Phila hfma may 26 2011 s mariani

A CLOSER LOOK
Healthcare Tax Update

BY SCOTT J. MARIANI, JD ,PARTNER
PRACTICE LEADER, HEALTHCARE SERVICES GROUP
MAY 26, 2011

1
WithumSmith+Brown, PC ▪ BE IN A POSITION OF STRENGTH withum.com

Part I

Extension of President Bush Tax Cuts

2

EXPIRING FEDERAL TAX PROVISIONS EFFECTIVE
DECEMBER 31, 2010 – EXTENDED TO 2013

 Individual Income Tax Rates

• Starting in 2013, the marginal Federal
Individual Income tax rates for the top two
brackets rise from 33% and 35% back to the
year 2000 levels of 36% and 39.6%;
respectively.

3


 Dividend Tax Rate

• Starting in 2013 qualified dividends are no
longer taxed at a rate of 15% and return to
being taxed as ordinary income.

4


 Capital Gains Tax Rate

• Starting in 2013 long term capital gains tax
rate increases from 15% to 20%.

5


 Child Tax Credit

• Starting in 2013 the child tax credit for
eligible households returns to $500 per child
from $1,000.

6


 Dependent Care Tax Credit

• Starting in 2013 the dollar amount limit for
creditable expenses is reduced from $3,000
to $2,400 ($6,000 to $4,800 for 2 or more
children), thus reducing the credit.

7

 Effective December 31, 2012 there are 64
additional Federal tax provisions due to expire.

 Stay tuned, Presidential election in November,
2012.

8

YEAR 2013 TAX INCREASE EXAMPLE

 Married filing joint $500K ordinary wages, $100K
dividends from US Corporation and $100K of
stock capital gains.
 Ordinary wages – 35% to 36/39.6%
 Dividend income - marginal rate - 15% to
39.6%
 LT Capital Gains 15% to 20%
 FIT approximately $175K to $221K

9

Part II

Form 990, Return Of An Organization Exempt From Income Tax

10

FORM 990-EZ – TRANSITIONAL RELIEF

May file 990-EZ for: If gross receipts are: And if assets are:

2008 Form (generally <$1,000,000 <$2,500,000
filed in 2009)

2009 Form (generally <$500,000 <$1,250,000
filed in 2010

2010 and later Forms <$200,000 <$500,000

11

2010 FORM 990, PART XI

Reconciliation of Net Assets

12

2010 FORM 990, SCHEDULES

New narrative parts have been added to
Schedules E, G, K, L and R. No longer utilize
Schedule O for these schedules.

13

FORM 990

Who’s looking at your Form 990 and why?
 IRS
 State taxing authority
 Employees – current & former
 Newspapers
 Competitors
 Unions
 The General Public; including donors
 www.guidestar.org
14

JEOPARDY! NFP ORGANIZATIONS

 Base compensation: $1,423,685

 Bonus and incentive compensation: $3,514,305

 Other compensation: $ 171,175

 Total Form W-2 Box 5, Medicare wages:
$5,109,165

15


 Deferred compensation: $94,844

 Nontaxable benefits: $21,339

 Total Compensation: $5,225,348

16


Perquisites
 First class or charter travel
 Travel for companions
 Health or social club dues or initiation fees
 Personal services

Who is the commissioner of the PGA Tour?

Source 2009 Form 990 PGA Tour, Inc.; GuideStar
17




 Other compensation: $309,000

$9,759,000

18


 Deferred compensation: $0



19


Perquisites
 Travel for companions
 Tax indemnification and gross-up payments
 Housing allowance or residence for personal
use

Who is the commissioner of the NFL?
Source 2009 Form 990 NFL Management Council;
GuideStar
20




 Other compensation: $312,102

$11,812,102

21


 Deferred compensation: $0



22


Perquisites

Highest paid I/C for services

 Steve A. Fehr, Legal Counsel, $606,351

Who is the head of the MLB player’s union?
Source 2009 Form 990 Major League Baseball
Players Association; GuideStar
23

COMPENSATION AND FORM 990

“It is very important to reconcile from total gross
compensation to Form W-2, Box 5, Medicare
wages.”

24

STATEMENT OF FACT

"The IRS EO division will never stop looking at NFP
executive compensation and benefits."

25

SCHEDULE H, PART I, COMMUNITY BENEFIT

 Community Benefit
1. AHA versus CHA model (excludes bad debt
at cost and Medicare shortfall)
2. Schedule H, Part III reports bad debt and
Medicare shortfall. Also asks for why you
feel bad debt and Medicare shortfall
should be treated as community benefit.
3. Costs not charges
4. Senate Finance Committee – 5% Test

26


5. Categories of Community Benefit
a. Charity care and Medicaid shortfall
b. Community Health Programs and
Services
c. Health Professions Education
d. Subsidized Health Services
e. Research
f. Cash and in-kind contributions

27


1. What are we seeing?

a. Charity care, Medicaid short fall and
medical residency programs are “big
drivers”.

b. CB percentages ranging from 2% - 15.2%.

c. Majority in the 6 – 9% range

28

2009 FORM 990, SCHEDULE H - REGIONAL
INFO

AtlantiCare Regional Medical Center

Net community benefit costs: $48,199,394

Community benefit percentage: 8.95%

29

INFO

Capital Health System



30

INFO

Cooper Health System



31

INFO

Kennedy University Hospital



32

INFO

South Jersey Health System



33

INFO

Virtua West Jersey Hospital - Camden



34

INFO

Virtua Memorial Hospital



35

2009 FORM 990, SCHEDULE H – NATIONAL
INFO
Robert Wood Johnson University Hospital, New
Jersey



Revenue less expenses: $32,800,937

36

INFO
The New York and Presbyterian Hospital, New
York




37

INFO
North Shore University Hospital - Manhasset, New
York




38

INFO
The Cleveland Clinic Foundation, Ohio




39

INFO
Mayo Clinic, Minnesota



Revenue less expenses: ($25,984,493)

40

2009 FORM 990, SCHEDULE H - OBSERVATION

"Not all institutions are applying the current rules
uniformly. There are many gray areas and not
bright line criteria for inclusions and exclusions."

41

2009 FORM 990, SCHEDULE H - CONSIDERATION

Mandatory review by IRS of every hospital's
schedule H once every three years. What do
your schedule H workpapers look like?

IRS – Will not take exam form.

42

HOSPITAL – TAX EXEMPTION

 Community Benefit Standard, Rev. Rul.69-545

 Charity Care Standard, Rev.Rul.56-185

43

GROUP EXEMPTION RULINGS

 The IRS does not like them.

 Original draft of new Form 990 prohibited
them.

 IRS review and approval time is extremely slow,
approximately 12-14 months.

 Results in 2 separate Forms 990.
44


Entities must give up their own separate tax-
exempt status and IRS determination letter;
may have to re-apply for tax-exempt status if
the organization wants to file its own separate
Form 990 again prospectively.

45


 Part VII of core Form 990 BOT's gets very long
and redundant, utilize schedule O.

 Combined Schedule H, including community
benefit percentage, except for Part V.

46


 Reduction in disclosure of Top 5 highest paid
employees after your officers and key
employees.

 New entities do not need to file a Form 1023,
Application for Tax-Exemption.

 Annual group exemption letter update to IRS
90 days prior to end of year.

47

Part II

Patient Protection and Affordable Care Act (PPACA) March 2010

48

HOSPITAL REQUIREMENTS - PPACA

 New IRC Section 501(r) as part of the PPACA.

 Four new hospital requirements.

 Effective date, tax years beginning after
March 23, 2010 (July 1, 2010 through June 30,
2011).

49


 IRS guidance still forthcoming.

 “2010 Schedule H too burdensome,” April 20,
2011 AHA, HFMA, and VHA letter to the IRS.

 Exception: mandatory CHNA (July 1, 2012
through June 30, 2013).

50


 Facility by facility basis, multiple hospitals, one
Federal tax id #.

 Attach your audited financial statements to
your hospital Form 990.

 Mandatory review by the IRS of every
Schedule H once every 3 years.

51

1. COMMUNITY HEALTH-NEEDS ASSESSMENT

 Each hospital must have conducted either a
community health-needs assessment
(“CHNA”) in the taxable year or in either of the
two taxable years immediately preceding the
taxable year.

 Applicable to 6/30/2013 Forms 990.

52

1. COMMUNITY HEALTH-NEEDS ASSESSMENT

 Each hospital
• adopt an implementation strategy for
meeting the community health needs
identified in the assessment;
• the CHNA must take into account input from a
broad cross section of the community served
by the hospital, including those with special
knowledge of or expertise in public health;
and
• the CHNA must be made available to the
general public. 53

2. FINANCIAL ASSISTANCE POLICY (“FAP”)

 Each hospital must adopt and make widely
available a written FAP:
• First:
► Eligibility criteria for financial assistance

and whether such assistance includes
free or discounted care;
► The basis for calculating amounts

charged to patients;
► The method for applying for financial

assistance; and
54


► For hospitals that do not have a separate
billing and collections policy, a statement
of the collection-related actions the
hospital may take in connection with non-
payment;

► How the hospital will widely publicize the
policy within the community it serves.

55


• Second:
► Each hospital must commit to provide

non-discriminatory emergency care,
regardless of whether the individual is
eligible for financial assistance under the
hospital’s FAP.

56

3. LIMITATION ON PATIENT CHARGES

 Each hospital must limit the charges for
emergency or other medically necessary care
provided to patients eligible for financial
assistance under its FAP to not more than the
lowest amounts charged to patients who
currently have insurance covering such care.

 Each hospital is also prohibited from using
gross charges.

57

4. LIMITATION ON COLLECTION EFFORTS

 A hospital may not carry out “extraordinary
collection actions” until it has made
“reasonable efforts” to determine whether a
patient is eligible for assistance under the
hospital’s FAP.

58

4. LIMITATION ON COLLECTION EFFORTS

 The definition of “reasonable efforts” is to be
determined by subsequent regulation,
although presumably the latter would include
notification to patients of the written financial
policy upon admission, in the bill, and by
subsequent telephone calls.

59

SCHEDULE H, PART V, FACILITY INFORMATION

 Section A, Hospital Facilities, by total revenue
 Section B, Facility Policies and Practices (for
each facility listed in Part V, Section A)

1.Community health needs assessment,
questions 1-7

2.Financial assistance policy, questions 8-13

60

SCHEDULE H, PART V, FACILITY INFORMATION

 Section B (continued)
3. Billing and collections, questions 14-17

4. Emergency medical care, question 18

5. Charges for medical care policy, questions
19-21

 Section C, Non-hospital facilities, by total
revenue
61

MAJOR TAX PROVISIONS - 2012

 Certain businesses must begin reporting the
value of health care benefits on employees’
Form W-2 statements.

 New Form 1099 tax information reporting is
required for businesses making in excess of $600
over the course of a calendar year to
corporations. Repealed April 2011.

62

2012 FORM W-2 HEALTH CARE REPORTING

IRS provides interim guidance - April 2011
New reporting has no tax ramifications.

"To provide useful and comparable consumer
information to employees."

63


 Aggregate cost of employer sponsored health
care coverage.

 Aggregate cost exclusions.

 ER sponsored health care coverage
exclusions.

64


 Relief for small employers
(less than 250 Forms W-2 in the prior year)

 Terminated employees

65


 A new 0.9% surtax will be added to the 1.45%
Hospital Insurance (Medicare) payroll taxes
paid by individuals earning more than $200,000
per year ($250,000 for joint filers). Subject to
payroll withholding.
 New IRS Code Section 1411 imposes a 3.8% tax
on unearned income of individuals earning
more than $200,000 per year ($250,000 for joint
filers).
 Contributions to health care FSA’s limited to
$2,500 as of 1/1/2013.
66


 U.S. citizens and legal residents are required to
maintain “minimum essential coverage”.

 Penalty is the greater of $95 or 1% of the
taxpayer’s income over the threshold amount
of income required for income tax return filing.

 2015 - $325 or 2%

 2016 - $695 or 2.5%
67


 A 40% excise tax on high-cost health insurance
plans goes into effect. The tax, paid by
insurers or self-insured firms, is on the amount in
excess of $10,200 for individuals and $27,500
for families.
 Health cost adjustment percentage –
between 2010 and 2018.
 Excise tax is not tax deductible.
 Excise tax passed to the consumers.

68

Part IV

IRS Employment Tax Initiative

69

IRS EMPLOYMENT TAX INITIATIVE

 Announced in 2009

 6,000 U.S. taxpayers over 3 years

 Originally 10-15% NFP organizations

 Revised to 25% NFP organizations

 Started in March 2010
70

EMPLOYMENT TAX ISSUES

 Form W-2 and Form 1099 to the same
individual

 Worker misclassification

 Improper treatment of fringe benefits

 Review of travel/entertainment expenses –
corporate credit cards

 FICA exempt individuals

 Back-up withholding tax; no Forms 1099/W-9 71

EMPLOYMENT TAX ISSUES

 Excess Benefit Transactions:
1. IRC Section 4958 – Intermediate Sanctions
a. Enacted in 1996, TBOR-2
b. Alternative to revocation of tax-exempt
status
2. Applies to certain transactions between IRC
501(c)(3) and IRC Section 501(c)(4)
organizations and a “disqualified person.”
3. Generally, a non-FMV transaction.
72

IRS EMPLOYMENT TAX INITIATIVE –
ACTION STEPS

1. Perform a self-assessment

2. Consider voluntary compliance filing with the
IRS

3. Be proactive as part of your organization’s
overall tax compliance program

73

SELF-ASSESSMENT; EMPLOYMENT TAXES

1. A review of all senior management fringe
benefits for imputation on Form W-2; including
a review of the company corporate credit
card, meals and entertainment and back-up
documentation.

2. A comparison of all employee social security
numbers to the accounts payable paid file
and Forms 1099 issued.

74


3. A review of all individuals who were paid as
an independent contractor for proper worker
classification determination between
employee or independent contractor.
4. A written policy and procedure should be
prepared with respect to worker
determination between employee or
independent contractor.
5. A review to ensure that a completed Form W-
9 is on file for all vendors and independent
contractors.
75


6. A review of all “non-1099 required” vendors to
determine if a Form 1099 should have been
issued under current IRS rules and regulations.

7. A written accounts payable policy should be
prepared applicable to all vendors, including
obtaining a completed Form W-9 and
determining whether or not a Form 1099 is
required prior to processing payment.

76

Part V

Accountable Care Organizations

77

ACCOUNTABLE CARE ORGANIZATIONS
("ACO'S")
 IRS Notice 2011-20 issued March 31, 2011

 Soliciting comments until May 31, 2011

 Private inurement and private benefit

 Unrelated business income ("UBI")

78

ACCOUNTABLE CARE ORGANIZATIONS
("ACO'S")

Whether IRC Section 501(c)(3) hospitals and
other tax-exempt healthcare organizations
participating in the Medicare Shared Savings
Program (“MSSP”) through an ACO may be
impacted by current limitations placed on
such organizations under the IRS. Case-by-
case basis, based on all the facts and
circumstances.

79

PARTICIPATION IN AN ACO

A tax-exempt hospital's participation in an ACO
may include:
1. membership in a nonprofit corporation;
2. ownership of shares in a corporation;
3. ownership of an interest in a partnership or an
LLC; and
4. contractual arrangements with the ACO
and/or its other participants.

80

CMS REGULATION AND OVERSIGHT

A tax-exempt hospital's participation in an ACO
will not result in private inurement or private
benefit if the following factors are met:
1. The terms of the tax-exempt hospital's
participation in the MSSP through the ACO
(including its share of MSSP payments or losses
and expenses) are set forth in advance in a
written agreement negotiated at arm's
length.
2. CMS has accepted the ACO into and has not
terminated the ACO from the MSSP.
81


3. The tax-exempt hospital's share of economic
benefits derived from the ACO (including its
share of MSSP payments) is proportional to the
benefits or contributions the hospital provides
to the ACO.
4. The ownership interest received by the tax-
exempt hospital, if any, is proportional and
equal in value to its capital contributions to
the ACO. All ACO returns of capital,
allocations, and distributions are made in
proportion to such ownership interest.
82


5. The tax-exempt hospital's share of the ACO's
losses (including its share of MSSP losses) does
not exceed the share of ACO economic
benefits to which the hospital is entitled.
6. All contracts and transactions entered into by
the tax-exempt hospital with the ACO and
the ACO's participants, and by the ACO with
the ACO's participants and any other parties,
are at fair market value.

83

UNRELATED BUSINESS INCOME TAX

Whether the participation of a tax-exempt
hospital in an ACO and its share of the
activities generating the MSSP payments are
substantially related to the performance of the
tax-exempt hospital's charitable purposes?

84

UNRELATED BUSINESS INCOME TAX

IRS, absent any private inurement or private
benefit, and as long as the ACO meets all of
the eligibility requirements established by CMS
for participation in the MSSP, it expects that
any MSSP payments received by the tax-
exempt hospital from an ACO would derive
from activities that are substantially related to
the performance of the charitable purpose of
"lessening the burdens of government."

85

NON-MSSP ACTIVITIES OF THE ACO

 ACO conducts activities outside of MSSP (such
as entering into and operating under shared
savings arrangements with other types of
health insurance payors).

 Unlikely lessens the burdens of government.

86


 IRS views any negotiation with private health
insurers on behalf of unrelated parties as
generally not a charitable activity, regardless
of whether such an agreement involves a
program aimed at achieving cost savings in
healthcare delivery.

87


 Certain non-MSSP activities may further or be
substantially related to an exempt purpose of
the tax-exempt hospital. An example would
be an ACO participating in shared savings
arrangements with Medicaid, which may
further the charitable purpose of relieving the
poor or underprivileged.

88

Part VI

Nonprofit Health Insurance Insurers

89

NONPROFIT HEALTH INSURANCE INSURERS

PPACA requires DHHS to establish a Consumer
Operated and Oriented Plan ("CO-OP")
program to foster the creation of qualified non
profit health insurance issuers to offer qualified
health plans in individual and small group
markets. The CO-OP program is intended to
make grants or loans to qualified nonprofit
health insurance issuers.

90


 New IRC Section 501(c)(29) as part of the
PPACA

 IRS Notice 2011-23 issued March 11, 2011

 Soliciting comments until May 27, 2011

91

WHAT IS A NONPROFIT HEALTH INSURANCE
ISSUER?
An organization:
 That is organized as a nonprofit, member
corporation under state law.
 Which substantially all of the activities of which
consist of the issuance of qualified health
plans in the individual and small group markets
in each state in which it is licensed to issue
such plans; and
 That meets various additional requirements as
follows.
92

QUALIFICATION CONDITIONS

 The organization must have received a grant
or loan under the CO-OP program and be in
compliance with the requirements of PPACA
§1322 and the terms of its loan or grant under
the CO-OP program.
 The organization must have given notice to
the secretary of the Treasury in the manner
prescribed by (not yet issued) regulations that
it is applying for recognition of its exempt
status as an organization described in IRC
Section 501(c)(29);
93


 No part of the organization's net earnings can
inure to the benefit of any private shareholder
or individual , except as provided in narrow
exceptions listed in PPACA § 1322 (c)(4)
(which requires the issuer’s profits to be used to
lower premiums, improve benefits, or for other
programs intended to improve the quality of
health care delivered to the organization’s
members).

94


 No substantial part of the organization's
activities can consist of attempting to
influence legislation, and the organization
cannot participate in, or intervene in, any
political campaign.

95


 Qualified nonprofit health insurance issuers will
be required to file an annual information return
and provide certain specified information,
including the amount of reserves required by
each state in which the organization is
licensed to issue qualified health plans and the
amount of reserves on hand.

96


 May apply to IRS for tax-exempt status
 Failure to apply or if tax-exempt status is
revoked may result in taxation as an insurance
company
 The IRS is currently not accepting applications
for recognition as a tax-exempt organization,
Form 1023
 Traditional IRC section 501(c)(3) principles
apply

97

Part VII
Foreign reporting Form 90-22.1, Report of Foreign Bank and
Financial Accounts

98

WHO MUST FILE

A U.S. person must file a FBAR 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.

99

FINANCIAL INTEREST DEFINED

 Financial interest includes accounts for which
the U.S. person is the owner of record or has
legal title, whether the account is maintained
on his or her own benefit or for the benefit of
others including non-United States persons.

100

FINANCIAL INTEREST DEFINED

 Financial interest also includes accounts
where the owner of record or holder of legal
title is a person acting as an agent, nominee,
or in some other capacity on behalf of a U.S.
person.
 Financial interest in an account also includes a
corporation in which a U.S. person directly or
indirectly owns more than 50 percent of the
total value of the shares of stock.

101

SIGNATURE AUTHORITY DEFINED

A U.S. person has account authority over an
account if that person can control the
disposition of money or other property in the
account by delivery of a document
containing his/her signature to the bank or
other person with whom the account is
maintained.

102

TYPICAL FORM 90-22.1 FILERS

 The owner of the foreign captive (e.g.
hospital)

 Certain officers of the owner (e.g. hospital
CEO and CFO)

103

OTHER CONSIDERATIONS

 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.
 Form 990, schedule R, Related Organizations
 Primary activity: Financial vehicle, not
insurance
 Individuals who file Form 90-22.1 also must
disclose on their Form 1040, schedule B

104

DUE DATE AND RECORDKEEPING

Filed with U.S. Treasury on or before June 30th.
FBAR records should be maintained 5 years
from June 30th.

105

Part VIII

Other IRS EO Issues

106

OTHER IRS EO ISSUES

 Proposed regulations - disclosure to State
officials regarding tax-exempt organizations.

 990-N e-postcard and automatic revocation.

 Elimination of advanced ruling process for
501(c)(3) public charities.

 Draft executive order could expand donor
disclosures.

 Cell phone legislation.
107

OTHER IRS EO ISSUES

2011 EO Work Plan:

 Executive Compensation.

 Supporting Organizations.

 Medical resident FICA.

 Gaming Non-Filer Project.
108

OTHER IRS EO ISSUES

2011 EO Work Plan (continued):

 Governance Check Sheet, Form 14114.

 Controlling Organizations.

 Charitable Spending.

 Colleges and Universities.
109

THANK YOU!

Scott J. Mariani, JD, Partner
WithumSmith+Brown, PC
465 South Street
Suite 200
Morristown, NJ 07960
973-532-8835
smariani@withum.com

110

Phila hfma may 26 2011 s mariani

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