The Draft Redesigned Form 990 - Key Considerations for Tax-Exempt Healthcare Organizations
by Robert W. Friz and Eric M. McNeil, PricewaterhouseCoopers LLP, Philadelphia, PA
On June 14, 2007, the Internal Revenue Service ("IRS") released a draft of the redesigned Form 990, Return of Organization Exempt from Income Tax under Section 501(c) of the Internal Revenue Code. This is the first major redesign of the Form 990 since 1979. The goal of the IRS is to have the form ready for the 2008 filing year (for organizations with tax years beginning on or after January 1, 2008). The draft redesigned Form 990 includes a ten page core form, to be completed by each Form 990 filer, as well as 15 schedules that may need to be completed depending on the organization's type and activities. The draft forms, schedules, and instructions can be found on the IRS website at: http://www.irs.gov/charities/article/0,,id=171213,00.html)
Even though the public comment period on the draft redesigned Form 990 recently ended and the draft form may be modified in light of those comments, healthcare organizations should begin to review their policies and practices as well as their ability to gather the required information, in order to be able to address the potential required disclosures. While the changes to the reporting requirements per the draft redesigned Form 990 and its accompanying schedules are extensive, this article focuses on several key proposed changes of particular interest to tax-exempt healthcare organizations.
With the redesigned Form 990, an organization that operates or maintains a facility to provide hospital or medical care would need to provide greater disclosure around its activities on the new Schedule H. According to the IRS, the purpose of the new schedule is to combat the lack of transparency surrounding the activities of tax-exempt organizations that provide hospital and medical care. In general, Schedule H adopts the Catholic Health Association's model for quantifying and reporting community benefit (including charity care). The community benefit report per Schedule H seeks information on the number of activities or programs and number of persons served, and an organization must also state whether it has a charity care policy. Further, there is a requirement to describe whether the organization's charity care policy bases eligibility on federal poverty guidelines, income, or asset levels, applies uniformly to all of its facilities, and imposes aggregate budget caps or other limitations. Schedule H also requires billing and collection information, which includes disclosure of gross charges, discounts, net expected and fees collected by Medicare, Medicaid, other government programs, insured, and uninsured. An explanation is also required for the organization's bad debt expense calculation as well as the organization's debt collection policy.
Schedule H also requires the organization to disclose information regarding any management company or joint venture where the organization is a partner or shareholder and the following requirements are met. First, more than 5% of the entity is owned in the aggregate by current or former officers, directors, trustees, or key employees of the organization, or physicians who have staff privileges with one or more of the organization's facilities. And second, the entity either provides management services used by the organization in its provision of hospital or medical care, or provides hospital or medical care, or owns or provides property used by the organization or by others to provide hospital or medical care.
In addition, Schedule H requires a description of how the organization assesses the healthcare needs of the community it serves, as well as how the organization's patient intake process informs and educates patients about their eligibility for assistance under government programs or the organization's charity care policy. Moreover, information must be provided regarding emergency room policies and the activities conducted by each of the organization's facilities.
The draft redesigned Form 990 also includes new Schedule K, which requires significant additional disclosure concerning tax-exempt bonds. For example, the new schedule focuses on the purpose and use of proceeds for each of the organization's tax exempt bond issues. Also, there are a number of questions focusing on private use. In this regard, for each bond issue it is asked whether the organization entered into a management contract or a research arrangement for the financed property and whether those agreements and arrangements meet the safe harbors provided in applicable Revenue Procedures. In addition, if there were management agreements or research arrangements, an organization is required to report the highest percentage of the project that was subject to either a management agreement or research arrangement. It is also asked whether any entity (other than a 501(c)(3) organization or state or local government) used the property during the reporting period for any other use, as well as the highest percentage of use. Further, information must be disclosed for compensation paid by the organization to third parties during the year with respect to the issuance of any tax-exempt bond issue, including name, role in the issue (e.g., bond counsel, borrower's counsel, financial advisor, underwriter), amount paid, and whether the third party was selected through a formal selection process.
In the area of joint ventures, in addition to the discloses described above in Schedule H, an organization must disclose whether it has a written policy or procedure to review its investments in or participation in disregarded entities, joint ventures, or other affiliated organizations (exempt or non-exempt). It is also asked whether the organization has a written policy that requires the organization to safeguard its exempt status with respect to transactions and arrangements with related organizations. The instructions provide that such safeguards can include control by the organization over a partnership sufficient to ensure that the partnership furthers the exempt purpose of the organization; requirements that a partnership give priority to exempt purposes over maximizing profits for the partners; that the partnership not engage in any activities that would jeopardize the organization's exemption; that returns of capital, allocations and distributions be made in proportion to the partners' respective ownership interests; and that all contracts entered into by the partnership with the organization be on arm's-length terms, with prices at fair market value. In addition, the organization must indicate whether it conducted all or a substantial part of its exempt activities through or using one or more partnerships, LLCs, or corporations. If so, the organization must report the name, primary activity, and ownership percentage of each partnership, LLC, or corporation in which the organization's ownership or control was 50% or less. Moreover, the organization must indicate whether it is a partner in a partnership, member of an LLC, or shareholder of a corporation that was managed by a company that was controlled by taxable partners, members, or shareholders.
In the area of compensation, the redesigned Form 990 requires that organizations disclose information regarding policies and procedures surrounding the determination and approval of compensation arrangements. All organizations are required to indicate whether the process for determining compensation for the CEO, Executive Director, Treasurer, and CFO included a review and approval by independent members of the governing body, comparability data, and contemporaneous substantiation of the deliberation and decision (similar to the criteria under the rebuttable presumption of reasonableness for intermediate sanctions). Moreover, for certain officers, directors, trustees, key employees, and highly compensated employees, organizations must provide a detailed breakout of Form W-2 or Form 1099 compensation, nonqualified deferred compensation, non-taxable benefits, and non-taxable expense reimbursements. Furthermore, for such persons, the organization must disclose whether it has a written policy regarding payment or reimbursement of travel and entertainment expenses; whether the organization paid or reimbursed for first-class travel, club dues, or use of personal residence; and whether the organization paid or accrued compensation determined in whole or in part by revenues of the organization or an affiliate.
Other key areas of additional disclosure applicable to all organizations relate to governance, management, and financial reporting. For example, the draft redesigned Form 990 asks whether the organization has a written conflict of interest policy and, if so, the number of transactions reviewed under such policy and related procedures during the year. It is also asked whether the organization has a written whistleblower policy as well as a written document retention and destruction policy. It must be disclosed whether the organization contemporaneously documents the meetings of the governing body and related committees through the preparation of minutes or other similar documentation. Also, an organization is asked whether it has an audit committee, and whether the Form 990 is reviewed by the governing body before filing. Further, it must be indicated how the organization makes the following documents available to the public: organizational/governing documents, conflicts of interest policy, Forms 990 and 990-T, financial statements, and the audit report.
The IRS has indicated that suggestions and comments provided as part of the public comment process will be taken into consideration when finalizing the redesigned Form 990 and schedules. Also, the IRS specifically requested comments regarding whether transition periods are necessary in order to ease the burden of implementing the new reporting requirements for certain form components (and there have been suggestions by commentators to allow transition periods for a number of proposed disclosures, including for Schedule H and Schedule K). While it is likely that there will be some changes to the draft resigned Form 990 once it is finalized, due to the fact that the IRS anticipates using the redesigned Form 990 for the 2008 tax year organizations should be proactive to address the proposed changes. This can include reviewing relevant policies and procedures in light of the new disclosures (as well as whether they exist in writing), as well as the process required for obtaining the additional information needed to prepare the return.