Both

The FAP has the option to explain how people can find the appropriate information and how they can calculate the AGB. This information must be provided in writing and at no charge.

3. Establish Written Financial and Emergency Policies

To create a comprehensive IRS Section 501(r) compliance checklist, a hospital organization needs to establish a financial assistance policy that addresses several requirements by including:

  • Eligibility criteria and basis for calculating charges
  • Information on how to apply for financial assistance
  • What may happen if a bill remains unpaid
  • A plain-language summary of the policy
  • Translation of documents where applicable

The FAP is one of the most important components of Section 501(r) requirements and, in conjunction with the emergency medical care policy, provides care for eligible patients without discrimination.

4. Adopt an Appropriate Billing and Collection Policy

The goal is to verify whether patients are eligible for financial assistance before engaging in ECAs. Hospitals that sell the debt to third-parties are equally responsible for ensuring:

  • No ECAs are attempted to collect payment of the debt
  • Interest is not charged in excess of the legal rate
  • Debt is returnable or recallable to the hospital if FAP-eligibility is verified
  • The patient does not overpay once FAP-eligibility is verified

While this type of sale isn’t considered an ECA and doesn’t require reasonable efforts to be made before making the sale, if any of these conditions are not met, the sale cannot happen until those efforts have been made.

5. Create a Timeline for Reporting Standards

The IRS generally expects hospital facilities to submit reports annually. Creating a timeline for when each report is due is the final touch to the compliance checklist:

  • CHNA report: While this assessment is only performed once every three years, the CHNA report should include any efforts made to solve community health needs.
  • Audited financial statements: These will need to be submitted every year and will likely take the most time to prepare.
  • Financial and emergency care policies: Every facility will need to submit this information as part of Form 990, Schedule H, Hospitals.
  • Billing and collections policy: This should include information on any payments the hospital collects as well as any debt that is sold to third-parties.

An efficient reporting process will start with the data that is most easily accessible and build from there, though it is best to consult a tax professional before putting together a reporting process to ensure all IRS regulations are met.

How to Maintain IRS Section 501(r) Compliance

Creating a compliance checklist is just one step in putting together a policy that meets the IRS Section 501(r) requirements. Compliance requires a commitment to put policies and processes in place that conform to rigorous IRS standards.

There are other ways to keep a hospital in full compliance, though:

  • Invest in software and technology that is designed around 501(r) compliance standards.
  • Hire a tax professional to ensure adequate reporting standards are in place.
  • Routinely monitor regulations and update processes accordingly.

While updates to the ACA can be frustrating and confusing, they offer an opportunity to review hospital policies. Advancements in technology can streamline processes and a tax professional can find ways to make policies more efficient. With help, maintaining IRS Section 501(r) compliance can be a simple task.