IRS’ CHNA proposed rule provides flexibility, allows correction of certain failures

Although the Internal Revenue Service (IRS) just issued a second proposed rule and final rule is yet to come, charitable hospitals must be conducting community health needs assessments (CHNAs) as required by section 9007 of the Patient Protection and Affordable Care Act (PPACA) for tax years beginning after March 23, 2012. On April 5, 2013, the IRS issued proposed regulations (78 FR 20523) under Internal Revenue Code Section 501(r)(3) governing the requirement that charitable hospitals must conduct a CHNA at least once every three years and submit a written implementation strategy addressing the findings of the CHNA annually with IRS Form 990 or risk losing their tax-exempt status.  In June of 2012, the Treasury Department issued proposed regulations (77 FR 38148) related to charitable hospitals’ responsibilities to publicize information needed to apply for financial assistance and establish billing and collections protections for patients. The two proposed regulations promote transparency and patient protections while providing flexible rules that can be applied to a wide range of charitable hospitals, the Treasury Department noted in the CHNA proposed rule fact sheet.

 CHNA Reporting  and Implementation Strategy 

A charitable hospital must conduct a CHNA in the current year or either of the two preceding years. In conducting a CHNA, the hospital first must define each community its services. Under the proposed regulations, a hospital may define its community based on its geographic location, target populations, or the hospital’s special medical focus. Second, it must assess the significant health needs of that community. The hospital must take into account input from public health departments; medically underserved, low-income, and minority populations; and written comments received on its last CHNA report, and must include an implementation strategy. The CHNA must be documented in a written report that is adopted by the hospital facility that identifies, assesses, and prioritizes significant health needs of the community. All needs identified do not need to be reported, however. Finally, the hospital must make the CHNA written report summarizing its findings widely available to the public by posting it on the hospital’s website, providing printed copies on request, or another method.

The proposed rule would require the hospital to adopt a written implementation strategy that describes how the hospital plans to address the significant community health needs identified or explains why it does not plan to address the health needs. The proposed rule, however, would provide additional time for the first implementation strategy.  The implementation strategy must discuss the anticipated impact of the actions the hospital plans to take as well as its plan to evaluate the impact. The hospital must attach the most recent implementation strategy to its Form 990 annually and include a description of the steps it took during the year to address the identified health needs in the Form 990. In comments to Wolters Kluwer reported in the May 20, 2013, CCH Tax Exempt Advisor, Nancy Ortmeyer Kuhn, director, Jackson and Campbell, P.C., Washington, D.C., said that “Hospitals have been given a good roadmap on how to develop a CHNA. The regulations use facts and circumstances and provide a flexible regulatory scheme. There are lots of different hospitals, hospital organizations, and communities; bright-line regulations would have been difficult to apply.”

Until final rules are published, hospitals may rely on the April proposed rules and the 2012 proposed regulations as they comply with the new requirements. Hospitals that have started their CHNAs can continue to rely on the interim rules in the Notice 2011-52 until October 2013, the IRS said.


PPACA imposes a $50,000 excise tax on a hospital organization that fails to conduct a CHNA. The excise tax can be imposed for any three-year period on a facility-by-facility basis, according to the IRS. The proposed rules addresses the excise tax as well as the consequences for hospitals that fail to satisfy any of the new requirements imposed on charitable hospitals by the statute. “Without the penalty, it would be difficult for the IRS to enforce these requirements. A $50,000 penalty gets their attention,” Kuhn told Wolters Kluwer. Under the proposed rules, the excise tax applies on a facility-by-facility basis. If a single facility within a multi-facility organization fails to comply with the statutory requirements (and the failure would have resulted in revocation in the case of a single-facility hospital organization), the proposed regulations would impose a tax on the income of the noncompliant facility.  

The IRS may revoke a hospital’s tax-exempt status in appropriate cases of noncompliance after taking into consideration all facts and circumstances, including whether the organization has had previous failures; the size, scope, and significance of the failure; and the reasons for the failure. A hospital organization that fails to comply fully with any requirement of Section 501(r), could lose its Section 501(c)(3) tax-exempt status at the entity level if it operates one facility or at the facility level if it operates more than one facility. Under the proposed regulations, however, errors or omissions that are minor or inadvertent due to reasonable cause and that are corrected promptly after discovery would not be considered failures. Further, a failure to meet the new requirements that is not willful or egregious would be excused if the hospital corrects the failure and makes disclosure. IRS reported that it will publish further guidance in a proposed form to correct more serious failures.

“The IRS Exempt Organization division is more concerned with reform than revocation. This approach reinforces the idea that their goal is to have entities operated in a charitable manner, not to collect revenues. I expect that it will be very unusual that a hospital’s exemption will be revoked. The violations would really have to be egregious,” Kuhn said.