n-14-03.pdf

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Part III – Administrative, Procedural, and Miscellaneous

Proposed Procedures for Charitable Hospitals to Correct and Disclose Failures to Meet
§ 501(r)

Notice 2014-3

PURPOSE AND BACKGROUND
This notice contains a proposed revenue procedure that provides correction and
disclosure procedures under which certain failures to meet the requirements of § 501(r)
of the Internal Revenue Code will be excused for purposes of § 501(r)(1) and
501(r)(2)(B).
Section 9007 of the Patient Protection and Affordable Care Act, Public Law 111-148
(124 Stat. 119 (2010)), enacted § 501(r), which imposes additional requirements on
charitable hospital organizations. Section 501(r)(1) provides that a hospital organization
will not be treated as described in § 501(c)(3) unless the organization meets the
requirements of § 501(r)(3) through (r)(6). Similarly, § 501(r)(2)(B)(ii) provides that a
hospital organization operating more than one hospital facility will not be treated as
described in § 501(c)(3) with respect to any such hospital facility for which the
requirements of § 501(r) are not separately met.
On June 26, 2012, the Department of the Treasury (“Treasury Department”) and the
Internal Revenue Service (IRS) published a notice of proposed rulemaking in the
Federal Register (REG-130266-11, 2012-32 I.R.B. 126 [77 FR 38148]) (“2012 proposed

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regulations”) that contains proposed regulations regarding the requirements of
§ 501(r)(4), (r)(5), and (r)(6). On April 5, 2013, the Treasury Department and the IRS
published a notice of proposed rulemaking in the Federal Register (REG-106499-12,
2013-21 I.R.B. 1111 [78 FR 20523]) (“2013 proposed regulations”) that contains
proposed regulations regarding the requirements of § 501(r)(3) and the consequences
for failing to meet any of the § 501(r) requirements.
To provide an incentive for hospital organizations to take steps not only to avoid
failures but to remedy and disclose them when they occur, the 2013 proposed
regulations specify that, for purposes of § 501(r)(1) and 501(r)(2)(B), a hospital
organization’s failure to meet one or more of the requirements described in § 501(r) and
§ 1.501(r)–3 through § 1.501(r)–6 that is neither willful nor egregious will be excused if
the hospital organization corrects the failure and makes disclosure in accordance with
the rules set forth in additional guidance to be issued by the Treasury Department and
the IRS.
This notice provides a proposed revenue procedure that if adopted would contain
that additional guidance.
REQUEST FOR COMMENTS
The Treasury Department and the IRS invite comments regarding the procedures set
forth in the proposed revenue procedure, including what additional examples, if any,
would be helpful to include and whether hospitals should be required to make disclosure
in ways other than reporting on Schedule H, Hospitals, of its Form 990, Return of
Organization Exempt From Income Tax, such as on their Web sites.

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Comments should refer to Notice 2014-3 and be submitted by March 14, 2014, to:
Internal Revenue Service
CC:PA:LPD:PR (Notice 2014-3)
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044

Submissions may be hand delivered Monday through Friday between the hours of 8
a.m. and 4 p.m. to:
CC:PA:LPD:PR (Notice 2014-3)
Courier’s Desk
Internal Revenue Service
1111 Constitution Avenue, N.W.
Washington, D.C. 20224

Alternatively, comments may be submitted electronically via e-mail to the following
address: Notice.Comments@irscounsel.treas.gov. Please include “Notice 2014-3” in
the subject line.
All comments submitted by the public will be available for public inspection and
copying.
DRAFTING INFORMATION
The principal author of this notice is Garrett Gluth of the Exempt Organizations, Tax
Exempt and Government Entities Division. For further information regarding this notice,
contact Garrett Gluth at 202-317-8413 (not a toll-free call).

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PROPOSED REVENUE PROCEDURE

SECTION 1. PURPOSE
This revenue procedure provides guidance regarding correction and disclosure
procedures for hospital organizations to follow so that certain failures to meet the
requirements of § 501(r) of the Internal Revenue Code will be excused for purposes of
§ 501(r)(1) and 501(r)(2)(B).
SECTION 2. BACKGROUND
Section 9007 of the Patient Protection and Affordable Care Act, Public Law 111-148
(124 Stat. 119 (2010)), enacted § 501(r), which imposes additional requirements on
charitable hospital organizations. Section 501(r)(1) provides that a hospital organization
described in § 501(r)(2) will not be treated as described in § 501(c)(3) unless the
organization meets the requirements of § 501(r)(3) through (r)(6).
Section 501(r)(2)(A) defines a hospital organization as including any organization
that operates a facility required by a state to be licensed, registered, or similarly
recognized as a hospital.
Section 501(r)(2)(B) requires a hospital organization that operates more than one
hospital facility to meet the requirements of § 501(r) separately with respect to each
hospital facility and provides that such a hospital organization will not be treated as
described in § 501(c)(3) with respect to any hospital facility for which the requirements
of § 501(r) are not separately met.
Section 501(r)(3) requires a hospital organization to conduct a community health
needs assessment (CHNA) every three years and adopt an implementation strategy to
meet the community health needs identified through such assessment. Section 4959

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imposes a $50,000 excise tax on a hospital organization that fails to meet the CHNA
requirements of § 501(r)(3).
Section 501(r)(4) requires a hospital organization to establish a financial assistance
policy (FAP) and a policy relating to emergency medical care.
Section 501(r)(5) requires a hospital organization to limit amounts charged for
emergency or other medically necessary care that is provided to individuals eligible for
assistance under the organization’s FAP (FAP-eligible individuals) to not more than the
amounts generally billed to individuals who have insurance covering such care. Section
501(r)(5) also prohibits the use of gross charges.
Section 501(r)(6) requires a hospital organization to make reasonable efforts to
determine whether an individual is FAP-eligible before engaging in extraordinary
collection actions (ECAs) against the individual.
The statutory requirements of § 501(r) (except for § 501(r)(3)) are effective for a
hospital organization's first taxable year beginning after March 23, 2010. Section
501(r)(3) is effective for a hospital organization's first taxable year beginning after March
23, 2012.
On June 26, 2012, the Department of the Treasury (“Treasury Department”) and the
Internal Revenue Service (“IRS”) published a notice of proposed rulemaking in the
Federal Register (REG-130266-11, 2012-32 I.R.B. 126 [77 FR 38148]) (“2012 proposed
regulations”) that contains proposed regulations regarding the requirements of
§ 501(r)(4), (r)(5), and (r)(6). On April 5, 2013, the Treasury Department and the IRS
published a notice of proposed rulemaking in the Federal Register (REG-106499-12,
2013-21 I.R.B. 1111 [78 FR 20523]) (“2013 proposed regulations”) that contains

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proposed regulations regarding the CHNA requirements of § 501(r)(3) and the
consequences for failing to meet any of the § 501(r) requirements.
Under section 1.501(r)-2(c) of the 2013 proposed regulations, a hospital facility’s
failure to meet the requirements of § 501(r) and § 1.501(r)-3 through § 1.501(r)-6 of the
regulations that is neither willful nor egregious shall be excused for purposes of
§ 501(r)(1) and 501(r)(2)(B) if the hospital facility corrects and makes disclosure of the
failure in accordance with a revenue procedure, notice, or other guidance to be
published in the Internal Revenue Bulletin.
Under section 1.501(r)-2(b) of the 2013 proposed regulations, a hospital facility's
omission of required information from a report or policy described in § 1.501(r)-3 or
§ 1.501(r)-4, or error with respect to the implementation or operational requirements
described in § 1.501(r)-3 through § 1.501(r)-6, will not be considered a failure to meet a
requirement of § 501(r) if (1) such omission or error was minor, inadvertent, and due to
reasonable cause; and (2) the hospital facility corrects such omission or error as
promptly after discovery as is reasonable given the nature of the omission or error.
Because minor and inadvertent omissions and errors due to reasonable cause that are
corrected in accordance with the requirements of § 1.501(r)-2(b) of the 2013 proposed
regulations are not considered failures to meet a requirement of § 501(r), hospitals do
not need to use the correction and disclosure procedures described in this revenue
procedure for such omissions and errors. However, an organization that wants to
correct a minor and inadvertent omission or error may rely on the principles regarding

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correction described in section 5 of this revenue procedure in meeting the correction
requirements of § 1.501(r)-2(b)(2).
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SECTION 3. EFFECT
.01 In general. The IRS will not treat a hospital organization’s failure to meet a
requirement of § 501(r) as a failure for purposes of § 501(r)(1) and 501(r)(2)(B) if the
failure falls within the scope of section 4 and the hospital organization corrects the
failure in accordance with section 5 and discloses the failure in accordance with section
6.
.02 Excise tax under § 4959
. Notwithstanding the treatment of a failure to meet a
requirement of § 501(r) as not a failure under section 3.01 for purposes of § 501(r)(1)
and 501(r)(2)(B), a hospital organization may be subject to excise tax under § 4959 for
failures to meet the requirements of § 501(r)(3).
SECTION 4. SCOPE
.01 In general
. A hospital organization may rely upon this revenue procedure to
correct and disclose any failure to meet a requirement of § 501(r) that is not willful or
egregious, provided that the hospital organization has begun correcting the failure in
accordance with section 5 and that it has disclosed the failure in accordance with
section 6 before the hospital organization is first contacted by the IRS concerning an
examination of the organization. If the annual return for the tax year in which the failure
is discovered is not yet due (with extensions), then the hospital organization need only

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In addition, § 1.501(r)-2(a)(8) of the 2013 proposed regulations provides that, for purposes of
determining whether to continue to recognize the § 501(c)(3) status of a hospital organization, the IRS will
consider whether a hospital organization corrected a failure as promptly after discovery as was
reasonable given the nature of the failure. A hospital organization that cannot or does not have an error
or omission excused by following the correction and disclosure procedures outlined in this revenue
procedure may nevertheless use these principles in demonstrating that they satisfy the factor described in
§ 1.501(r)-2(a)(8).

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to have begun correcting the failure in accordance with section 5 before the hospital
organization is first contacted by the IRS concerning an examination.
.02 Willful or egregious
. A failure that is willful includes a failure due to gross
negligence, reckless disregard, or willful neglect. A hospital organization’s correction
and disclosure of a failure does not create a presumption that the failure was not willful
or egregious. However, the fact that correction and disclosure in accordance with this
revenue procedure were made will be considered as a factor and may tend to indicate
that an error or omission may not have been willful or egregious.
SECTION 5. CORRECTION
.01 Correction principles
. Correction must be made in accordance with the following
principles:
(1) Restoration of affected persons
. To the extent reasonably feasible, the
correction should be made with respect to each affected person, if any, and should
restore the affected person(s) to the position they would have been in had the failure not
occurred, regardless of whether the harm suffered by the affected person(s) occurred in
a prior year and regardless of whether such prior year is a closed taxable year.
(2) Reasonable and appropriate correction
. The correction should be reasonable
and appropriate for the failure. Depending on the nature of the failure, there may be
more than one reasonable and appropriate correction.
(3) Timing
. The correction should be made as promptly after discovery as is
reasonable given the nature of the failure.
(4) Implementation/modification of safeguards. If the hospital organization has not
established practices and procedures (whether informal or formal) for its hospital facility

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or facilities that are reasonably designed to achieve each facility’s compliance with the
requirements of § 501(r), the hospital organization should establish such practices and
procedures as part of its correction. If the hospital organization has established
practices and procedures for its hospital facility or facilities to achieve compliance with
§ 501(r) but those practices and procedures failed to anticipate the particular type of
failure that occurred, the hospital organization should determine if changes to its
practices and procedures are needed to reduce the likelihood of that type of failure
recurring and to assure prompt identification and correction of any such failures that do
occur. If it identifies any such changes to its practices and procedures, it should
implement those changes.
.02 Examples
. The provisions of section 5.01 may be illustrated by the following
examples. For purposes of these examples, assume that the hospital facility corrected
the failure with respect to all affected persons as promptly after discovery as is
reasonable given the nature of the failure and put into place revised or newly
established practices and procedures to minimize the likelihood of the failure recurring.
(1) A hospital facility that has failed to adopt a CHNA report that contains all of the
elements required by § 1.501(r)-3 may correct the failure by preparing and adopting a
CHNA report containing all of the required elements and making the corrected CHNA
report widely available on a Web site within the meaning of § 1.501(r)-1(c)(4) of the
2013 proposed regulations.
(2) A hospital facility that has failed to adopt a FAP that contains all of the elements
required by § 1.501(r)-4 may correct the failure by establishing a FAP containing all of

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the required elements, including making the corrected FAP widely available on a Web
site within the meaning of § 1.501(r)-1(c)(4) of the 2013 proposed regulations.
(3) A hospital facility has failed to meet the requirements of § 1.501(r)-5 because,
due to processing errors, it charged FAP-eligible individuals more than an amount
permitted under that section. The errors were discovered during the month-end
accounting period closing. The hospital facility may correct the failure by providing all of
the affected FAP-eligible individuals with an explanation of the error, a corrected billing
statement, and a refund of any payments the individuals made to the hospital facility (or
any third party) in excess of the amount they are determined to owe as FAP-eligible
individuals.
(4) If a hospital facility fails to properly implement a policy required under
§ 1.501(r)-4 and that failure does not involve over-charging a FAP-eligible individual or
engaging in an ECA (for example, a failure to widely publicize a FAP in the manner
described in the FAP), the hospital facility may correct the failure by beginning to
implement the policy correctly and taking reasonable actions to compensate for the
failure (such as doing additional outreach or advertising of the FAP in local media in the
case of a failure to widely publicize the FAP).
SECTION 6. DISCLOSURE
A failure is disclosed for purposes of this revenue procedure if the hospital
organization reports the following information on Schedule H, Hospitals, of its Form 990,
Return of Organization Exempt From Income Tax, for the tax year in which the failure is
discovered:

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(1) A description of the failure, including the type of failure, the hospital facility or
facilities where the failure occurred, the date(s) of the failure, the number of
occurrences, and, in the case of failures to meet the operational requirements in
§ 1.501(r)-5 or § 1.501(r)-6, the number of persons affected and the dollar amounts
involved. In addition, a hospital organization must describe the cause of the failure and
the practices and procedures (if any) that were in place prior to the occurrence of the
failure to detect or prevent the type of failure that occurred.
(2) A description of the discovery
, including how it was made and the timing of
discovery.
(3) A description of the correction made, including the method of correction, the
date of correction, and whether all persons were restored to the position they would
have been in had the failure not occurred and, if not, the reasons why.
(4) A description of the practices and procedures
, if any, that were revised or newly
established by the hospital organization for its hospital facility or facilities to minimize
the likelihood of the type of failure recurring and to promptly identify and correct any
such future failures that do occur; or, if no practices and procedures were revised or
newly established by the hospital organization, an explanation of why no changes in
practices and procedures were needed.
SECTION 7. EFFECTIVE DATE
This revenue procedure is effective on and after [INSERT DATE OF PUBLICATION
OF THE FINAL REVENUE PROCEDURE IN THE INTERNAL REVENUE BULLETIN].

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SECTION 8. DRAFTING INFORMATION
The principal author of this Revenue Procedure is Garrett Gluth of the Exempt
Organizations, Tax Exempt and Government Entities Division. For further information
regarding this revenue procedure, contact Garrett Gluth at 202-317-8413 (not a toll-free
call).