Tax Issues Impacting Not-For-Profit Organizations

Transcription

1 Tax Issues Impacting Not-For-Profit Organizations August 17 th, 2017 Amber Sherrill, CPA, Director BKD, LLP Risk Analysis Report Year End AGENDA Unrelated Business Income (UBI) Accountable Care Organizations (ACO) 501(r) Potential Risk and Exposure Areas 2// experience direction 1

2 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) 3// experience direction UNRELATED BUSINESS INCOME General overview UBI Activities Excluded from UBI Volunteer Labor Members Convenience Donated Merchandise Games of Chance Furnishing Certain Services by One Hospital to Another 4// experience direction 2

3 UNRELATED BUSINESS INCOME General overview UBI Income Excluded from UBI Interest, Dividends, and Similar Income Royalties Rental Income Gains & Losses from Disposition of Property Research Income 5// experience direction 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 6// experience direction 6 3

4 JOINT VENTURES AND CONTROLLED ORGANIZATIONS 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 7// experience direction JOINT VENTURES AND CONTROLLED ORGANIZATIONS 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? 8// experience direction 4

5 JOINT VENTURES AND CONTROLLED ORGANIZATIONS JV UBI or not? Revenue Ruling 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) Return of capital and distributions made in proportion to ownership interests 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 9// experience direction JOINT VENTURES AND CONTROLLED ORGANIZATIONS JV UBI or not? Revenue Ruling 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 Return of capital and distributions made in proportion to ownership interests 10// experience direction 5

6 JOINT VENTURES AND CONTROLLED ORGANIZATIONS 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. 11// experience direction JOINT VENTURES AND CONTROLLED ORGANIZATIONS 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 12// experience direction 6

7 JOINT VENTURES AND CONTROLLED ORGANIZATIONS 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 13// experience direction JOINT VENTURES AND CONTROLLED ORGANIZATIONS 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? 14// experience direction 7

8 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 15// experience direction 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 16// experience direction 8

9 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 17// experience direction 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 18// experience direction 9

10 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 19// experience direction 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 patientcenteredness criteria 20// experience direction 10

11 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 21// experience direction 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 22// experience direction 11

12 Management Structure Includes clinical and administrative systems Operations managed by an executive Clinical management and oversight managed by seniorlevel medical director Providers with meaningful commitment Ongoing quality assurance and process improvement program 23// experience direction 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 12

13 Structure & Operations 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 Structure & Operations 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? 13

14 ACO Notice Notice 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. 27// experience direction 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. 28// experience direction 14

15 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 29// experience direction 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 30// experience direction 15

16 Is there potential for UBI? Notice 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 31// experience direction 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? 32// experience direction 16

17 501(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? 33// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS 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 15 th day of fifth month following year of CHNA completion Written plan must be available on website orattached to the filed Form 990 Must apply to licensed hospital joint ventures, if not UBI Authorized governing body must adopt 34// experience direction 17

18 501(r) POTENTIAL RISK AND EXPOSURE AREAS 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 Must apply to licensed hospital joint ventures, if not UBI 35// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS 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 36// experience direction 18

19 501(r) POTENTIAL RISK AND EXPOSURE AREAS Red Flags on Form 990, SchH 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) 37// experience direction SA1 501(r) POTENTIAL RISK AND EXPOSURE AREAS 38// experience direction 19

20 Slide 38 SA1 Sherrill, Amber, 8/2/2017

21 SA1 501(r) POTENTIAL RISK AND EXPOSURE AREAS Part I, Question 3 and Part V, Section B, Question 13 Same Question *Make sure answers are consistent* 39// experience direction SA1 501(r) POTENTIAL RISK AND EXPOSURE AREAS Part I, Question 4 and Part V, Section B, Question 13 *Make sure answers are consistent* 40// experience direction 20

22 Slide 39 SA1 Sherrill, Amber, 8/2/2017 Slide 40 SA1 Sherrill, Amber, 8/2/2017

23 SA1 501(r) POTENTIAL RISK AND EXPOSURE AREAS 41// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS CHNA 42// experience direction 21

24 Slide 41 SA1 Sherrill, Amber, 8/2/2017

25 501(r) POTENTIAL RISK AND EXPOSURE AREAS - CHNA 43// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS - CHNA 44// experience direction 22

26 501(r) POTENTIAL RISK AND EXPOSURE AREAS FAP, PLS, APPLICATION 45// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS FAP, PLS, APPLICATION 46// experience direction 23

27 501(r) POTENTIAL RISK AND EXPOSURE AREAS FAP, PLS, APPLICATION 47// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS BILLINGS & COLLECTIONS 48// experience direction 24

28 501(r) POTENTIAL RISK AND EXPOSURE AREAS BILLINGS & COLLECTIONS 49// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS EMERGENCY MEDICAL CARE POLICY 50// experience direction 25

29 501(r) POTENTIAL RISK AND EXPOSURE AREAS LIMITATIONS ON BILLINGS 51// experience direction 501(r) POTENTIAL RISK AND EXPOSURE AREAS 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 52// experience direction 26

30 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. 53// experience direction Questions? Thank you for attending! If you have further questions Amber Sherrill, CPA Director