Not-For-Profit/Exempt Organizations Blog : Non-Profit Lawyers & Attorneys : Proskauer Rose Law Firm : Tax & Corporate Law for 501(c), 501(3) Organizations

 As we have previously reported, the Affordable Care Act (the "Act") included additional requirements for tax-exempt hospitals to maintain their tax-exempt status; these changes are effective for tax years starting after March 23, 2010, the enactment date of the Act.  　

These additional requirements included Form 990 reporting obligations for hospitals, which required some adjustments to Form 990 and the corresponding instructions. Late yesterday, the IRS released the 2010 Schedule H and instructions. The IRS also announced  that hospitals should not file 2010 Forms 990 requiring Schedule H before July 1, 2011 and granted an automatic three-month extension to all such organizations whose Forms 990 would otherwise be due on or before August 15, 2011.　

This announcement does not affect the ultimate due date for such returns, but simply means that the three-month automatic extension will be granted without filing a request. Although the IRS has not yet issued guidance on the new hospital requirements, the new Schedule H and instructions will shed some light on their interpretations.

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Federal legislation often includes provisions that lead to unintended consequences. One such provision in the Patient Protection and Affordable Care Act (the “Act”) likely has left some hospital benefits managers scratching their heads: a requirement that certain group health plans may not impose greater restrictions on out-of-network emergency care services (Section 10101(h) of the Act).)

Specifically, under the Act, starting in 2011, non-grandfathered plans must provide coverage for emergency services without regard to whether the provider is in-network or out-of-network.

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In Mayo Foundation for Medical Education and Research v. United States , the U.S. Supreme Court upheld the validity of a Treasury Regulation that states that the student exception from FICA (Social Security and Medicare) tax does not apply to medical residents because they work at least 40 hours per week. Applying the deferential two-part standard of review from Chevron  the Supreme Court concluded that the relevant statutory provision was ambiguous and the regulation was a permissible interpretation of the statute. 

For background on the medical resident FICA issue, click here.  

As we have previously reported, since the 1990’s many academic medical centers and individual medical residents have filed claims with the IRS seeking refunds of FICA taxes paid on medical resident salaries based on the argument that the residents are students and thus exempt from FICA. In March 2010, the IRS announced that it would concede and pay outstanding claims for periods before April 1, 2005. April 1, 2005 is the date the new FICA regulation precluding student status for full-time workers  went into effect. 

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We have been closely following the medical resident FICA refund issue.  As we noted in our blog entry in March on the topic, the IRS conceded that refund claims for FICA taxes for medical residents for the periods before April 1, 2005 will be paid.  The IRS has now announced this month that it has begun sending letters to individual medical residents who filed individual claims for FICA refunds.  These letters ask the individuals to submit copies of their claims. 

Medical residents who filed a claim but did not receive a letter by August 16, 2010 should contact the IRS.  

The IRS has prepared FAQs for these refund claims that are available here.

For additional information on the medical resident FICA refund issue, please review our June 2, 2010 blog entry. 

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Many health care and medical education institutions have claims pending with the IRS for refunds of the FICA (Social Security and Medicare) tax paid on wages for employed medical residents.  The issue for these claims is whether the residents are “students,” and their wages accordingly exempt from FICA tax, for purposes of the student FICA exception in the Internal Revenue Code.

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After attending the Georgetown University Law Center "Representing & Managing Tax-Exempt Organizations" Conference in April, 2010, we wanted to discuss some of the lessons that exempt organizations should take away in the following areas: governance; transparency; compensation; joint ventures; and endowments and investments.

1. Governance - If you did not think that the way that you ran your organization was anybody's business but your own, you will have to immediately adjust that frame of mind.  To say that the IRS is focused on governance would be an understatement.  Governance matters are the motivators for a lot of the changes that the IRS has made in its policies affecting exempt organizations and we can see the IRS's approach to governance in its Form 990 revisions.  The IRS is looking at the management of each organization and how that management runs the organization.  Organizations that do not have good governance policies that are tailored for that particular organization, effective boards, and independent voting members are organizations that will undoubtedly raise a red flag for the IRS.  Moreover, the IRS cares a great deal about the organization's ability to follow its own governing documents and document the decisions that its governing body and officers make.  In short, the IRS is concerned about an organization's leadership being informed about the organization's activities and assets in order to effectively govern the organization.  If you have not implemented an effective governance policy or have an almost absentee board or management, you must address your governance procedures immediately.

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We tweeted live from the Georgetown Conference that occurred on April 22-23, 2010.  Our tweets from the conference highlight IRS next steps and agenda items, as well as discuss other topics of interest to exempt organizations.

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On March 18, 2010, the Illinois Supreme Court denied property tax exemption to a not-for-profit hospital in the nationally watched Provena case.  The plurality's reasoning has implications for many nonprofits beyond hospitals. 

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Since the 1990's, many academic medical centers have filed claims with the IRS seeking refunds of FICA (social security and Medicare) taxes paid on medical resident salaries on the basis that the residents are students and exempt from FICA.  For the most part, the government has come out on the losing side when this issue has been litigated. 

The IRS has now announced that it plans to concede this issue for periods before April 1, 2005, when new IRS regulations went into effect.  The IRS's brief announcement does not indicate the terms on which claims will be paid.  Still, the IRS notes that verification of the claim amount will be required and interest will be paid. 

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Section 9007 of the health reform bill passed by the Senate on December 24, 2009 contains specific requirements for Section 501(c)(3) hospitals wishing to retain their tax exemption.  This development is of interest to all exempt organizations, not just hospitals, because it is another example of Congressional action imposing specific standards on particular types of exempt organizations (such as Section 501(q), added by the Pension Protection Act of 2006 to address credit counseling organizations). 

Its provisions also increase requirements for exempt hospitals’ transparency and public accountability, a favorite topic of Senator Charles Grassley (R-Iowa) of the Senate Finance Committee, and is another indication that scrutiny of tax-exempt organizations is unlikely to abate.  Senator Grassley has recently issued two releases on rising college tuition, high not-for-profit executive compensation, and the need for governance transparency. 

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