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

Here are some take-away points from each presentation:

Best Practices for Board Members.  Bob Kaufman, Partner, described how increased outside scrutiny of tax-exempt organizations requires increased attention by boards, particularly with respect to governance questions now asked on IRS Form 990.  Critical responsibilities of all board members are the selection, evaluation, and, if necessary, replacement of the CEO, but also support, encouragement, and assistance to the CEO.  Good practices include how replacement directors are selected, compensation practices and audit committees, and being able to answer "yes" to the Form 990 questions of whether the organization has certain key policies.

The Effects of Health Care Reform.  Elizabeth Mills, Senior Counsel, described highlights of this year’s health care reform act relating to tax-exempt organizations both as employers and as charitable organizations.  Health plans maintained by exempt organizations for their employees are subject to the same new rules as those of taxable employers, many of which are effective beginning January 1, 2011 or even sooner.  Depending on whether the plan is "grandfathered," these rules may include coverage of preventive services, limitations on waiting periods to obtain coverage, prohibition of preexisting condition limitations, and application of nondiscrimination rules to insured plans.  Tax-exempt hospitals are also subject to specific new requirements that are effective now.  Finally, the health reform legislation includes many funding opportunities for education and innovative care arrangements, some of which require partial funding from private sources.  More information can be found at Proskauer's Health Care Reform Task Force web page.

Executive Compensation Developments.  Lisa A. Berkowitz Herrnson, Senior Counsel, described how nonqualified deferred compensation for executives of tax-exempt employers is governed by the rules of Code Section 457.  If a plan does not satisfy the requirements to be an "eligible deferred compensation plan" under Code Section 457(b), it will be considered to be an "ineligible deferred compensation plan" under Code Section 457(f) and will then need to ensure that it also complies with the rules under Code Section 409A.  The IRS has announced its intention to issue additional guidance concerning certain aspects affecting "ineligible deferred compensation plans" in the near future.

Ethics Issues Facing In-House Counsel.  A. Nicole Spooner, Associate General Counsel at the Open Society Institute, described the New York Rules of Professional Conduct  and how those rules can apply to in-house counsel.  Specifically, in-house counsel should be aware of the level of protection and confidentiality afforded business and legal services that they provide and should determine the extent of their attorney-client relationships.  Moreover, in-house counsel should be aware of how their practice can be limited across state and international jurisdictions, including limitations on privilege and what information can be kept confidential.  Finally, in-house investigations should be conducted with these principles in mind and in-house counsel that are not the primary counsel in an organization should still realize that they have responsibilities under the Rules of Professional Conduct and can also be in violation of the Rules.

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Both small businesses and tax-exempt organizations will use the form to calculate the credit.  Instead of claiming the credit on an income tax return, however, exempt organizations will instead claim the small business health care tax credit on a revised Form 990-T.  The Form 990-T is currently used by exempt organizations to report and pay the tax on unrelated business income.  Form 990-T will be revised for the 2011 filing season to enable eligible exempt organizations to also claim the small business health care tax credit.  These organizations will not have to owe unrelated business income tax to be able to file a Form 990-T and claim the tax credit.

The draft Form 8941 is available on the IRS website.  The IRS states that the final Form will be available later this year.

For additional information on the health care tax credit, please visit the IRS page on this topic or review our April 7, 2010 blog entry.

The IRS said that the credit is generally available to small employers that pay at least half the cost of single coverage for their employees.  The maximum credit is 35 percent of the premiums paid in 2010 by eligible small employers and 25 percent of the premiums paid by eligible tax-exempt organizations.  In 2014, these maximum credits will increase to 50 percent for eligible small employers and 35 percent for eligible tax-exempt organizations.

Eligible small businesses can claim the credit as part of the general business credit starting with their 2010 income tax return.  For tax-exempt employers, however, the IRS will provide further information on how to claim the credit.

For additional information, please visit the IRS page on this topic.

For the past 40 years, the availability of tax exemption for hospitals and other health care organizations has been judged by the “community benefit” standard articulated by the IRS.  We have previously described the history of the community benefit standard.  If Congress adopts a health reform bill and the Senate provisions are included, hospitals will have greater transparency and public accountability requirements.  Because the House health reform bill passed in November had no provision concerning this issue, it is unlikely that the hospital tax exemption provisions will change significantly in the process of agreeing upon a final bill.

Section 9007 of the bill, in essence, codifies and elaborates on certain key aspects of the “community benefit” standard.  The penalty provisions and focus on ongoing charity care trends should prompt hospital governance and management to pay much closer attention to these particular requirements and the broader distinctions between tax-exempt and for-profit hospitals.

The legislation contains the following four specific requirements, which hospitals must satisfy in order to qualify for tax-exempt status under Section 501(c)(3):

·        Community health needs assessment.  Each hospital must conduct or participate in a community health needs assessment at least every three years and report on its implementation.  A hospital not meeting this standard would be subject to an excise tax.

·        Financial assistance policy.  Each hospital must adopt a financial assistance policy spelling out its criteria for free or discounted care and make the policy widely available.

·        Limitations on charges.  Each hospital must charge those who are eligible for partial financial assistance no more than the amount generally billed (that is, the “list price” cannot be charged for the balance).

·        Billing and collection.  Each hospital must make reasonable efforts to determine whether a patient is eligible for assistance under its financial assistance policy before taking extraordinary collection actions.

Interestingly, the legislation would also require the IRS to review each hospital’s community benefit activities at least once every three years – the level and manner of scrutiny is not specified.  The IRS has not indicated how it would conduct such reviews.  Finally, the Departments of Treasury and Health and Human Services would be required to report each year to Congress on levels of charity care and other activities of tax-exempt, public, and taxable hospitals.

Many tax-exempt hospitals have already adopted most of the practices set forth in the health reform legislation.  Even if the hospital tax exemption provisions (or health reform itself) do not pass, however, hospitals that currently do not engage in these practices should consider adopting some or all of them to stay current with the practices that the public and the government expect.