Major Hospital leaders are taking actions now to put right its tax status after the Internal Revenue Service revoked the hospital's 501(c)3 nonprofit designation last year.
Major Health Partners President and CEO Jack Horner said this week that the hospital itself will not be impacted and its employees are unlikely to see any effects, though the 501(c)3 status deals directly with retiree pensions. Horner said he has filed the necessary paperwork to get the status returned and he expects the IRS to accept the new exemption. "We will have this issue resolved with the IRS before the end of the year to prevent any future issues," he said.
The IRS revoked the nonprofit status in October because the hospital failed to file a Form 990 for three consecutive years.
A Form 990 is an informational tax form that most tax-exempt organizations must file annually with the IRS. The form contains information pertaining to revenues and expenses and also lists patient payments for medical services, along with contributions received directly from individuals, foundations and federal, state or local governments that are considered to provide a direct benefit to the general public. A Form 990 also lists people who are responsible in whole or in part for the operations of an organization and the compensation of current officers, directors and most employees.
Luis Garcia, a spokesman with the IRS Media Relations office, said the federal organization cannot comment directly on individual cases such as Major Hospital's status. Generally, though, an organization's completed Form 990 is a public record and available for public inspection, he said.
"Some members of the public rely on Form 990 as their primary or sole source of information about a particular organization," Garcia said. "How the public perceives an organization in such cases can be determined by information presented on its return. Therefore, the return must be complete, accurate and fully describe the organization's programs and accomplishments."
When an organization does not file one for three consecutive years, it has its 501(c)3 status automatically revoked by the IRS.
Horner said Major Hospital is still tax-exempt because it is a government entity.
"In the 1920s, the Indiana Legislature created city-county hospitals, which function as a government entity in many ways. The board is appointed by the city council, county council and county commissioners. Clearly, we are a government affiliated entity. We are tax exempt under that status," Horner said. "Our status as a 501(c)3 is an IRS-defined entity."
Seeking new exemption
Only the 501(c)3 status - which designates how employee benefits are taxed - is under review now. Horner said the IRS has not indicated there is a procedure or timeline in place to re-grant the 501(c)3 status. "The only procedure is to re-apply," Horner said. He and the hospital began work on the re-application for the exemption - a Form 1023 - in May.
"We have continued to try to correspond (with the IRS), and in June the IRS said we didn't have to fill out a Form 990, but there is no policy in place to re-grant the status," Horner said. "I decided to fill out a Form 1023 and argue the IRS. The 1023 would reapply our 501(c)3 status."
According to the IRS' website, an organization must apply to have its tax-exempt status reinstated, even if it was not originally required to file an application for exemption.
"If an organization has had its tax-exempt status automatically revoked and wishes to have that status reinstated, it must file an application for exemption and pay the appropriate user fee, even if it was not required to apply for exempt status initially," Garcia said.
The IRS' website says eligibility revocation can be corrected by submitting several tax forms, a correction resolution plan of action and payment of fees - $1,000 for 21 to 50 participants, or up to $25,000 if there are more than 10,000 participants.
Garcia said if the IRS determines an organization meets the requirements for 501(c)3 status, it will issue a new determination letter. He also said that in most cases the reinstated exemption is retroactive to the date the organization's exemption application was submitted to the IRS.
David Weisman, vice president of finance for the Indiana Hospital & Health Association, said once an organization appears on the list of agencies that have been revoked after missing the Form 990 for three years, it does not come off. "You can get your status back, but you remain on that list," Weisman said.
501(c)3 needed for pensions
Horner said the hospital sought the 501(c)3 status in the 1970s to expand its pension offerings. Major Hospital's website says it offers varying pension, 401(k) and 403(b) plans to full-time and part-time employees.
"We decided to do it for retirement and pensions and it became beneficial for us," Horner said.
The IRS requires the sponsor of a 403(b) plan to be a 501(c)3 organization. If a 403(b) sponsor loses its 501(c)3 status, as Major Hospital has, the plan may have an eligibility failure. Horner said there are no problems with the pensions and employees will not have any issues withdrawing their money.
"Many retired employees are currently withdrawing their funds with no issues. We will have this issue resolved with the IRS before the end of the year to prevent any future issues with the 403(b) contributions," Horner said Thursday.
Weisman said Major Hospital can rectify the issue by working with the IRS.
"It is a concern, but it they get it taken care of, I don't think there would be an issue," Weisman said. "They have an opportunity to go ahead and file the returns. They may be a tax-exempt entity due to being a governmental entity, but there is the requirement that they file a Form 990 for the pension plan."
Neither Weisman nor Garcia could say what would happen if the IRS declines Major Hospital's re-application.
'Misinterpretation' to blame
Major Hospital did not file a Form 990 for three consecutive years, due, in part, to a "misinterpretation," Horner said.
The confusion centers on a 1999 case at another Indiana hospital. The Indiana Hospital & Health Association obtained a decision on behalf of that hospital in which the IRS ruled that, because it was an affiliate of a governmental unit, it was exempt from filing the annual Form 990.
"We felt that ... we did not have to fill it out any more, and we quit filling out the Form 990," Horner said.
The letter applied only to the hospital that requested it, however, according to Weisman. It was not to be used by others or cited as legal precedent.
"I think (Major Hospital) used the memo. A number of years went by before they decided not to send in the Form 990. There had been a number of CEOs that came through the organization. It may have been a matter where someone felt they didn't have to because they had the memo we sent out," Weisman said.
Horner said Major Hospital believed a broader precedent had been established with that case. The hospital did enter a Form 990 up until 2007, but not from 2008-10.
"When the complexity and costs of filling out the Form 990 further increased due to Sarbanes-Oxley, Major decided not to fill out the 990 and claimed the exemption as a government-affiliated organization," Horner said.
The Sarbanes-Oxley Act of 2002 was a U.S. federal law that set new or enhanced standards for all U.S. public company boards, management and accounting firms.
According to the IRS, in 2006, Congress passed a law called the Pension Protection Act, ordering all nonprofits with federal tax-exempt status to submit returns for 2007, 2008 and 2009. The law required all organizations to file returns.
Horner said the matter is complex and the hospital staff is doing their best to comply. "The forms were not complicated in 1979 when we applied for our 501(c)3 status, but they have become more and more complicated over time," Horner said.
Newspaper Article by Paul Gable - Staff Writer - The Shelbyville News