Section 501(r) considerations in tax-exempt hospital acquisitions

Background

Tax-exempt hospitals must generally comply with the specific requirements outlined in section 501(r). Each hospital facility must individually demonstrate its compliance with these requirements, including:

• Every three years:

o    Conduct a detailed CHNA, which demonstrates a hospital facility’s attention to the healthcare needs in its community, and

o    Formally adopt an implementation strategy with regard to the priorities identified in the CHNA.

• At all times:

o    Maintain a written financial assistance policy and an emergency medical policy.

o    Limit charges for financial policy-eligible individuals for emergency and other medically necessary care.

o    Set billing and collection limits and make reasonable efforts to determine if individuals are eligible for financial assistance before engaging in extraordinary collection efforts.

Hospitals that fail to comply with section 501(r) may be subject to excise taxes and risk loss of exempt status. Questions around section 501(r) compliance and timing often arise during hospital consolidations, and the rules differ depending upon the specific section 501(r) requirement.

CHNA and implementation strategy transition rules

Following a hospital acquisition, the tax regulations require an acquiring organization to ensure that the hospital facility completes a CHNA with respect to any hospital facility by the last day of the organization’s second taxable year beginning after the date on which the hospital facility was acquired.

This rule applies regardless of:

• The method of acquisition, whether through a merger or an asset acquisition, or
• When any CHNA was completed by a hospital facility’s prior owner.

The corresponding implementation strategy must be adopted by the acquired facility’s governing body by the 15^th day of the fifth month following the tax year in which the hospital completed the CHNA. The transition rule is intended to mirror the general rule, specifically coinciding with the Form 990 due date (without extensions).

A simple example demonstrates these principles:

• System A is a calendar year taxpayer, making its Form 990 due May 15, without extension.
• System A acquires Hospital Facility Y on Jan. 1, 2026.
• Hospital Facility Y last completed its CHNA in 2023 and adopted its implementation strategy on May 15, 2024. Absent the acquisition, Hospital Facility Y’s next CHNA is due no later than Dec. 31, 2026.
• The transition rules give System A until Dec. 31, 2028 (the last day of the second taxable year beginning after the acquisition) to complete Hospital Facility Y’s next CHNA and adopt the associated implementation strategy by May 15, 2029.

This example also reinforces how closing dates can affect the transition rules. If closing occurred merely one day earlier, on Dec. 31, 2025, System A would have lost a full year to complete Hospital Facility Y’s next CHNA. With the earlier closing date, the second taxable year beginning after the acquisition would have ended on Dec. 31, 2027, with the implementation strategy requiring adoption by May 15, 2028.

Financial assistance policies following a hospital acquisition

There are no similar transition rules governing the section 501(r)(4) financial assistance policy (FAP) and billing and collection limitations in the IRS regulations. Importantly, the acquired facility must maintain unbroken adherence to these requirements.

Each licensed hospital facility must establish, by formal adoption, a written FAP and a written emergency medical care policy and follow the policies at all times for each hospital facility. However, an acquiror cannot merely substitute its FAP for that of an acquired hospital facility without taking additional actions. Further, there is no opportunity for the acquiring entity to wait to evaluate the new hospital facility’s section 501(r) compliance post-close due to the lack of a transition rule.

Therefore, it is a best practice for the acquiring entity to conduct section 501(r) diligence as part of its pre-closing checklist and adopt section 501(r) compliance policies as part of closing. This practice becomes particularly important where there is a new governing body over the acquired facility. Options include:

(1) Readopting the acquired facility’s existing FAP and related policies, and

(2) Adopting a FAP and related policies for the new facility consistent with the acquiror’s policies.

Option (1) would allow the acquiring entity additional time to evaluate considerations relevant to FAPs in the new facility’s community. Option (2) requires additional upfront planning. If the acquiror extends its FAP and related policies to the new hospital facility, it must update those policies to specifically identify the new hospital facility by name. While the Treasury regulations permit multiple hospital facilities to have identical FAPs and policies, or even share one document, the information in the policies must be accurate, and the policy must clearly state that it is applicable to each facility.

How RSM US can help

The examples discussed above only address a few compliance considerations a tax-exempt hospital may encounter when acquiring a new facility. RSM’s tax-exempt healthcare professionals can assist tax-exempt hospitals evaluating potential section 501(r) compliance issues involved in expansions and acquisitions. Our experience with the tax-exempt healthcare sector enables us to provide tax-exempt hospitals with insights about how to successfully demonstrate compliance with CHNAs and implementation strategies, identify gaps relating to establishing and implementing FAPs and evaluate overall compliance with section 501(r).