Tax Issues Facing Non-Profit Health Care Organizations:
Tax Issues Facing Non-Profit Health Care Organizations: How to recognize and reduce your IRS exposure and risk Anne McGeorge, g , Nat’l Managing g g Partner-Health Care (704) 632-3520 [email protected] September 2, 2009 Association of Healthcare Internal Auditors 2009 Annual Conference Agenda • IRS Initiatives and 2010 Work Plan • Legislative Update • Form 990 – – – – – Governance and Policies Schedule J: Compensation Schedule L: Loans S h d l K Schedule K: T Tax-Exempt E t Bonds B d Schedule H: Hospitals and Community Benefits • Q&A IRS Initiatives and C Current t Work W k Plan Pl Association of Healthcare Internal Auditors 2009 Annual Conference IRS Initiatives: 2009-2010 Work Plan • • • • • • • • • • Community Benefit 403(b) Plans Section 409(A) – Deferred Compensation Tax-Exempt Bond Compliance Electronic Health Records Governance Practices IRS Procedural P d l Ch Changes Medical Resident FICA H Hospital/Physician it l/Ph i i R Relationships l ti hi Compensation R Recent t Legislative L i l ti A Activity ti it Association of Healthcare Internal Auditors 2009 Annual Conference 403(b) Plans • Final regs issued on July 26, 2007 regarding IRC Section 403(b) plans for IRC Section 501(c)(3) organizations. • Audit requirement for 2009 year: – Requires written plan, – Tax-exempt entities aggregated as single employer, – Nondiscrimination rules changed and universal i l availability il bili requirement i adopted d d ffor deferrals. Stark II,, Phase III Final Regulations • Issued September 5, 2007, effective December 4, 2007 • Final Stark Changes: Effective October 2009 • "Stand in the Shoes" rule – Rules "look through physician organization” to the individual physicians – Must rely on direct compensation exceptions • Recruitment Provisions • Retention Payments • Limitations on "per click" arrangements • Most provisions have Fair Market Value exceptions and must be “set in advance” “Red Flags” Legislation • • • • • Legislation enacted in 2007 Effective August 2009 Identity Theft Monitoring and Reporting T k Force Task F Recommended R d d Senior Executive or Board Member to oversee hospital’s efforts efforts. • Privacy/Protection Policies could save hospitals millions. millions Community Benefits • Lots of debate in Senate and House of Representatives p about legislation g mandating g levels of community benefits. • Tax-Exempt Hospitals would need to quantify their benefits and report. • Should benefits be required to equal the value of a hospital’s tax-exempt status. • Debate as to how to measure benefits. Health Care Reform • Many different stakeholders are voicing their p preferences: – Insurers – Providers – Physicians – Employers – Patients agendas. • All have different agendas Health Care Reform • Will it get done? • Questions loom large: – Should we have a government run plan? – Should universal coverage be a goal? – How can we reduce costs? – How will the new plan be funded? • There will be winners and losers, for sure. The New Form 990 Association of Healthcare Internal Auditors 2009 Annual Conference The New Form 990 Focus on: • Governance • Charity Care • Policies Who is looking at your Form 990? • • • • • • • • • Congress Internal Revenue Service Media General public (including those who don't like you) Donors and potential donors Vendors P i t ffoundations Private d ti State Attorneys General Your competitors Who is looking at your Form 990? • Consumer groups and watchdog organizations • Labor unions • Other nonprofit organizations Æ IRS website: If you suspect or know of an individual or company that is not complying with the tax laws laws, you may report this activity by completing Form 3949-A. You may fill out Form 3949-A online … Æ Check out your organization organization’s s Form 990 at www.guidestar.org Why Form 990 Is Important – The IRS Retaining tax tax-exempt exempt status Form 990 states your case for retaining tax-exempt status and demonstrates your compliance with the tax rules on an annual basis: • • • • Still organized as a tax tax-exempt exempt entity? Still operated as a tax-exempt entity? Is there a liabilityy for income or excise taxes? Have you started the statute of limitations? Æ Does your Form 990 support your case? Æ Does your Form 990 confirm your tax-exempt mission? Why Form 990 Is Important – The Public Maintaining your reputation, credibility and goodwill Transparency, disclosure and accuracy: • Form 990 is an “information information return” return not a “tax tax return” return . – Form 990 must be complete and accurate – you sign under penalties of perjury! – Form F 990 mustt be b available il bl ffor public bli iinspection. ti – Where is your revenue coming from? – What public good are you accomplishing? – Where is the rest of the money going? Æ Form F 990-T 990 T mustt be b made d available il bl ffor public bli iinspection ti Electronic Filing Will Also Drive Accuracy Substantial Penalties for Noncompliance • Against the organization – Filing an incomplete or inaccurate Form 990 • $100 per day, limited to $50,000 per return • Against responsible persons – you? – Upon notification of an incomplete or inaccurate return – Failure to provide information within the time allotted • $10 per d day, lilimited it d tto $5 $5,000 000 per return t • Fines and imprisonment (egregious cases) – Willfully not filing returns – Filing fraudulent returns and statements with the IRS Preparing Form 990 now and i the in th ffuture t The stakes are higher than ever • Understand Form 990 and Schedule A from both the organizational and operational perspective. • Remember accuracy, disclosure and transparency are keys for preparing an “information” return. • Ensure that you are complying with all applicable tax regulations. • Put policies in place to ensure accuracy and completeness. completeness Æ Be proactive. Completing Form 990 will require more research and documentation than ever before. This will take tax accountants working together with operations personnel to ensure compliance. Start now. Redesigned Form 990 Expanded Form Current form - 9 pages and 2 supporting schedules Revised Form - 11 pages and 16 supporting schedules Changes to Form 990 for 2008 – 16 S Supplemental l t l schedules h d l Schedule A – Public Charity Status and Public Support Schedule B – Schedule of Contributors Schedule C – Political Campaign and Lobbying Activities Schedule D – Supplemental Financial Statements Schedule E – Schools Schedule F – Statement of Activities Outside the U.S. Schedule G – Fundraising and Gaming Activities Schedule H – Hospitals Schedule I – Grants and Other Assistance In the U U.S. S Schedule J – Compensation Information Changes to Form 990 for 2008 – 16 Supplemental Schedules Schedule K – Tax Exempt Bonds Schedule L – Transactions with Interested Persons Schedule M – Non-cash Contributions Schedule N – Liquidation, Liquidation Termination Termination, Dissolution or Significant Distribution of Assets Schedule O – Supplemental Information to Form 990 Schedule R – Related Organizations and Unrelated Partnerships Governance Part VI – Governance, Management and Disclosure • Number of voting members and how many are independent. • Family and Business relationships (Officers (Officers, Directors, Trustees, Key Employees). • Is there delegation of control over management to outside persons or organizations? • Did you become aware of a material diversion of assets during the year? Governance Part VI – Governance, Management and Disclosure • Who elects the governing body? • Who approves decisions made by the governing body? • Are meetings and actions undertaken by the governing body and committees documented? • What process was followed to review the 990 and was the g governing g body yp provided a copy py before filing? Policies Part VI – Policies • Written conflict of interest policy? – Are potential conflicts required to be disclosed annually? – Does the organization regularly and consistently monitor and enforce compliance? – Is it available to the public? How? • Written whistleblower policy? • Written document retention and destruction policy? Policies Part VI – Policies Did process for determining compensation of the • "Did following persons include a review and approval by independent persons, comparability data, contemporaneous substantiation of the deliberation and decision?" – Top Management, Officers, Key Employees – Describe the process P li i Policies Part VI – Policies • Joint Ventures – Written policy to evaluate participation to ensure tax-exempt tax exempt status is protected? Schedule J When is it required? • Schedule J is required if there is reportable compensation provided to: – A former f officer, ffi key k executive ti or hi highly hl compensated t d executive of more than $100,000 from you and all related organizations. – A former director or trustee of more than $10,000 in that capacity from you and all related organizations. • Schedule S h d l J iis required i d if th there iis reportable t bl compensation and other compensation provided to: – Any individual listed in Part VII, Section A, or more than $150,000 from you and all related organizations. Schedule J Requirements Where required, Schedule J pertains to all officers, directors, trustees and key employees listed on the core form. Starting with a check-the-box reporting format, new disclosures are required for the following: • Fi First-class t l or charter h t ttravell (i (including l di airplane i l or b boatt owned by the organization) • Travel for companions p ((not for a bona fide business purpose) • Tax indemnification and gross-up payments • Discretionary spending accounts Schedule J Requirements • Housing allowance or personal residence • Payment for business use of personal residence • Health or social club dues or initiation fees (not including onsite facility) • Personal services (e.g., chef, chauffeur, maid, financial planner, nanny, physician, tax preparation) Schedule J Requirements Schedule J also requires disclosure through check boxes of the processes used to establish compensation for the top executive: ti • • • • • • Compensation committee I d Independent d t consultant lt t Forms 990 of other organizations Written employment contract Compensation survey or study Approval pp by y board or compensation p committee Schedule J Requirements If Schedule J is required, the compensation disclosure must not only show the base compensation, bonus amount and other compensation for certain officers officers, directors directors, trustees trustees, key employees and highest compensated employees, but must also: g in control p payments y • Indicate whether severance or change are provided • Include supplemental nonqualified retirement benefits • Include equity equity-based based compensation arrangements • Identify compensation contingent upon revenues or net earnings • Provide a description of any non-fixed payments Schedule J Additional requirements • Organizations must describe the process for determining the compensation of the CEO, executive director or other officers and key employees. • While the classification of officer is determined by reference to state law, law it always includes the organization’s top management official. • If an organization is required to attach Schedule J, disclosing the base compensation, bonus amount and other compensation for insiders is required, as well as the process for determining incentive compensation. Schedule J Preparation • Determine Related Organizations/Disregarded Entities to identify the universe of individuals that must be considered. id d • Prepare/review explanations of current compensation arrangements. – Determine whether arrangements currently include any of the compensation items that require specific di l disclosure. – Educate board/management regarding new expanded disclosures and identify any desired changes to arrangements. Schedule J Preparation • Determine/modify written policies regarding expense reimbursements and consider requiring substantiation prior to reimbursing or allowing the listed expenses . • Review process and data utilized to establish the CEO/Executive Director compensation to determine if any modifications are needed (consider complying with “presumption presumption requirements” requirements where possible). possible) • Review severance agreements as they must be reported by individual. If an organization satisfies the f ll i criteria, following it i a ttransaction ti should be considered reasonable: • A board of directors or trustees tr stees composed of individuals unrelated to the disqualified persons involved in the transaction approves pp the transaction • The board or committee obtains and relies upon appropriate data as to comparability • The board or committee documents the basis for the decision Compensation- Action Items • Determine Related Organizations/Disregarded Entities to identify universe of individuals that must be considered. • Prepare/review explanations of current compensation arrangements. – Determine whether arrangements currently include any of the compensation items that require specific disclosure. – Educate board/management regarding new expanded disclosures and identify any desired changes to arrangements. arrangements Compensation- Action Items – Determine/modify written policies regarding expense reimbursements and consider requiring substantiation b t ti ti prior i tto reimbursing i b i or allowing ll i th the listed expenses. • Review process and data utilized to set CEO/Executive Director compensation to determine whether modifications should be adopted (consider complying with “presumption presumption requirements” requirements where possible). possible) • Review severance agreements as they must be reported present legal g issues unless byy individual – mayy p addressed at time of separation. Compensation Action items and best practices What should organizations do now? • The board charters an independent committee with executive compensation oversight. • The committee hires a compensation consultant directly. consultant. • The committee supervises the work of the consultant • The committee has a total compensation philosophy (pay and benefits). • The Th consultant lt t utilizes tili appropriate i t d data t ffor analysis. l i • The committee makes determinations in executive session. decision making process. • The committee minutes reflect the decision-making • All of the appropriate tax forms are fully completed. Loans • C Core F Form – Part P t X, X Balance B l Sh Sheett – Line 5 – receivables from current and former officers, directors, trustees, keyy employees p y or other related p parties – Line 6 – receivables from other disqualified persons as defined under section 4958(f) and persons described in section 4857(c)(3)(B) • Disqualified person – “position to influence”, 5 year period • Substantial S contributors • Look at family members and 35% owned entities • Supplemental Schedules – Thresholds • Record keeping Loans • Core Form – Part X, Balance Sheet – Line 22 – payable to current and former officers, directors, trustees, key employees, highest compensated employees, and disqualified persons. • No reference on this line to substantial contributors – Core Form draft instructions do not provide good definitions regarding who and what has to be reported. – Have H tto look l k tto Supplemental S l t l Schedule S h d l L ffor th thatt information. Loans • Comparison to existing Form 990 – Previously Schedule A and Balance sheet – New Form Part IV questions 25, 26, 27 & 28 (Y/N) – If yes, details on Schedule L • Cautions – Schedule O – Explanation of how policies implemented – Policies to Implement p • Rebuttable presumption Loans • Schedule L – Part II – Loans to and from “Interested Persons” Instructions also provide for reporting of loans: o Originally between organization and third party th t were ttransferred that f d tto an iinterested t t d person. o Originally between interested person and third party p y that were transferred to the organization. g o How originated appears not to be important, but ultimately whether there is any debt outstanding t t di between b t th interested the i t t d person and d the organization. Loans • Schedule L – Part II – Loans to and from “Interested Persons” – Detail of each loan must then be provided including: Name of interested person and purpose of loan Whether the loan is to, or from the organization The original principal amount of the loan The balance at the end of the year (including accrued interest and any applicable penalties/collection costs) o Note: for Form 990 filers, the total in this column must equal the amount reported on the Balance Sheet for lines 5, 6 and 22. Whether the loan is in default, had approval of the board or a committee, and whether there is a written agreement. Loans – Action Items • View all loans to determine reporting requirements and modifications, if any, that should be considered: – Ensure arrangements are in writing – Consider requiring Board approval of all existing loans to/from interested persons – Consider adding Board approval as a condition for future loan transactions with interested persons • Monitor any loans/advance balances to determine whether they can be eliminated prior to year-end. • C Communicate i t with ith iinterested t t d persons regarding di di disclosures l that will be required. Schedule K IIncreased d IRS ffocus on post-issuance ti compliance if you file a Form 990 and issue tax-exempt bonds Beginning in 2008, for tax forms filed in 2009, the IRS requires any y organization g that answered “yes” y to q question 24a of Form 990, Part IV, to complete and attach Schedule K to Form 990. – Part I is required for 2008 – Part II through IV are optional for 2008 and required beginning in 2009 The Schedule K is divided into four parts: – Part I - Bond Issues – Part II - Proceeds – Part III - Private Business Use – Part IV - Arbitrage Schedule K General Information Part I - Bond Issues: Provide general information for each outstanding tax-exempt bond issue which which, both had an outstanding principal amount in excess of $100,000 as of the last day of the tax year (or other selected 12 month period) and d was iissued d after ft D December b 31 31, 2002 2002. Part II - Proceeds: Provide more specific information for the bonds listed in Part I such as total proceeds, the use of those proceeds, and the allocation of those proceeds. Schedule K General Information Part III - Private Business Use: Provide information related to the private business use of the bond issues listed i P in Partt I such h as lease l arrangements, t managementt and d service contracts, research agreements, percentage of the property p p y used in a p private business use and record retention policies. Part IV - Arbitrage: Provide information with respect to arbitrage such as arbitrage rebate and yield reduction payments made, hedge contracts and guaranteed investment contracts. Schedule K Why is the IRS Making all these Changes? • Previous version did not keep pace with changes in the law and the increasing size, diversity and complexity of the tax-exempt sector. • IRS believes there is “significant noncompliance with recordkeeping and record retention requirements relating to tax-exempt bonds issued by or for the benefit of section 501(c)3 organizations”. • Represents an expansion of the IRS oversight in the taxexempt bond area. • IRS wants to know if tax rules are being followed after the issuance of tax-exempt bonds. Schedule K Why is the IRS Making all these Changes? • Previously, focus was on the time period leading up to and including the issuance of tax-exempt bonds. • Encourages tax-exempt organizations to set up post issuance compliance policies and procedures to ensure compliance with bond related tax requirements. • Detailed reporting requirements provide incentive for borrowers to be more rigorous in record keeping and post i issuance compliance li monitoring. it i • This process is expected to be time consuming and burdensome. burdensome • Some believe Schedule K was designed to obtain information for IRS audits. Schedule K Action items and best practices What should organizations do now? • Create post-issuance compliance practices and procedures for tax-exempt bond issues. • Define facilities and equipment financed by tax-exempt bond p proceeds. • Trace and allocate your tax-exempt bond proceeds. • Identify and review documents related to your tax-exempt bonds such as arbitrage certificates certificates, management and service contracts, research agreements, etc. • Confirm you are in compliance with arbitrage rebate and yield restriction regulations. Schedule H Hospitals: Phased in over time – most parts optional for 2008, for 2009 all parts are required Required if you operate one or more state licensed, registered or similarly recognized hospitals (defined by EIN). – Definition of Hospital – specific to use for Schedule H only – U.S. entities only – Direct and Indirect ownership (SMLLCs, Partnerships) • • • • • • Part I, Charity care and Certain Other community benefits at cost Part II, Community Building Activities Part III, III Bad Debt Debt, Medicare, Medicare and Collection Practices Part IV, Management Companies and Joint Ventures Part V, Facility Information (required in 2008) Part VI, VI Supplemental Information Instructions for Schedule H are 24 pages, plus 8 worksheets Schedule H Hospitals: (Part I) Charity care and other community benefits at cost • Do you have a charity care policy and is it written? • How does it apply to hospitals within your group? – Uniformly U if l applied? li d? • How do you determine eligibility for providing free care? – Federal Povertyy Guidelines or Other? • Does your policy provide free or discounted care to the "medically indigent"? • Does your budget include amounts for free or discounted care provided under your policy? – Unable to provide care due to budget considerations? • Do you prepare an annual community benefit report? – Is it available to the public? Schedule H Hospitals: (Part I) Charity care and other community benefits at cost Schedule H Hospitals: (Part I) Charity care and other community benefits at cost Line 7. Charity Care and Means-Tested programs (show expenses offset by revenue) – Charity care at cost – Un-reimbursed Medicaid – Other un un-reimbursed reimbursed means means-tested tested government programs – Community health improvement services and community benefit operations – Health professions education – Subsidized health services – Research – Cash and in-kind contributions to community groups Schedule H Hospitals: (Part I) Charity care and other community benefits at cost • Worksheets are provided to assist with calculations but they are not to be filed with the return return. • Instructions state: "Bad debt expense is not to be reported in the Table under any circumstances. circumstances." • Medicare related expenses or costs are not to be included in the table. Schedule H Hospitals: (Part II) Community Building Activities Show expenses offset by revenue: – – – – – – – – – Physical improvements and housing Economic development Community support E i Environmental t l iimprovements t Leadership development and training for community members Coalition building Community health improvement advocacy Workforce f development Other Schedule H Hospitals: (Part III) Bad Debt, Medicare, and Collection Practices • Section A – Bad Debt Expense, at cost – Do you follow HFMA statement 15? – Enter bad debt amount, amount at cost, cost attributable to charity care patients. – Provide the text of the footnote that describes bad debt expense g methodology gy used to determine the and describe the costing amounts. • Section B – Medicare (including DSH and IME): Allowable costs offset by revenue received. – Describe the extent to which the shortfall should be treated as a community benefit and your costing methodology. • Section C – Collection Practices – Do D you h have a written itt d debt bt collection ll ti policy li and d if so, d describe ib your practices for patients known to qualify for charity care or financial assistance? Schedule H Hospitals: (Part IV) Management Companies and Joint Ventures • Joint Ventures of which Exempt Org is partner or shareholder (includes foreign, but not passive investments). OR … • Management Company – Provided persons who were O, D, T or KE of Exempt Org. – Physicians of Exempt Organization (employed or staff privileges). and owned >10% of ownership p or p profits – And the Management company either Provided management services to Exempt Organizations, or Provided medical care or owned or provided property (real, personal, intellectual) to Exempt Org, or others, for use in medical care. Schedule H Hospitals: (Part IV) Management Companies and Joint Ventures List the following information: – Name of entity – Description of primary activity of entity – Organization Organization'ss profit % or stock ownership – Officer, Director, Trustee or Key Employee's profit % or stock ownership p – Physicians' profit % or stock ownership Schedule H Hospitals: (Part V) Facility Information; (Check the box) – Required for 2008 • Licensed, registered or similarly recognized under state law as a 'health care facility'. • Direct or indirect operation (SMLLC (SMLLC, Partnership) Partnership). Identify facilities by name and address and indicate the type: Licensed hospital General medical and surgical Children's hospital Teaching hospital Critical access hospital Research facility ER-24 ER 24 hours ER-Other Other (Describe: e.g., outpatient physician clinic) Schedule H Hospitals: (Part VI) Supplemental Information • If you don't use the Federal Poverty Guidelines, describe how you determine eligibility for free or discounted care. • Describe how you assess community health care needs. • Describe how you inform and educate patients about eligibility for assistance. g g p • Describe the communityy that yyou serve byy geographic area and demographic constituents. • Describe your community building activities. Schedule H Hospitals: (Part VI) Supplemental Information • Describe how you further your exempt purpose by promoting community health (e.g., open medical staff, community it board, b d use off surplus l ffunds, d etc.). t ) • If you are part of an affiliated health care system, describe the role of affiliates in promoting the health of the communities served. • If app applicable, cab e, identify de y the e sstates a es in which c you file ea community benefit report. Schedule H Action items and best practices • Even though the majority of the information is not required for 2008 returns, begin gathering the information now. • Forms F and d IInstructions t ti available il bl att www.irs.gov/charities • Review the information and assess how it will be viewed by the public. • Develop internal processes to gather complete and accurate data. – Consider assigning responsibility to a management member. – Consider C id assigning i i responsibility ibilit tto a b board d member. b Contributions and Grant Making • • • • Core Reporting – Where are the questions hiding? Supplemental Schedules – Thresholds and disclosures Compliance – Series of Y/N questions – “Correct” answers Governance – Policies and procedures disclosures – Contributions C t ib ti off C Cash h – Contributions in-kind – Domestic Grants – Foreign Grants Fundraising & Special Events: – – – – Compliance with donor acknowledgement Understand what is and isn’t in this category Understand timing and reporting Set up procedures for gathering information p y contemporaneously – Insure quid pro quo donor receipts are issued • Gaming: – Compliance with state regulatory agencies – Compliance with federal reporting requirements Written Substantiation • Pre- PPA >$250 cash contribution • Post P t – PPA allll cash h contributions t ib ti – Less than $250 donor can use bank records but donors may no longer use detailed written logs • Quid Pro Quo > $75 with value What is Written Substantiation? • • • • Document from charity Name of EO and Donor Date of donation (Date of postmark) Exact amount of cash or description of property – Do Not provide value • Quid pro quo – Do provide value Line 43 "Other Other Expenses" Expenses Reporting Requirements "Miscellaneous" Miscellaneous cannot exceed 5% of line 44 • For health care organizations, payments to health care professionals who are not employees. • Investment advisors and other professional fees (do not include fundraising fees, accounting fees, or legal fees). • Penalties, P lti fi fines and d jjudgments. d t • Unrelated business income taxes. • Insurance and real estate taxes not attributable to rental property or reported as occupancy expenses. • Other expenses, identify by type of expense. • Payments or reimbursements of travel and entertainment for certain government officials and their family members. Assistance to Individuals • Schedule I, Part III – Complete if aggregate is > $5,000 – Group by type of grant or assistance – Number of individuals in group – Total oa a amount ou o of cas cash g grants a s in g grouping oup g – Total amount of non-cash assistance in grouping – Method of non-cash valuation – Description of non-cash assistance – Cash assistance only described in column (a) Type Closing remarks Key action items • Create a strategy to ensure Form 990 compliance involving the right people and process. process • Ensure that your Form 990 return is accurate and reflects positively on your organization since it is a public document. • Involve management, your board and audit committees appropriately. QUESTIONS? Tax Professional T P f i l Standards St d d Statement St t t This document supports Grant Thornton LLP’s marketing of professional services, and is not written tax advice directed at the particular facts and circumstances of any person. If you are interested in the subject of this document we encourage you to contact us or an independent tax advisor to discuss the potential application to your particular situation. Nothing herein shall be construed as imposing a limitation on any person from disclosing the tax treatment or tax structure of any matter addressed herein herein. To the extent this document may be considered to contain written tax advice, any written advice contained in, forwarded with, or attached to this document is not intended by Grant Thornton to be used, and cannot be used, by any person for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.
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