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Healthcare Industry
Tax Update 2014
Rules, Regulations, Changes,
Best Practices and Recommendations
2
Introduction
Scott J. Mariani, JD, Tax Partner
Practice Leader
Healthcare Services Group
smariani@withum.com
465 South Street, Suite 200
Morristown, NJ 07960
(973) 532-8835
withum.com
3
Agenda
IRS Update
IRS Exempt Organizations Update
Affordable Care Act
Schedule H and Community Benefit
Foreign Reporting
Executive Compensation
4
IRS Update
Part One
5
For a historical perspective, in 1986, the top 1% of earners
reported 11% of all income and paid 26% of the income
taxes; the lower-earning 50% made 17% of the income and
paid 6% of the nation's individual income tax bill.
IRS Update
Breakdown of Income and Taxes Paid by Category
Income Category 2011 AGI % of All Income % of Income Taxes Paid
Top 1% Over $388,905 18.7% 35.1%
Top 5% Over $167, 728 33.9% 56.5%
Top 10% Over $120,136 45.4% 68.3%
Top 25% Over $70,492 67.8% 85.6%
Top 50% Over $34,823 88.5% 97.1%
Bottom 50% Under $34,823 11.5% 2.9%
6
IRS tea party/patriot issue.April 2013
Resignation of Acting IRS
Commissioner Steven Miller.April 2013
Government shutdown.October 2013
IRS budget decrease of $526 million, or 4.4%
compared to the previous year’s enacted level.January 2014
“Gross mismanagement” by Office of Chief
Counsel staff in NY and LI is alleged.
March 2014
Problems at the IRS
7
Are subject to FICA. SUPREME COURT CASE
Severance Payments
United States v. Quality Stores, Inc.
U.S., No. 12-1408, 3/25/14.
 Supreme Court decision; 8-0; March 25, 2014.
 Medical resident FICA issue.
8
 IRC Section 125 plans a/k/a cafeteria plans.
 IRS Notice 2013-71.
 Further Modification of Use-or-Lose Rule.
1. Expenses incurred by 12/31; or
2. Expenses incurred during the period of up to 2
months and 15 days immediately following the end
of the plan year; or
3. Carryover of $500 to the immediately following
plan year.
Flexible Spending Accounts
9
Accounts Payable – New Form W-9
New Form W-9; Request for Taxpayer Identification
Number and Certification.
Disregarded entity; shown on line 2 not on line 1.
Limited liability company.
Exempt payee code (if any).
Exemption from FATCA reporting code (if any).
10
Accounts Payable – New Form W-9
10
11
Senate Finance Committee report “Cost Recovery and
Accounting Discussion Draft”; released November 21, 2013.
 AICPA Coalition Letter; January 17, 2014.
Cash Versus Accrual
Taxable income
is recognized
when received
(cash basis)
versus when
services are
rendered
(accrual basis).
Annual gross
receipts
threshold of
$10 million.
Personal
service
corporations
and
professional
firms; e.g.
physician
practices.
12
Revenue Ruling 2013-17;
effective September 16th.
Same-sex couples legally married in a
jurisdiction that recognizes their marriage
are now recognized as married for federal
tax purposes; regardless of jurisdiction in
which they reside.
Terms included in the IRC that refer to marital
status will include an individual married to a
person of the same sex, if the couple is lawfully
married under state law and such a marriage is
between individuals of the same sex.
Defense of Marriage Act (“DOMA”)
13
Income tax.
Estate and gift taxes.
Federal tax provisions:
• Filing status.
• Exemptions.
• Standard deduction.
• Employee benefits.
• IRA contributions.
• Earned income tax credit.
• Child tax credit.
DOMA Applicability
14
Additional procedures and guidance forthcoming:
• Refund claims for payroll taxes paid on previously-taxed
health insurance and fringe benefits.
• Cafeteria plans.
• Qualified retirement plans and other tax-favored
arrangements.
FAQs on IRS website.
IRS Publication #555.
DOMA - Additional Guidance
15
02 Review your existing IRC Section 125 plan and
consider revising the plan.
01 Review your current arrangements with respect to
severance, including written agreements, where applicable.
Recommendations
 Do you have a Form W-9 for every vendor?
 Review your “non-1099 required” vendors.
 Consider a process to obtain an updated Form W-9 for all
vendors.
 Consider voluntary disclosure options if issues are
identified.
03 Review your accounts payable function.
16
IRS Exempt Organizations Update
Part Two
16
17
IRS EO Reorganization April 2013
Tea Party/Patriot
Issue and
Applications for
Tax-Exemption.
IRC Section
501(c)(4) social
welfare
organization.
IRC Section
501(c)(27)
political
organization.
Lois Lerner,
IRS Exempt
Organizations (“EO”)
Director retired in
April of 2013.
Tamera Ripperda,
named IRS EO Director,
December 2013. From
Large Business and
International Division.
INVESTIGATION
STILL
ONGOING
NEW
DIRECTOR
18
The IRS Exempt Organizations
group will not publish a 2013
Annual Report & 2014 Work Plan
this year.
IRS EO Group
19
IRS Forms 1023 and 1024
Significant period of time from the date of taxpayer
filing, IRS receipt, review and issuance of IRS
determination letter in most instances.
Applications for Tax-Exemption.
IRS TE/GE expects a “significant” decrease in the IRS’
backlog of 80,000 applications by the end of 2014;
announced in February of 2014.
Streamlined IRC Section 501(c)(3) exemption process
starting in the summer of 2014; Form 1023-EZ; Federal
Register 3/31/2014.
20
 Instructions to the Form 990; Appendix D: Public
Inspection of Returns.
 Application for Recognition of Exemption and three most
recently filed Forms 990 and 990-T.
Form 990 Public Inspection
Amended
Forms 990
and 990-T.
 3 years from the date of filing.
 Provide copy of the amended
Form 990 to each voting
member of the governing
body prior to filing?
21
02
Use Form
4506-A
Request for Public
Inspection or Copy of
Exempt or Political
Organization IRS Form
Form 990 Public Inspection
• Request made
in person.
 Unusual
Circumstances.
• Request made
in writing.
01
Guidestar.org
03
Through the
organization
Available Via:
22
Form 13909
22
23
Form 13909
23
24
 Pension Protection Act of 2006; failure to file Form 990, 990-
EZ or 990-N for three consecutive years results in automatic
revocation of tax-exempt status.
 Notice 2011-43 and Notice 2011-44.
 Revenue Procedure 2014-11; Streamlined Retroactive
Reinstatement Process.
 Reasonable cause depends on whether the new Form
1023/1024 is filed not later than 15 months after the later of the
date of IRS revocation letter or the date on which the IRS
posted the entity’s name on the Revocation List.
Revocation of Tax-Exempt Status
25
The bill would strike
“professional football
leagues” from the
Internal Revenue Code,
a phrase that has been
in place since 1966.
Revocation of Tax-Exempt Status
Properly Reducing
Overexemptions for
Sports Act (H.R. 3965),
which would prevent
professional sports
organizations with
annual revenues of more
than $10 million from
claiming an IRC Section
501(c)(6) tax exemption;
introduced January 29,
2014.
WOULD BE
AFFECTED
NFL earns about
$9B in revenue
annually.
26
Charitable contributions limitation.
Elimination of Rebuttable Presumption of
Reasonableness.
Excise Tax on Excess Tax-Exempt
Organization Executive Compensation.
Unrelated Business Income Tax.
The Tax Reform Act of 2014 - Proposed
27
DESIGNATE
• A contact
person to
handle all
Form 990
requests.
MAINTAIN
• Both a
“taxpayer”
copy and a
“public
disclosure”
copy of the
Forms 990 for
each of your
tax-exempt
organizations
annually.
ADOPT
• A written
Form 990
public
disclosure
policy.
Recommendations
27
28
Affordable Care Act
Part Three
28
29
Tax Provisions and Revenue Generators
2013 2014 2018
 Additional
Medicare Tax.
 Net Investment
Income Tax.
 Medical Device
Excise Tax.
 Patient-
Centered
Outcomes
Research Fee.
 Transitional
Reinsurance
Fee.
 Health
Insurance
Provider Fee.
 Cadillac Tax.
30
Large employers that DO
NOT offer coverage to at
least 95% of full-time
employees must:
pay a penalty if
any full-time
employee
receives premium
assistance
through a
marketplace.
Penalty is equal to:
$2,000
x
Total Full-Time
Employees in
excess of 30.
Employer Shared Responsibility
31
Large employers that
DO offer coverage to
at least 95% of
full-time employees that:
IS NOT affordable,
or
DOES NOT meet
minimum value
requirements must
pay a penalty.
Penalty is equal to:
lesser of $3,000 for each
full-time employee
receiving premium
assistance or cost
sharing reduction through
a marketplace or $2,000
per full-time employee in
excess of 30.
Employer Shared Responsibility
32
Employer Shared Responsibility
If the employee share
of the premium is in
excess of 9.5% of
their household
income, coverage is
not “affordable”.
If health plan doesn’t
cover at least 60% of
total allowed costs of
benefits provided
under the plan, it is
not providing
“minimum value”.
PREMIUM IN EXCESS OF
9.5%OF HOUSEHOLD INCOME
33
Employer Shared Responsibility
Full-time
employee
Averages, for a
calendar month, at
least 30 hours of
service per week or
has worked at least
130 hours of service
during the month.
Full-time
equivalent
Total number of
hours of service for
all non full-time
employees for the
month divided by
120.
34
Employer Penalties
For those with 50+ Full-Time
Do you offer
coverage?
Does the plan
provide minimum
value? Plan pays
60% of claims.
Is the coverage
affordable?
Yes
Yes
Yes
No $2,000 per FT
(minus first 30)
$3,000 per FT
Receiving tax credit/subsidy
No
No
Employer “Safe Harbor”
Coverage would be considered “affordable” if the
premium contribution for single coverage does not
exceed 9.5% of an employee’s W-2, box 1 wages.
$3,000 per FT
Receiving tax credit/subsidy
No Penalty
35
CONTROLLED GROUPS
Employer Shared Responsibility
Large
employer
status is
determined
on basis of
entire
controlled
group.
Penalties
are
determined
on a
separate
basis.
Only one 30
employee
exclusion
allowed per
controlled
group.
36
Final regulations 2/10/2014.
Transitional relief for:
• Mid-sized employers (50-99 FTEs) have an additional
one year to January 1, 2016 to comply.
• Large employers (100 or more FTEs) only required
to offer to 70% of full-time employees.
What Has Been Delayed
37
Generally incorporate
reporting requirements
outlined in the
proposed rules.
Provide limited options for
streamlined reporting of
employer offer of coverage in
specific circumstances.
Generally requires employers
and insurers to collect Social
Security numbers for primary
insured, covered spouses and
dependents to report minimum
essential coverage.
Highlights of Final Regulations
Sections 6055 and 6056
38
Information to be reported under IRC Section 6055:
• The name and tax payer identification number (TIN) of each individual
enrolled;
• The name and address of the primary insured who submits the application
for coverage;
• Months during which the individual is enrolled in minimum essential
coverage.
For coverage offered in 2015, information returns must be provided to
individuals by February 1, 2016, and to the IRS by March 31, 2016.
Reporting via Form 1095-C employee statement and Form 1094-C
employer transmittal (6055/6056 combined).
Section 6055 General Rules
39
• Birth date of dependent may be reported if employer made a “reasonable
effort” to obtain the TIN.
• Three efforts must be made to obtain the TIN to avoid filing.
Taxpayer Identification Numbers (TINs): Must report TIN of
the primary insured and each individual covered under the policy
and the months that the individuals were covered.
Penalties.
• Employee consent and other requirements apply.
Electronic filing permitted.
• Third party may be designated to file on behalf of the employer.
Reports filed by employing entity for self-funded plans.
Complexities of Section 6055 Reporting
40
 General reporting method:
• Number of full-time employees, by month;
• For each full-time employee, months when coverage was
available for each full-time employee, the employee’s share of
the lowest-cost monthly premium for self-only coverage;
• Additional information, some by indicator code.
 For coverage offered in 2015, information returns must be
provided to individuals by February 1, 2016, and to the
IRS by March 31, 2016.
 Reporting via Form 1095-C employee statement and
Form1094-C employer transmittal (6055/6056 combined).
Section 6056 General Rules
41
Requires you and each member of
your family to either:
Individual Shared ResponsibilityONE
Have minimum
essential
coverage, or TWO
Have an
exemption
from the
responsibility
to have
minimum
essential
coverage, or
THREE
Make a shared
responsibility
payment when
you file your
2014 Federal
income tax
return in 2015.
42
Minimum Essential Coverage
Health insurance coverage provided by your employer,
Health insurance purchased through the Health Insurance
Marketplace in the area where you live, where you may qualify for
financial assistance,
Coverage provided under a government-sponsored program for
which you are eligible (including Medicare, Medicaid, and health care
programs for veterans),
Health insurance purchased directly from an insurance company,
and
Other health insurance coverage that is recognized by the Department
of Health & Human Services as minimum essential coverage.
43
Has no affordable coverage
options because the minimum
amount you must pay for the
annual premiums is more
than eight percent of your
household income,
Has a gap in coverage for
less than three consecutive
months, or
Qualifies for an exemption for
one of several other reasons,
including having a hardship
that prevents you from
obtaining coverage, or
belonging to a group explicitly
exempt from the requirement.
Exemptions – some are
obtained only through the
Marketplace, some only from
the IRS and some from either
the Marketplace or IRS.
An individual may be exempt if he/she:
44
For 2014, the annual payment amount is:
Making a Payment – 2014 Year
The greater of:
1%
of your household
income that is
above the tax
return filing
threshold for your
filing status, or
Your family's flat
dollar amount, which
is:
But capped at
the cost of the
national average
premium for a
bronze level
health plan
available
through the
Marketplace in
2014.
$95 per adult
and $47.50
per child,
limited to a
family
maximum of
$285
45
Because $497 is greater than $285 (and is less than
the national average premium for bronze level
coverage for 2014), John and Mary’s shared
responsibility payment is $497 for 2014, or $41.41
per month for each month the family is uninsured
(1/12 of $497 equals $41.41).
SCENARIO
Married couple
with 2 children,
$70,000 income
and their filing
threshold is
$20,300.
Example - 2014
To determine their payment using the income formula,
$70,000 (2014 household income).
MINUS
$20,300 (filing threshold).
$49,700 (the result).
One percent of $49,700 equals $497
John and Mary’s flat dollar amount is $285, or
$95 per adult and $47.50 per child. The total
of $285 is the flat dollar amount in 2014.
46
2.5%2.0%
Making a payment – 2015 and 2016
The income
percentage increases
to 2 percent of
household income and
the flat dollar amount
increases to $325 per
adult ($162.50 per child
under 18).
These figures increase
to 2.5 percent of
household income and
$695 per adult
($347.50 per child
under 18). After 2016,
these figures increase
with inflation.
20162015
47
 Tax-exempt hospitals must attach their
audited financial statements to their Form
990 annually.
 IRS mandatory review of every hospital’s
Schedule H once every 3 years. Treasury
thereafter prepares a report to Congress.
 New Internal Revenue Code (“IRC”) Section
501(r).
 IRS Notices 2014-2 and 3; December 2013.
 To date the IRS has not finalized the IRC
Section 501(r) Regulations; end of 2014.
Affordable Care Act; March 23, 2010
48
Effective for tax years beginning after March 23, 2012
Internal Revenue Code Section 501(r)(3)
Community Health Needs Assessment (“CHNA”)
Section 501(r)(3) July of 2011 April of 2013
Each hospital
facility must
conduct a CHNA
once every three
years and prepare
and update a
written
implementation
strategy annually.
IRS Notice
2011-52 issued.
IRS released
proposed
regulations.
Adopt and make widely available.
49
Section 501(r)(3) Proposed Regulations
“Participates in a hospital facility which is structured as
a flow through entity (LLC or partnership).”
“Making your CHNA widely available.”
“New hospital facilities.”
50
Section 501(r)(3) Proposed Regulations
“Collaboration with other hospital facilities; separate
written reports per each hospital facility.”
An exception to
the separate
report
requirement was
acknowledged
by the IRS.
A joint report may be
permitted in
situations where the
involved hospital
facilities each define
their communities
identically and
conduct a joint CHNA
process.
The report
clearly identifies
all the hospital
facilities.
51
• Attached to the Form 990; or
• Provide on the Form 990 the webpage
address(es) on which they are available along
with, or as part of, the CHNA.
• In addition, the Form 990 must annually describe
the actions taken to address the CHNA significant
health needs or state why none were taken and
the reasons why.
“Implementation strategy.”
Section 501(r)(3) Proposed Regulations
52
Section 501(r)(3) Proposed Regulations
• Code Section 4959 imposes a $50K excise tax
per facility per year; reported on Form 990-T.
• Revocation of tax-exempt status is an option.
• Errors or omissions that are neither willful or
egregious will be excused if the hospital facility
corrects provides disclosure that is reasonable
and appropriate.
• Based upon facts and circumstances on a case by
case basis.
• IRS intends to issue a Revenue Procedure.
“Non-compliance with Code Section 501(r).”
53
Code Section 501(r)(4)
Compliance with Code Section 501(r)(4)
Financial
assistance
policy (“FAP”)
and
emergency
medical care
policy;
A plain
language
summary of
the FAP; and
A FAP
application
form and
instructions.
54
Code Section 501(r)(4)
The FAP must contain:
• Eligibility criteria for financial assistance, and whether the
assistance includes free or discounted care;
• The basis for calculating amounts charged to patients;
• The method for applying for financial assistance;
• The actions the hospital may take in the event of
nonpayment if the hospital does not have a separate
billing and collections policy; and
• Measures taken to widely publicize the FAP within the
community served by the hospital facility.
55
• Limit amounts charged for medically necessary healthcare
services and emergency medical care for FAP-eligible
individuals.
• Prohibits the use of gross charges.
• A hospital facility must choose and retain 1 of the following:
Code Section 501(r)(5)
Amounts Generally Billed (“AGB”)
Look Back
Method
• Medicare fee-for-service only; or
• Medicare fee-for-service and all
private health insurers.
Prospective
Method
• Medicare fee-for-service only.
• Part A and Part B.
56
Code Section 501(r)(5)
Amounts Generally Billed (“AGB”)
 Acceptable AGB methods
to consider.
 One average percentage
for all ER and other
medically necessary care
provided by the hospital.
 Separate categories of
care (I/P; O/P; different
departments).
 Separate items or
services.
Total Claims paid to hospital
total gross charges of claims
x 100
AGB PERCENTAGE
Calculations:
DIVIDED BY
Gross charges x AGB%
AGB
EQUALS
57
Code Section 501(r)(5)
AGB Example
CALCULATE THE AGB
ER / medically necessary
service charge = $10,000
$10,000 x 30%
Gross charges x AGB%;
AGB for the ER / medically
necessary service is
$3,000
Total claims paid to hospital
Total gross charges of claims x 100
$300 million / $1.0 billion
$300 = $200 private
insurers; $80 Medicare and
$20 individuals
AGB Percentage = 30%
CALCULATE AGB PERCENTAGE
DIVIDED BY
58
A hospital facility must make reasonable
efforts to determine whether an individual is
FAP-eligible prior to engaging in an ECA.
Code Section 501(r)(6)
Notification Period
• This period begins on the
date care is provided
and ends on the 120th
day after the hospital
provides the individual
with the first billing
statement for care.
Application Period
• A hospital must accept
and process FAP
applications until the end
of the 240th day after the
hospital provides the
individual with the first
billing statement for care.
Extraordinary Collection Actions (“ECA”)
59
Code Section 501(r)(6)
Placing liens and/or foreclosing on real
property;
Attaching or seizing a bank account or
garnishing an individual’s wages; and
Commencing a civil action or causing an
individual’s arrest.
An ECA includes any action that requires a
legal or judicial process, including:
60
Recommendations
60
Form an internal working group for ACA and/or IRC
Section 501(r) compliance.
Perform an IRC Section 501(r) readiness assessment.
Review your FAP and billing and collection policies.
Perform an AGB analysis.
Review your written agreements and arrangements with
outside entities, e.g. collection agencies.
61
Schedule H and
Community Benefit
Part Four
61
62
Why is community benefit important?
Supports Federal, state and local tax-exempt status.
Community Benefit
Federal
• Exempt from
corporate
income tax.
• Issue tax-
exempt debt.
• Receive
charitable
contributions
and government
grants.
State
• Exempt from
corporate
income tax.
• Exempt from
sales and use
tax.
Local
• Exempt from
property (real
estate) taxes
(Provena
Medical Center
and UPMC).
63
Schedule H and Community Benefit
63
64
Schedule H and Community Benefit
64
65
• Community benefit definitions and reports.
• Costs, not charges.
• Senate Finance Committee – 5% Test.
• Community benefit, inclusions/exclusions.
FORM 990 – Schedule H
Total
benefits to
the
community
American
Hospital
Association
(“AHA”).
IRS definition
– Catholic
Health
Association
(“CHA”).
66
Categories of Community Benefit
Schedule H, Part I, Community Benefit
Financial
Assistance
at Cost.
Medicaid and
other means
tested
programs.
Community
Health
Improvement
Services and
Community
Benefit
Operations.
Health
Professions
Education.
Subsidized
Health
Services.
Research.
Cash and
in-kind
contributions.
67
• Two separate reports; based upon 1st and 2nd year
filings of Form 990, Schedule H (2009 and 2010).
• AHA released the reports in February of 2012 and
April of 2013; www.aha.org.
• AHA Schedule H project.
AHA Schedule H Project
Community
benefit – IRS
definition.
Total benefits
to the
community.
68
AHA project, 2009 and 2010 Form 990, Schedule H, Part I
2009 2010
Small hospitals 7.3% 7.3%
Medium hospitals 8.0% 7.5%
Large hospitals 9.8% 9.2%
Hospital systems 9.3% 8.1%
Overall Average 8.4% 8.2%
AHA Schedule H Project
69
Schedule H and Community Benefit
69
70
Schedule H and Community Benefit
70
71
Schedule H and Community Benefit
71
72
Schedule H and Community Benefit
72
73
Schedule H and Community Benefit
73
74
Hospital Example
TAX-EXEMPT VERSUS TAXABLE.
Federal corporate income tax $32,464,058
State corporate income tax $ 9,137,517
Local – property (real estate) taxes – est. $10,000,000
State sales / use taxes – est. $ 2,100,000
Total $53,701,575
Less: Schedule H net CB costs: ($19,191,878)
Differential $34,509,697
75
Recommendations
Grant to a FQHC or other organizations which provide care to
the indigent and/or Medicaid populations or general purpose
community benefit grant. Alternatively, a grant to an unrelated
tax-exempt hospital?
Community Benefit
Quantitative - #’s
and %’s
• Form 990, Schedule H
Qualitative –
written community
benefit statement
• Form 990, Schedule O
76
• Financial assistance does not include self-pay or prompt
pay discounts.
• Restricted grants include as direct offsetting revenue.
Part I:
• Requires a state license number for each hospital facility
listed.
Part V, Section A:
• Requires the organization to provide the URL for a
community health needs assessment that is posted to the
hospital facility’s website or other website.
Part V, Section B, Line 5a and 5b:
2013 Form 990, Schedule H Changes
77
Recommendations
77
01.
Benchmark your hospital to
its peers, both nationally and
regionally.
02.
Calculate your net
community benefit costs and
% using methods other than
CHA, including AHA and
state reporting and disclose
in Form 990 Schedule O.
03.
Consider a written
community benefit
statement to include with
your annual Form 990.
04.
Ensure key individuals are
aware of your net
community benefit costs and
%; including senior
management; Board
members and others.
78
Foreign Reporting
Part Five
78
79
THE IRS MEANS BUSINESS!
 August of 2011; San Francisco man pleads guilty to
hiding $13 million at UBS AG in Switzerland and
agrees to pay $6.8 million FBAR penalty.
 Financial Crimes Enforcement Unit.
 FinCEN Report 114 supersedes the Form 90-22.1.
 Individuals who file FinCEN Report 114 must also
disclose on their Form 1040, Schedule B, Part III.
Foreign Bank Account
80
 A U.S. person must file a FinCEN Report 114 if that
person has a financial interest in, signature authority
or other authority over any financial account in a
foreign country and the aggregate value of these
account(s) exceeds $10,000 at any time during the
calendar year.
 Filed with U.S. Treasury on or before June 30th.
FBAR records should be maintained 5 years from
June 30th.
 Mandatory electronic filing of the FinCEN Report 114.
Who Must File and Due Date
81
Certain
entities/owners
of a foreign captive
(e.g. hospital).
Certain officers of
the owner (e.g.
hospital CEO and
CFO) with signature
authority.
The owner of the
captive may have
other filing
requirements, Forms
5471 and 926.
Form 990, Schedule
F, Statement of
Activities Outside the
U.S.
Foreign Bank Account
82
 Deadline is July 1, 2014; 30% withholding tax.
 Foreign captive insurance companies.
 Determination of a foreign financial institution
(“FFI”) or a non-financial foreign entity (“NFFE”).
 Most hospital foreign captive insurance
companies will be NFFE.
 Form W-8BEN-E, Certificate of Status of
Beneficial Owner for US Tax Withholding and
Reporting (Entities).
Foreign Account Tax Compliance Act
(“FATCA”)
83
Review your captive insurance company as part of your
healthcare system.
Review your captive insurance company bank
accounts for signature authority.
Confirm that your captive is a NFFE and complete
Form W-8BEN-E.
Does your organization have any other foreign
investments or foreign bank accounts?
Consider voluntary disclosure options if potential issues
are identified.
Recommendations
83
84
Executive Compensation
Part Six
84
85
"The IRS EO division will never stop
looking at NFP executive
compensation and benefits."
Mariani
Statement of Opinion
86
2004 Executive compensation compliance project.
2006
Tax exempt hospital community benefit
questionnaire, Form 13790.
2008 Colleges and universities compliance initiative.
2009 IRS governance check sheet, Form 14114.
2010-2012 Employment tax initiative.
2013 Colleges and universities compliance study.
IRS EO and Executive Compensation
87
Who’s looking at your Form 990?
Public Disclosure
IRS
State
taxing
authority
Employees
current &
former
Newspapers Competitors
Unions
The
general
public;
including donors
Accountants,
lawyers and
others
www.guidestar.org
88
Executive Compensation
88
89
Executive Compensation
89
90
Reasonable Compensation
Treas. Reg. 53.4958-4(b)(1)(ii)(A)
Reasonable compensation is the amount
ordinarily paid for like services by like
enterprises (whether tax-exempt or taxable)
under like circumstances.
91
Total Compensation
Form 990, Schedule J, Column E
Total compensation includes all compensation items,
whether taxable or not. Items include salary, bonus,
deferred compensation (whether or not funded), payments
to welfare benefit plans (medical, dental, life), and taxable
and non taxable benefits and de minimis fringe benefits.
92
 Arrangement approved by the governing body or a committee of
the governing body composed entirely of individuals who do not
have a conflict of interest with respect to the arrangement;
 Governing body or committee obtained and relied on appropriate
data as to comparability (internally or externally developed); and
 Governing body or the committee adequately documents the
basis for its determination by the later of the next meeting of the
authorized body or 60 days after final approval by the authorized
body.
 Burden of proof, IRS vs. tax-exempt organization.
Rebuttable Presumption of Reasonableness
93
IRC
Section
4958
Effective for
transactions
post
September
14, 1995.
An
enforcement
mechanism
rather then
revocation of
tax-exempt
status.
Intermediate Sanctions
94
• An IRC Section 501(c)(3) or (c)(4) tax-
exempt organization.
• A disqualified person.
• An excess benefit transaction:
Intermediate Sanctions Criteria
ONE
A non-FMV
transaction
(including
reasonable
compensation).
TWO Prohibited
revenue
sharing
transactions.
THREE
Prohibited
transactions
involving
SO's.
95
 The individual must return the amount of the excess
benefit (with interest) to the tax-exempt organization and
pay an excise tax to the IRS.
 Potential excise tax due IRS for organization managers
who knowingly approved the transaction knowing it was an
excess benefit transaction.
 Disclosure on Form 990, Supplemental Schedule L.
 Reasonable Cause.
 Automatic Excess Benefit Transactions.
Excess Benefit - Excise Taxes
96
01
•Review your
compensation
committee.
03
•Ensure the organization
satisfies the RPOR
factors.
02
•Inclusion of all items for
purposes of “total
compensation”
of each key
person.
04
•Obtain a
reasonableness opinion.
Recommendations
96
97
ReportingDocumentationProcessReasonableness
We are in a challenging Political and Regulatory Environment!
Your organization does not want to be the newspaper story!
Avoiding Intermediate Sanctions
It’s All About
98
Questions & Answers
THANK YOU!
98

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Healthcare Industry Tax Update 2014

  • 1. Healthcare Industry Tax Update 2014 Rules, Regulations, Changes, Best Practices and Recommendations
  • 2. 2 Introduction Scott J. Mariani, JD, Tax Partner Practice Leader Healthcare Services Group smariani@withum.com 465 South Street, Suite 200 Morristown, NJ 07960 (973) 532-8835 withum.com
  • 3. 3 Agenda IRS Update IRS Exempt Organizations Update Affordable Care Act Schedule H and Community Benefit Foreign Reporting Executive Compensation
  • 5. 5 For a historical perspective, in 1986, the top 1% of earners reported 11% of all income and paid 26% of the income taxes; the lower-earning 50% made 17% of the income and paid 6% of the nation's individual income tax bill. IRS Update Breakdown of Income and Taxes Paid by Category Income Category 2011 AGI % of All Income % of Income Taxes Paid Top 1% Over $388,905 18.7% 35.1% Top 5% Over $167, 728 33.9% 56.5% Top 10% Over $120,136 45.4% 68.3% Top 25% Over $70,492 67.8% 85.6% Top 50% Over $34,823 88.5% 97.1% Bottom 50% Under $34,823 11.5% 2.9%
  • 6. 6 IRS tea party/patriot issue.April 2013 Resignation of Acting IRS Commissioner Steven Miller.April 2013 Government shutdown.October 2013 IRS budget decrease of $526 million, or 4.4% compared to the previous year’s enacted level.January 2014 “Gross mismanagement” by Office of Chief Counsel staff in NY and LI is alleged. March 2014 Problems at the IRS
  • 7. 7 Are subject to FICA. SUPREME COURT CASE Severance Payments United States v. Quality Stores, Inc. U.S., No. 12-1408, 3/25/14.  Supreme Court decision; 8-0; March 25, 2014.  Medical resident FICA issue.
  • 8. 8  IRC Section 125 plans a/k/a cafeteria plans.  IRS Notice 2013-71.  Further Modification of Use-or-Lose Rule. 1. Expenses incurred by 12/31; or 2. Expenses incurred during the period of up to 2 months and 15 days immediately following the end of the plan year; or 3. Carryover of $500 to the immediately following plan year. Flexible Spending Accounts
  • 9. 9 Accounts Payable – New Form W-9 New Form W-9; Request for Taxpayer Identification Number and Certification. Disregarded entity; shown on line 2 not on line 1. Limited liability company. Exempt payee code (if any). Exemption from FATCA reporting code (if any).
  • 10. 10 Accounts Payable – New Form W-9 10
  • 11. 11 Senate Finance Committee report “Cost Recovery and Accounting Discussion Draft”; released November 21, 2013.  AICPA Coalition Letter; January 17, 2014. Cash Versus Accrual Taxable income is recognized when received (cash basis) versus when services are rendered (accrual basis). Annual gross receipts threshold of $10 million. Personal service corporations and professional firms; e.g. physician practices.
  • 12. 12 Revenue Ruling 2013-17; effective September 16th. Same-sex couples legally married in a jurisdiction that recognizes their marriage are now recognized as married for federal tax purposes; regardless of jurisdiction in which they reside. Terms included in the IRC that refer to marital status will include an individual married to a person of the same sex, if the couple is lawfully married under state law and such a marriage is between individuals of the same sex. Defense of Marriage Act (“DOMA”)
  • 13. 13 Income tax. Estate and gift taxes. Federal tax provisions: • Filing status. • Exemptions. • Standard deduction. • Employee benefits. • IRA contributions. • Earned income tax credit. • Child tax credit. DOMA Applicability
  • 14. 14 Additional procedures and guidance forthcoming: • Refund claims for payroll taxes paid on previously-taxed health insurance and fringe benefits. • Cafeteria plans. • Qualified retirement plans and other tax-favored arrangements. FAQs on IRS website. IRS Publication #555. DOMA - Additional Guidance
  • 15. 15 02 Review your existing IRC Section 125 plan and consider revising the plan. 01 Review your current arrangements with respect to severance, including written agreements, where applicable. Recommendations  Do you have a Form W-9 for every vendor?  Review your “non-1099 required” vendors.  Consider a process to obtain an updated Form W-9 for all vendors.  Consider voluntary disclosure options if issues are identified. 03 Review your accounts payable function.
  • 16. 16 IRS Exempt Organizations Update Part Two 16
  • 17. 17 IRS EO Reorganization April 2013 Tea Party/Patriot Issue and Applications for Tax-Exemption. IRC Section 501(c)(4) social welfare organization. IRC Section 501(c)(27) political organization. Lois Lerner, IRS Exempt Organizations (“EO”) Director retired in April of 2013. Tamera Ripperda, named IRS EO Director, December 2013. From Large Business and International Division. INVESTIGATION STILL ONGOING NEW DIRECTOR
  • 18. 18 The IRS Exempt Organizations group will not publish a 2013 Annual Report & 2014 Work Plan this year. IRS EO Group
  • 19. 19 IRS Forms 1023 and 1024 Significant period of time from the date of taxpayer filing, IRS receipt, review and issuance of IRS determination letter in most instances. Applications for Tax-Exemption. IRS TE/GE expects a “significant” decrease in the IRS’ backlog of 80,000 applications by the end of 2014; announced in February of 2014. Streamlined IRC Section 501(c)(3) exemption process starting in the summer of 2014; Form 1023-EZ; Federal Register 3/31/2014.
  • 20. 20  Instructions to the Form 990; Appendix D: Public Inspection of Returns.  Application for Recognition of Exemption and three most recently filed Forms 990 and 990-T. Form 990 Public Inspection Amended Forms 990 and 990-T.  3 years from the date of filing.  Provide copy of the amended Form 990 to each voting member of the governing body prior to filing?
  • 21. 21 02 Use Form 4506-A Request for Public Inspection or Copy of Exempt or Political Organization IRS Form Form 990 Public Inspection • Request made in person.  Unusual Circumstances. • Request made in writing. 01 Guidestar.org 03 Through the organization Available Via:
  • 24. 24  Pension Protection Act of 2006; failure to file Form 990, 990- EZ or 990-N for three consecutive years results in automatic revocation of tax-exempt status.  Notice 2011-43 and Notice 2011-44.  Revenue Procedure 2014-11; Streamlined Retroactive Reinstatement Process.  Reasonable cause depends on whether the new Form 1023/1024 is filed not later than 15 months after the later of the date of IRS revocation letter or the date on which the IRS posted the entity’s name on the Revocation List. Revocation of Tax-Exempt Status
  • 25. 25 The bill would strike “professional football leagues” from the Internal Revenue Code, a phrase that has been in place since 1966. Revocation of Tax-Exempt Status Properly Reducing Overexemptions for Sports Act (H.R. 3965), which would prevent professional sports organizations with annual revenues of more than $10 million from claiming an IRC Section 501(c)(6) tax exemption; introduced January 29, 2014. WOULD BE AFFECTED NFL earns about $9B in revenue annually.
  • 26. 26 Charitable contributions limitation. Elimination of Rebuttable Presumption of Reasonableness. Excise Tax on Excess Tax-Exempt Organization Executive Compensation. Unrelated Business Income Tax. The Tax Reform Act of 2014 - Proposed
  • 27. 27 DESIGNATE • A contact person to handle all Form 990 requests. MAINTAIN • Both a “taxpayer” copy and a “public disclosure” copy of the Forms 990 for each of your tax-exempt organizations annually. ADOPT • A written Form 990 public disclosure policy. Recommendations 27
  • 29. 29 Tax Provisions and Revenue Generators 2013 2014 2018  Additional Medicare Tax.  Net Investment Income Tax.  Medical Device Excise Tax.  Patient- Centered Outcomes Research Fee.  Transitional Reinsurance Fee.  Health Insurance Provider Fee.  Cadillac Tax.
  • 30. 30 Large employers that DO NOT offer coverage to at least 95% of full-time employees must: pay a penalty if any full-time employee receives premium assistance through a marketplace. Penalty is equal to: $2,000 x Total Full-Time Employees in excess of 30. Employer Shared Responsibility
  • 31. 31 Large employers that DO offer coverage to at least 95% of full-time employees that: IS NOT affordable, or DOES NOT meet minimum value requirements must pay a penalty. Penalty is equal to: lesser of $3,000 for each full-time employee receiving premium assistance or cost sharing reduction through a marketplace or $2,000 per full-time employee in excess of 30. Employer Shared Responsibility
  • 32. 32 Employer Shared Responsibility If the employee share of the premium is in excess of 9.5% of their household income, coverage is not “affordable”. If health plan doesn’t cover at least 60% of total allowed costs of benefits provided under the plan, it is not providing “minimum value”. PREMIUM IN EXCESS OF 9.5%OF HOUSEHOLD INCOME
  • 33. 33 Employer Shared Responsibility Full-time employee Averages, for a calendar month, at least 30 hours of service per week or has worked at least 130 hours of service during the month. Full-time equivalent Total number of hours of service for all non full-time employees for the month divided by 120.
  • 34. 34 Employer Penalties For those with 50+ Full-Time Do you offer coverage? Does the plan provide minimum value? Plan pays 60% of claims. Is the coverage affordable? Yes Yes Yes No $2,000 per FT (minus first 30) $3,000 per FT Receiving tax credit/subsidy No No Employer “Safe Harbor” Coverage would be considered “affordable” if the premium contribution for single coverage does not exceed 9.5% of an employee’s W-2, box 1 wages. $3,000 per FT Receiving tax credit/subsidy No Penalty
  • 35. 35 CONTROLLED GROUPS Employer Shared Responsibility Large employer status is determined on basis of entire controlled group. Penalties are determined on a separate basis. Only one 30 employee exclusion allowed per controlled group.
  • 36. 36 Final regulations 2/10/2014. Transitional relief for: • Mid-sized employers (50-99 FTEs) have an additional one year to January 1, 2016 to comply. • Large employers (100 or more FTEs) only required to offer to 70% of full-time employees. What Has Been Delayed
  • 37. 37 Generally incorporate reporting requirements outlined in the proposed rules. Provide limited options for streamlined reporting of employer offer of coverage in specific circumstances. Generally requires employers and insurers to collect Social Security numbers for primary insured, covered spouses and dependents to report minimum essential coverage. Highlights of Final Regulations Sections 6055 and 6056
  • 38. 38 Information to be reported under IRC Section 6055: • The name and tax payer identification number (TIN) of each individual enrolled; • The name and address of the primary insured who submits the application for coverage; • Months during which the individual is enrolled in minimum essential coverage. For coverage offered in 2015, information returns must be provided to individuals by February 1, 2016, and to the IRS by March 31, 2016. Reporting via Form 1095-C employee statement and Form 1094-C employer transmittal (6055/6056 combined). Section 6055 General Rules
  • 39. 39 • Birth date of dependent may be reported if employer made a “reasonable effort” to obtain the TIN. • Three efforts must be made to obtain the TIN to avoid filing. Taxpayer Identification Numbers (TINs): Must report TIN of the primary insured and each individual covered under the policy and the months that the individuals were covered. Penalties. • Employee consent and other requirements apply. Electronic filing permitted. • Third party may be designated to file on behalf of the employer. Reports filed by employing entity for self-funded plans. Complexities of Section 6055 Reporting
  • 40. 40  General reporting method: • Number of full-time employees, by month; • For each full-time employee, months when coverage was available for each full-time employee, the employee’s share of the lowest-cost monthly premium for self-only coverage; • Additional information, some by indicator code.  For coverage offered in 2015, information returns must be provided to individuals by February 1, 2016, and to the IRS by March 31, 2016.  Reporting via Form 1095-C employee statement and Form1094-C employer transmittal (6055/6056 combined). Section 6056 General Rules
  • 41. 41 Requires you and each member of your family to either: Individual Shared ResponsibilityONE Have minimum essential coverage, or TWO Have an exemption from the responsibility to have minimum essential coverage, or THREE Make a shared responsibility payment when you file your 2014 Federal income tax return in 2015.
  • 42. 42 Minimum Essential Coverage Health insurance coverage provided by your employer, Health insurance purchased through the Health Insurance Marketplace in the area where you live, where you may qualify for financial assistance, Coverage provided under a government-sponsored program for which you are eligible (including Medicare, Medicaid, and health care programs for veterans), Health insurance purchased directly from an insurance company, and Other health insurance coverage that is recognized by the Department of Health & Human Services as minimum essential coverage.
  • 43. 43 Has no affordable coverage options because the minimum amount you must pay for the annual premiums is more than eight percent of your household income, Has a gap in coverage for less than three consecutive months, or Qualifies for an exemption for one of several other reasons, including having a hardship that prevents you from obtaining coverage, or belonging to a group explicitly exempt from the requirement. Exemptions – some are obtained only through the Marketplace, some only from the IRS and some from either the Marketplace or IRS. An individual may be exempt if he/she:
  • 44. 44 For 2014, the annual payment amount is: Making a Payment – 2014 Year The greater of: 1% of your household income that is above the tax return filing threshold for your filing status, or Your family's flat dollar amount, which is: But capped at the cost of the national average premium for a bronze level health plan available through the Marketplace in 2014. $95 per adult and $47.50 per child, limited to a family maximum of $285
  • 45. 45 Because $497 is greater than $285 (and is less than the national average premium for bronze level coverage for 2014), John and Mary’s shared responsibility payment is $497 for 2014, or $41.41 per month for each month the family is uninsured (1/12 of $497 equals $41.41). SCENARIO Married couple with 2 children, $70,000 income and their filing threshold is $20,300. Example - 2014 To determine their payment using the income formula, $70,000 (2014 household income). MINUS $20,300 (filing threshold). $49,700 (the result). One percent of $49,700 equals $497 John and Mary’s flat dollar amount is $285, or $95 per adult and $47.50 per child. The total of $285 is the flat dollar amount in 2014.
  • 46. 46 2.5%2.0% Making a payment – 2015 and 2016 The income percentage increases to 2 percent of household income and the flat dollar amount increases to $325 per adult ($162.50 per child under 18). These figures increase to 2.5 percent of household income and $695 per adult ($347.50 per child under 18). After 2016, these figures increase with inflation. 20162015
  • 47. 47  Tax-exempt hospitals must attach their audited financial statements to their Form 990 annually.  IRS mandatory review of every hospital’s Schedule H once every 3 years. Treasury thereafter prepares a report to Congress.  New Internal Revenue Code (“IRC”) Section 501(r).  IRS Notices 2014-2 and 3; December 2013.  To date the IRS has not finalized the IRC Section 501(r) Regulations; end of 2014. Affordable Care Act; March 23, 2010
  • 48. 48 Effective for tax years beginning after March 23, 2012 Internal Revenue Code Section 501(r)(3) Community Health Needs Assessment (“CHNA”) Section 501(r)(3) July of 2011 April of 2013 Each hospital facility must conduct a CHNA once every three years and prepare and update a written implementation strategy annually. IRS Notice 2011-52 issued. IRS released proposed regulations. Adopt and make widely available.
  • 49. 49 Section 501(r)(3) Proposed Regulations “Participates in a hospital facility which is structured as a flow through entity (LLC or partnership).” “Making your CHNA widely available.” “New hospital facilities.”
  • 50. 50 Section 501(r)(3) Proposed Regulations “Collaboration with other hospital facilities; separate written reports per each hospital facility.” An exception to the separate report requirement was acknowledged by the IRS. A joint report may be permitted in situations where the involved hospital facilities each define their communities identically and conduct a joint CHNA process. The report clearly identifies all the hospital facilities.
  • 51. 51 • Attached to the Form 990; or • Provide on the Form 990 the webpage address(es) on which they are available along with, or as part of, the CHNA. • In addition, the Form 990 must annually describe the actions taken to address the CHNA significant health needs or state why none were taken and the reasons why. “Implementation strategy.” Section 501(r)(3) Proposed Regulations
  • 52. 52 Section 501(r)(3) Proposed Regulations • Code Section 4959 imposes a $50K excise tax per facility per year; reported on Form 990-T. • Revocation of tax-exempt status is an option. • Errors or omissions that are neither willful or egregious will be excused if the hospital facility corrects provides disclosure that is reasonable and appropriate. • Based upon facts and circumstances on a case by case basis. • IRS intends to issue a Revenue Procedure. “Non-compliance with Code Section 501(r).”
  • 53. 53 Code Section 501(r)(4) Compliance with Code Section 501(r)(4) Financial assistance policy (“FAP”) and emergency medical care policy; A plain language summary of the FAP; and A FAP application form and instructions.
  • 54. 54 Code Section 501(r)(4) The FAP must contain: • Eligibility criteria for financial assistance, and whether the assistance includes free or discounted care; • The basis for calculating amounts charged to patients; • The method for applying for financial assistance; • The actions the hospital may take in the event of nonpayment if the hospital does not have a separate billing and collections policy; and • Measures taken to widely publicize the FAP within the community served by the hospital facility.
  • 55. 55 • Limit amounts charged for medically necessary healthcare services and emergency medical care for FAP-eligible individuals. • Prohibits the use of gross charges. • A hospital facility must choose and retain 1 of the following: Code Section 501(r)(5) Amounts Generally Billed (“AGB”) Look Back Method • Medicare fee-for-service only; or • Medicare fee-for-service and all private health insurers. Prospective Method • Medicare fee-for-service only. • Part A and Part B.
  • 56. 56 Code Section 501(r)(5) Amounts Generally Billed (“AGB”)  Acceptable AGB methods to consider.  One average percentage for all ER and other medically necessary care provided by the hospital.  Separate categories of care (I/P; O/P; different departments).  Separate items or services. Total Claims paid to hospital total gross charges of claims x 100 AGB PERCENTAGE Calculations: DIVIDED BY Gross charges x AGB% AGB EQUALS
  • 57. 57 Code Section 501(r)(5) AGB Example CALCULATE THE AGB ER / medically necessary service charge = $10,000 $10,000 x 30% Gross charges x AGB%; AGB for the ER / medically necessary service is $3,000 Total claims paid to hospital Total gross charges of claims x 100 $300 million / $1.0 billion $300 = $200 private insurers; $80 Medicare and $20 individuals AGB Percentage = 30% CALCULATE AGB PERCENTAGE DIVIDED BY
  • 58. 58 A hospital facility must make reasonable efforts to determine whether an individual is FAP-eligible prior to engaging in an ECA. Code Section 501(r)(6) Notification Period • This period begins on the date care is provided and ends on the 120th day after the hospital provides the individual with the first billing statement for care. Application Period • A hospital must accept and process FAP applications until the end of the 240th day after the hospital provides the individual with the first billing statement for care. Extraordinary Collection Actions (“ECA”)
  • 59. 59 Code Section 501(r)(6) Placing liens and/or foreclosing on real property; Attaching or seizing a bank account or garnishing an individual’s wages; and Commencing a civil action or causing an individual’s arrest. An ECA includes any action that requires a legal or judicial process, including:
  • 60. 60 Recommendations 60 Form an internal working group for ACA and/or IRC Section 501(r) compliance. Perform an IRC Section 501(r) readiness assessment. Review your FAP and billing and collection policies. Perform an AGB analysis. Review your written agreements and arrangements with outside entities, e.g. collection agencies.
  • 61. 61 Schedule H and Community Benefit Part Four 61
  • 62. 62 Why is community benefit important? Supports Federal, state and local tax-exempt status. Community Benefit Federal • Exempt from corporate income tax. • Issue tax- exempt debt. • Receive charitable contributions and government grants. State • Exempt from corporate income tax. • Exempt from sales and use tax. Local • Exempt from property (real estate) taxes (Provena Medical Center and UPMC).
  • 63. 63 Schedule H and Community Benefit 63
  • 64. 64 Schedule H and Community Benefit 64
  • 65. 65 • Community benefit definitions and reports. • Costs, not charges. • Senate Finance Committee – 5% Test. • Community benefit, inclusions/exclusions. FORM 990 – Schedule H Total benefits to the community American Hospital Association (“AHA”). IRS definition – Catholic Health Association (“CHA”).
  • 66. 66 Categories of Community Benefit Schedule H, Part I, Community Benefit Financial Assistance at Cost. Medicaid and other means tested programs. Community Health Improvement Services and Community Benefit Operations. Health Professions Education. Subsidized Health Services. Research. Cash and in-kind contributions.
  • 67. 67 • Two separate reports; based upon 1st and 2nd year filings of Form 990, Schedule H (2009 and 2010). • AHA released the reports in February of 2012 and April of 2013; www.aha.org. • AHA Schedule H project. AHA Schedule H Project Community benefit – IRS definition. Total benefits to the community.
  • 68. 68 AHA project, 2009 and 2010 Form 990, Schedule H, Part I 2009 2010 Small hospitals 7.3% 7.3% Medium hospitals 8.0% 7.5% Large hospitals 9.8% 9.2% Hospital systems 9.3% 8.1% Overall Average 8.4% 8.2% AHA Schedule H Project
  • 69. 69 Schedule H and Community Benefit 69
  • 70. 70 Schedule H and Community Benefit 70
  • 71. 71 Schedule H and Community Benefit 71
  • 72. 72 Schedule H and Community Benefit 72
  • 73. 73 Schedule H and Community Benefit 73
  • 74. 74 Hospital Example TAX-EXEMPT VERSUS TAXABLE. Federal corporate income tax $32,464,058 State corporate income tax $ 9,137,517 Local – property (real estate) taxes – est. $10,000,000 State sales / use taxes – est. $ 2,100,000 Total $53,701,575 Less: Schedule H net CB costs: ($19,191,878) Differential $34,509,697
  • 75. 75 Recommendations Grant to a FQHC or other organizations which provide care to the indigent and/or Medicaid populations or general purpose community benefit grant. Alternatively, a grant to an unrelated tax-exempt hospital? Community Benefit Quantitative - #’s and %’s • Form 990, Schedule H Qualitative – written community benefit statement • Form 990, Schedule O
  • 76. 76 • Financial assistance does not include self-pay or prompt pay discounts. • Restricted grants include as direct offsetting revenue. Part I: • Requires a state license number for each hospital facility listed. Part V, Section A: • Requires the organization to provide the URL for a community health needs assessment that is posted to the hospital facility’s website or other website. Part V, Section B, Line 5a and 5b: 2013 Form 990, Schedule H Changes
  • 77. 77 Recommendations 77 01. Benchmark your hospital to its peers, both nationally and regionally. 02. Calculate your net community benefit costs and % using methods other than CHA, including AHA and state reporting and disclose in Form 990 Schedule O. 03. Consider a written community benefit statement to include with your annual Form 990. 04. Ensure key individuals are aware of your net community benefit costs and %; including senior management; Board members and others.
  • 79. 79 THE IRS MEANS BUSINESS!  August of 2011; San Francisco man pleads guilty to hiding $13 million at UBS AG in Switzerland and agrees to pay $6.8 million FBAR penalty.  Financial Crimes Enforcement Unit.  FinCEN Report 114 supersedes the Form 90-22.1.  Individuals who file FinCEN Report 114 must also disclose on their Form 1040, Schedule B, Part III. Foreign Bank Account
  • 80. 80  A U.S. person must file a FinCEN Report 114 if that person has a financial interest in, signature authority or other authority over any financial account in a foreign country and the aggregate value of these account(s) exceeds $10,000 at any time during the calendar year.  Filed with U.S. Treasury on or before June 30th. FBAR records should be maintained 5 years from June 30th.  Mandatory electronic filing of the FinCEN Report 114. Who Must File and Due Date
  • 81. 81 Certain entities/owners of a foreign captive (e.g. hospital). Certain officers of the owner (e.g. hospital CEO and CFO) with signature authority. The owner of the captive may have other filing requirements, Forms 5471 and 926. Form 990, Schedule F, Statement of Activities Outside the U.S. Foreign Bank Account
  • 82. 82  Deadline is July 1, 2014; 30% withholding tax.  Foreign captive insurance companies.  Determination of a foreign financial institution (“FFI”) or a non-financial foreign entity (“NFFE”).  Most hospital foreign captive insurance companies will be NFFE.  Form W-8BEN-E, Certificate of Status of Beneficial Owner for US Tax Withholding and Reporting (Entities). Foreign Account Tax Compliance Act (“FATCA”)
  • 83. 83 Review your captive insurance company as part of your healthcare system. Review your captive insurance company bank accounts for signature authority. Confirm that your captive is a NFFE and complete Form W-8BEN-E. Does your organization have any other foreign investments or foreign bank accounts? Consider voluntary disclosure options if potential issues are identified. Recommendations 83
  • 85. 85 "The IRS EO division will never stop looking at NFP executive compensation and benefits." Mariani Statement of Opinion
  • 86. 86 2004 Executive compensation compliance project. 2006 Tax exempt hospital community benefit questionnaire, Form 13790. 2008 Colleges and universities compliance initiative. 2009 IRS governance check sheet, Form 14114. 2010-2012 Employment tax initiative. 2013 Colleges and universities compliance study. IRS EO and Executive Compensation
  • 87. 87 Who’s looking at your Form 990? Public Disclosure IRS State taxing authority Employees current & former Newspapers Competitors Unions The general public; including donors Accountants, lawyers and others www.guidestar.org
  • 90. 90 Reasonable Compensation Treas. Reg. 53.4958-4(b)(1)(ii)(A) Reasonable compensation is the amount ordinarily paid for like services by like enterprises (whether tax-exempt or taxable) under like circumstances.
  • 91. 91 Total Compensation Form 990, Schedule J, Column E Total compensation includes all compensation items, whether taxable or not. Items include salary, bonus, deferred compensation (whether or not funded), payments to welfare benefit plans (medical, dental, life), and taxable and non taxable benefits and de minimis fringe benefits.
  • 92. 92  Arrangement approved by the governing body or a committee of the governing body composed entirely of individuals who do not have a conflict of interest with respect to the arrangement;  Governing body or committee obtained and relied on appropriate data as to comparability (internally or externally developed); and  Governing body or the committee adequately documents the basis for its determination by the later of the next meeting of the authorized body or 60 days after final approval by the authorized body.  Burden of proof, IRS vs. tax-exempt organization. Rebuttable Presumption of Reasonableness
  • 94. 94 • An IRC Section 501(c)(3) or (c)(4) tax- exempt organization. • A disqualified person. • An excess benefit transaction: Intermediate Sanctions Criteria ONE A non-FMV transaction (including reasonable compensation). TWO Prohibited revenue sharing transactions. THREE Prohibited transactions involving SO's.
  • 95. 95  The individual must return the amount of the excess benefit (with interest) to the tax-exempt organization and pay an excise tax to the IRS.  Potential excise tax due IRS for organization managers who knowingly approved the transaction knowing it was an excess benefit transaction.  Disclosure on Form 990, Supplemental Schedule L.  Reasonable Cause.  Automatic Excess Benefit Transactions. Excess Benefit - Excise Taxes
  • 96. 96 01 •Review your compensation committee. 03 •Ensure the organization satisfies the RPOR factors. 02 •Inclusion of all items for purposes of “total compensation” of each key person. 04 •Obtain a reasonableness opinion. Recommendations 96
  • 97. 97 ReportingDocumentationProcessReasonableness We are in a challenging Political and Regulatory Environment! Your organization does not want to be the newspaper story! Avoiding Intermediate Sanctions It’s All About