Tax Issues Impacting Not-For-Profit Organizations · 2017-08-10 · 8/9/2017 1 Risk Analysis Report...

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Risk Analysis Report

Year End

Tax Issues Impacting

Not-For-Profit Organizations

August 17th, 2017

Amber Sherrill, CPA, Director

BKD, LLP

AGENDA

�Unrelated Business Income (UBI)

�Accountable Care Organizations (ACO)

� 501(r) Potential Risk and Exposure Areas

2 // experience direction

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UNRELATED BUSINESS INCOME

General overview UBI

• Three Tests

• Trade or business – profit motive,

• Regularly carried on, and

• Not substantially related to performance of exempt functions

• Form 990-T is open to public inspection

• Summary of 990-T information is also shown on page 1 of

Form 990

• State filing potentially required (Required in AR)




• Activities Excluded from UBI

• Volunteer Labor

• Members Convenience

• Donated Merchandise

• Games of Chance

• Furnishing Certain Services by One Hospital to Another


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• Income Excluded from UBI

• Interest, Dividends, and Similar Income

• Royalties

• Rental Income

• Gains & Losses from Disposition of Property

• Research Income


JOINT VENTURES AND CONTROLLED ORGANIZATIONS

Joint Ventures

• Highly scrutinized

• JV is licensed hospital – musts comply with 501r

• Abundant information on Form 990 allows IRS to analyze

joint ventures

• Part VI - Joint Venture policy

• Schedule H, Part IV and Part V

• Schedule R

• S Corporation income is always UBI

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Controlled Organizations

• Abundant information on Form 990 allows IRS to analyze

controlled entities

• Part VI – Lines 35, 35a, and 35b

• Schedule R – Disregarded Entities, Tax Exempt, Partnerships,

Corporations, and Trusts

• Intercompany transactions

• Checklist of transactions with controlled entities and amounts



Joint Venture (JV) Income – UBI or not?

• Look Through Test

• Does participation in the JV further a charitable purpose?

• Does the JV allow the charity to act exclusively to further its

exempt purposes and only incidentally benefit for-profit

partners?

• Who “controls” the JV?


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JV – UBI or not? Revenue Ruling 98-15

• Situation 1: exempt org forms hospital LLC with a for-profit

• Exempt org has majority voting control on the board

• Governing documents explicitly state that charitable purpose of LLC is to promote health

and will satisfy community benefit standard for community as a whole

• Return of capital and distributions made in proportion to ownership interests

• JV only incidentally benefits for-profit partners

• Situation 2: exempt org forms hospital LLC with a for-profit

• Exempt org and for-profit have equal voting control on the board

• Governing documents state that charitable purpose of LLC is to operate health care facilities (no

stated obligation to serve charitable purposes for whole community)


• More than incidental benefit to for-profit partners

• Exempt org can’t initiate activities without approval of for-profit since doesn’t have majority

vote



JV – UBI or not? Revenue Ruling 2004-51

• Exempt university forms LLC with for-profit to provide training

programs

• University and for-profit have equal voting power on the board

• Governing documents state that sole purpose of LLC is to offer virtual teacher

training seminars, which are similar to seminars conducted by university

• University has exclusive right to approve curriculum and training materials

• Virtual seminars allow university to reach individuals who otherwise could not travel

to university campus


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Creation of JV Policy

• Purpose

• Applicability

• Policies & Procedures

• Charitable Purposes & Effect

• Economic Terms

• Prohibited Activities

• Required Approvals

• Amendments to Policy

• Reference to Other Policies – Excess Benefit, Conflict of Interest,

etc.



Controlled Entities (including JVs)

• Tax exempt and taxable entities

• >50% controlled for taxable entities

• Defined under §512(b)(13)

• Parent, subsidiary, brother/sister

• Report transactions

• Potential for UBI – interest, rents, royalties, or annuities


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Controlled Entities (including JVs)

• Reported on Schedule R of Form 990

• Must maintain adequate records of ‘intercompany’

transactions

• Not just parent to sub; brother/sister too



• Entity creation decisions

• Do you need a separate entity?

• What kind of entity should it be?

• Who should own the entity?

• Who should manage the entity?

• Do governing documents have necessary language?

• Will the JV or controlled entity create unwanted UBI?


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ACCOUNTABLE CARE ORGANIZATIONS

Accountable Care Organization (ACO)

Section 3022 of the Affordable Care Act instructed

CMS to establish a Medicare Shared Savings Program

(MSSP) to:• Promote accountability for care of Medicare beneficiaries

• Improve the coordination of Medicare fee-for-service items and

services

• Encourage investment in infrastructure and redesigned care

process for high quality and efficient service delivery



Definition of ACO:

• Group of healthcare service providers and suppliers that

has established a mechanism for shared governance and

meets criteria specified by CMS and HHS is eligible to

participate as an ACO

• Legal entity

• Organized under state law

• Has taxpayer ID

• Comprised of eligible group of Medicare providers or

suppliers

• Each must have taxpayer ID


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Definition of ACO (cont.):

• Eligible Providers

• Professionals in group practice arrangements

(physicians and other clinicians)

• Networks of individual practices

• Joint venture arrangements between hospitals and

professionals

• Hospitals employing professionals

• In addition, eligibility will be open to a subset of CAHs,

RHCs, and FQHCs



Definition of ACO (cont.)

• Must have an established mechanism for shared governance between all ACO Participants

• Be capable of –

• Receiving and distributing shared savings

• Repaying shared losses

• Establishing, reporting and ensuring compliance by all participants

• Performing all ACO functions


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Section 1899(b)(2) of the SSA

Requirements for an ACO to participate in the program:

• Be willing to become accountable for the quality, cost, and overall care of the Medicare fee-for-service beneficiaries assigned to it.

• Enter into an agreement with the HHS Secretary to participate for not less than 3 years

• Formal legal structure that allows the org to receive and distribute shared savings payments

• Include primary care ACO professionals sufficient for the number of Medicare fee-for-service beneficiaries assigned to the ACO

• Provide the HHS Secretary with information regarding ACO professionals to support the assignment of Medicare fee-for-service beneficiaries to the ACO, the implementation of quality & other reporting requirements, and determination of SSPs



Section 1899(b)(2) of the SSA

Requirements for an ACO to participate in the program (cont.):

• Have in place a leadership and management structure that includes clinical & administrative systems

• Define processes to promote evidence-based medicine and patient engagement, report on quality and costs, and coordinate care

• Demonstrate to the HHS Secretary that it meets patient-centeredness criteria


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Governance

• Must have a governing body with adequate authority to

perform all functions

• Can be a Board of Directors

• The key is that the body provides a mechanism for

shared decision-making

• Body must be separate and unique from governing body of

an ACO Participant



Governance (cont.)

• Composition of governing body

• 75% control must rest with ACO Participants

• Must provide for beneficiary representation

• Must have a conflict of interest policy


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Management Structure

• Includes clinical and administrative systems

• Operations managed by an executive

• Clinical management and oversight managed by senior-

level medical director

• Providers with “meaningful commitment”

• Ongoing quality assurance and process improvement

program



Structure & Operations

• Many ACOs being formed as partnerships (or LLCs treated as

partnerships)

• Single-member LLCs owned 100% by tax-exempt hospital

• No direct role in the delivery of health care services

• No patients or contracts with patients

• Does not sell services or products to patients or others

• Plays no role in payment for, or financing of, health care

services delivered to patients

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• Two sources of Revenue

• Capital contributions to fund formation and implementation of

cost savings and quality improvement programs

• MSSP payments if the ACO is successful in meeting HHS

benchmarks for reducing cost and improving quality and patient

satisfaction

• No change to revenue stream of participating health care

providers

• Providers continue to receive payments directly from Medicare



• No change in nature & type of services participating providers

deliver to their patients

• No change in providers’ relationship with their patients or with

Medicare

• What does change?

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ACO Notice 2011-20

• Notice 2011-20 issued by IRS

• IRS later issued a ‘Fact Sheet’ in Q&A format

• Expectation, as a general matter, because of CMS

regulation and oversight by the MSSP:

• TE org participation in MSSP through ACO will not jeopardize

TE status,

• Will not violate the private inurement or private benefit

doctrine,

• And will not be subject to UBIT.



Avoid Private Inurement/Private Benefit

Private Inurement – Organization does not operated

exclusively for a §501(c)(3) exempt purpose if its net earnings

inure in whole or in part to the benefit of private shareholders

or private individuals. Such persons are typically referred to as

insiders.

Private Benefit – Organization does not operate exclusively for

an exempt purpose unless it serves a public rather than a

private interest. Can apply to any person receiving a benefit,

not just insiders or those in a position to influence the org.


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Avoid Private Inurement/Private Benefit – 5 Factors

1. Terms of TE’s participation in MSSP through ACO are set

forth in advance in a written agreement, negotiated at arm’s

length

2. CMS has accepted the ACO into the MSSP (has not been

terminated)

3. TE’s share of economic benefits derived from ACO

proportional to benefits/contributions the TE provides the

ACO; Proportional ownership; Proportional returns of capital,

allocations, and distributions



Avoid Private Inurement/Private Benefit – 5 Factors

(cont.)

4. Share of ACO’s losses does not exceed the share of ACO

economic benefits to which the TE is entitled

5. All contracts & transactions entered into are at FMV


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Is there potential for UBI?

• Notice 2011-20 focuses on UBIT consequences

• ACO activity not likely to be large enough to affect exempt

status

• MSSP Payments - Substantially related to purpose of

“lessening the burdens of government”

• Services provided to ACO

• IRS has declined to identify whether a tax-exempt org’s

participation in a non-MSSP activity through an ACO would

result in UBI or not



Planning Issues• What does Medicare reimbursement for potentially assigned

beneficiaries look like over the next few years?

• How robust is your planned clinical and financial information systems in

relation to managing care across the ACO?

• Is the benefit of shared savings distributions greater than the potential

increased cost and oversight of an ACO and assumption of risk on

shared losses?


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501(r) POTENTIAL RISK AND EXPOSURE AREAS

Are you 501(r) compliant?

• Second round of CHNA and Implementation Strategy

• Financial Assistance Policy (FAP), Financial Assistance Policy

Plain Language Summary (PLS), and Financial Assistance

Policy Application

• Limitation on charges

• Billing and collections practices

• Are all of your current policies & procedures 501(r)

compliant?



CHNA and Implementation Strategy

• Community Health Needs Assessment (CHNA)

• Must be available on website and paper copy by request, free of charge

• Must apply to licensed hospital joint ventures, if not UBI

• Authorized governing body must adopt

• Implementation Strategy

• Extend time to adopt to 15th day of fifth month following year of CHNA

completion

• Written plan must be available on website or attached to the filed Form 990


• Authorized governing body must adopt


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Financial Assistance Policy (FAP)

• Must apply to all emergency and other medically necessary care provided

by hospital

• Elements required:

• Eligibility criteria

• Basis for calculating amounts charged

• Method for applying

• Actions that may be taken in event of nonpayment

• Presumptive eligibility

• Provider list




Widely Publicizing the FAP

• Measures to publicize FAP do not have to be listed in the FAP, but….

• Must do the following

• FAP, Plain Language Summary, and FAP Application on website

• Paper copies upon request, free of charge

• Notify and inform members of the community

• Notify and inform individuals who receive care – reasonable effort

• Make documents available in non-English languages – lesser of 1,000 or 5%

of community


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Red Flags on Form 990, Sch H

• Part I – Financial Assistance & Certain Other Community

Benefits

• Part V - CHNA/Implementation Strategy (Q 1-12)

• Part V - FAP, PLS, and FAP Application (Q 13-16)

• Part V - Billing and Collections (Q 17-20)

• Part V - Policy Relating to Emergency Medical Care (Q 21)

• Part V - Limitations on Billing (Q 22-24)




SA1

SA1 Sherrill, Amber, 8/2/2017

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Part I, Question 3 and Part V, Section B, Question 13 – Same Question

*Make sure answers are consistent*

SA1



Part I, Question 4 and Part V, Section B, Question 13

*Make sure answers are consistent*

SA1


Slide 40


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SA1

501(r) POTENTIAL RISK AND EXPOSURE AREAS – CHNA


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501(r) POTENTIAL RISK AND EXPOSURE AREAS - CHNA


501(r) POTENTIAL RISK AND EXPOSURE AREAS - CHNA


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501(r) POTENTIAL RISK AND EXPOSURE AREAS – FAP, PLS,

APPLICATION



APPLICATION


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APPLICATION


501(r) POTENTIAL RISK AND EXPOSURE AREAS – BILLINGS &

COLLECTIONS


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501(r) POTENTIAL RISK AND EXPOSURE AREAS – BILLINGS &

COLLECTIONS


501(r) POTENTIAL RISK AND EXPOSURE AREAS – EMERGENCY

MEDICAL CARE POLICY


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501(r) POTENTIAL RISK AND EXPOSURE AREAS – LIMITATIONS ON

BILLINGS



• Make sure your organization is actually 501r compliant

• More than just getting reports out and the policies into place

• Education

• Pay attention to the Form 990 questions

• Could be in compliance, but wrong answers are red flags

• CPA review of your policies and procedures

• Don’t assume you are in compliance

• Devil is in the details


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DISCLOSURES

• These discussions & conclusions are based on facts as stated & existing

authorities as of date of this communication. Our advice could change

as result of changes in applicable laws & regulations. We are under no

obligation to update this communication if such changes occur. Any

advice should be based on your unique facts & circumstances as you

communicated them to us & should not be used or relied on by anyone

else. This advice is not intended or written to be used for the purpose

of avoiding penalties that may be imposed.


Questions?

Thank you for attending!

If you have further questions…

Amber Sherrill, CPA

Director

501.372.1040

[email protected]

Tax Issues Impacting Not-For-Profit Organizations · 2017-08-10 · 8/9/2017 1 Risk Analysis Report...

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