HFMA – Region 11 Symposium
Accounting and Tax Hot Topics
January 27, 2009
Gwen Spencer
Partner
David R. Merriam
Senior Manager
This document was not intended or written to be used, and it cannot be used, for the purpose of avoiding
U.S. federal, state or local tax penalties.
PwC
Agenda
I.
Credit Crisis Hot Topics
II.
Fair Value Implementation Issues
III.
Standard Setting Activities
IV. Tax Update
Credit Crisis Hot Topics
Credit Crisis Implications
•
Muni Market Impact
•
Other-Than-Temporary-Impairments (OTTI)
•
Underwater Endowments
•
Alternative Investments
•
Money Market Funds
•
Securities Lending
•
Derivatives
PricewaterhouseCoopers
Slide 4
Fair Value
Implementation Issues
FAS 157, Fair Value Measurements
Does not address when to apply or measure fair value
Principles based standard which provides framework for how to
define/determine fair value when required or allowed by GAAP
 Central standard for any use of fair value measurement under any
accounting guidance
 Eliminates multiple sources and sometimes inconsistent guidance on fair
value measurement
 May require changes to valuation upon adoption
Expands disclosures related to fair value measurements
PricewaterhouseCoopers
Slide 6
What Accounts Are Impacted by FAS 157?
Investments at Fair Value (FAS 124/115)
Derivatives (FAS 133)
Contributions (FAS 116, FAS 136, AAG-NPO)
Assets in pensions and OPEB (FAS 87/158, FAS 106)
Debt disclosures (FAS 107)
Nonfinancial Assets and Liabilities (deferred one year)
 Impairments (FAS 144)
 AROs (FAS 143)
 Exit Costs (FAS 146)
PricewaterhouseCoopers
Slide 7
FAQ: How does the use of a pricing service (e.g., by a
custodian) for investments impact the classification of an input
in the fair value hierarchy?
PricewaterhouseCoopers
Slide 8
Response: Information provided by such sources could be
any level in the fair value hierarchy, depending on the source
of the information for a particular security. It is necessary to
understand how the pricing service is determining price in
order to appropriately classify it within the hierarchy.
PricewaterhouseCoopers
Slide 9
FAQ: What will external auditors do to ensure that information
provided by a pricing service is representative of fair value?
PricewaterhouseCoopers
Slide 10
Response:
 Understand HCOs controls for assessing pricing data
 Consider nature of security and general availability of
observable market data
 Understand pricing service's methodologies
 Consider quality of pricing service
 Consider whether there is any inconsistent market
information
 Evaluate independence
PricewaterhouseCoopers
Slide 11
FAQ: Is Net Asset Value (NAV) representative of fair value
under FAS 157?
PricewaterhouseCoopers
Slide 12
Response: NAV is a starting point, but management must
consider whether any adjustments are necessary. NAV
may end up being fair value, but key considerations should
be well documented.
PricewaterhouseCoopers
Slide 13
Response: FAS 157 concepts do not easily apply to investments in
hedge funds, alternative products, and commingled funds
 NAV of a fund represents unitized value of all the holdings
 NAV may be a starting point for determining fair value
 Before placing reliance on NAV, HCOs need to obtain evidence
that NAV is appropriate to use as an input into a fair value
measurement
 Typically, that evidence is gathered via initial due diligence and
ongoing monitoring of investee fund by investor entity (AU 332)
PricewaterhouseCoopers
Slide 14
Application to Investments – Use of NAV
Key valuation factors for HCOs to consider regarding investee fund:
 Fair value estimation processes (including use of third party experts) and
control environment, and any changes to those processes
 Portion of underlying securities held that are traded on active markets
 History of significant adjustments to NAV as a result of annual financial
statement audit
 Findings in fund’s advisor or administrator’s SAS 70 report, if any
 Professional reputation and standing of fund's auditor
 Evidence that NAV is based on application of FAS 157 as of its preparation
date
PricewaterhouseCoopers
Slide 15
Application to Contributions
 Contributions are initially recorded at fair value
Existing contributions not impacted by adoption of FAS 157 (unless an
election under FAS 159 is made)
 Generally, no new fair value considerations for contributions of cash or
actively traded securities
 Nonfinancial contributions (e.g., land) require new FAS 157 concepts to be
applied (e.g., highest and best use) and requires consideration of any
restrictions
PricewaterhouseCoopers
Slide 16
Application to Contributions (Cont.)
 Other considerations:
Most contributions (other than physical assets) will use an income
approach (e.g., present value technique) to determine fair value
Discount rate based on a rate market participants would demand
(e.g., average investment return)
Discount rate should be consistent with terms of contribution
(e.g., 3 year pledge vs. 10 year pledge)
Subsequent periods recorded at net realizable value (not fair
value)
No additional disclosures under FAS 157
PricewaterhouseCoopers
Slide 17
Application to Split-Interest Agreements/Beneficial Interests
If the NPO serves as trustee:
Assets at fair value on a recurring basis, while liabilities are only initially at
fair value
Existing assets in charitable trusts impacted by adoption of FAS 157,
while existing liabilities are not
Two units of account to measure at fair value
Most NPOs will continue to use an income approach (e.g., present value
technique) to determine fair value of liabilities
Most NPOs will continue to use a market approach to determine fair value
of trust assets
No additional disclosures under FAS 157 for split-interest obligations
PricewaterhouseCoopers
Slide 18
Application to Split-Interest Agreements/Beneficial Interests
If the NPO does not serves as trustee:
Charitable lead or remainder interest – Beneficial interest measured at
fair value on a recurring basis
Therefore, existing beneficial interests would be impacted by adoption
of FAS 157
One unit of account to measure at fair value
Most NPOs will continue to use an income approach (e.g., present value
technique) to determine fair value of beneficial interest
Since beneficial interests are recurring fair value measures, additional
disclosures are required under FAS 157
PricewaterhouseCoopers
Slide 19
Application to Pensions/OPEB Plan Assets
 Plan assets are recorded at fair value at each measurement date
Publicly traded debt/equity would generally not expect a
significant impact unless blockage factors or bid/ask policy
decisions are significant
Real estate and other investment may need adjustment
 Liabilities are not recorded at fair value
 No disclosure requirements on sponsor financial statements (because
the net funded status on balance sheet is not at fair value)*
 Full disclosure requirements on plan’s financial statements
• FSP FAS 132R-1 requires similar disclosures to FAS 157
PricewaterhouseCoopers
Slide 20
Application to Debt
 FAS 157 is applicable for required disclosures under FAS 107
 Rebuttable presumption that for actively traded debt, no material
difference exists between a purchase in open market and a transferbased measure
 Follow general liability guidance when determining fair value of non
public / non traded debt
 Incorporate market-based credit spreads/nonperformance risk
 Proposed FSP 157-c may address certain liability considerations
 EITF 08-05 consensus addresses assessment of nonperformance risk
when a debt instrument has a financial guarantor
PricewaterhouseCoopers
Slide 21
FAS 159 - Fair Value Option (FVO)
 Applies only to financial assets and liabilities
 Effective for periods beginning after November 15, 2007
(beginning of the year adoption)
 Election, not a requirement
 Elections can be made on an instrument-by-instrument
basis
 Once made, election is irrevocable
 Fair value determined using FAS 157
 Transition gain or loss is treated as a cumulative-effect
adjustment
 Future FVO elections are limited
PricewaterhouseCoopers
Slide 22
FAS 159 - What Accounts Can Be Considered for FVO Election?



Equity method investments (investments and operating
entities)
Carrying value < fair value = Day 1 realized gain
Difficulties in measuring fair value
Creates volatility in the statement of activities
Promises to give and split-interest obligations
Recordkeeping considerations - update discount rate
annually
Debt and derivatives
PricewaterhouseCoopers
Slide 23
FAS 159 - Disclosures





Rationale for items elected
Line item disclosures of those items that FVO is elected and
related impact on earnings
How interest and dividends are measured and recorded
Identification of fair value measurements on balance sheet
FAS 157 disclosure requirements
PricewaterhouseCoopers
Slide 24
Standard Setting Activities
FSP SOP 94-3-1 and AAG-HCO-1 – Omnibus Changes to
Consolidation and Equity Method Guidance for HCOs
• Eliminates the temporary control exceptions to
consolidation that currently exist for certain relationships
between HCOs
• Sole corporate membership is considered a controlling
financial interest unless control is limited by law or
contractual agreement
• Reaffirms the continued applicability to HCOs of guidance
in certain EITF Issues related to special-purpose entities
that were nullified for entities within the scope of FIN
46/46R
• Effective for years beginning after June 15, 2008
PricewaterhouseCoopers
Slide 26
Not-For-Profit Business Combinations Project
Two separate EDs issued in October 2006:
• Proposed SFAS: Not-for-Profit Organizations: Mergers and Acquisitions
• Proposed SFAS: Not-for-Profit Organizations: Goodwill and Other
Intangible Assets Acquired in a Merger or Acquisition
Project conducted using a “differences-based approach” (i.e., presumption that
FAS 141R and 142 will apply unless unique circumstances are identified that
would justify different conclusions for non-profits)
Issues recently redeliberated:
• Distinguishing a “true merger” from an acquisition (request of additional
comment issued)
• Initial recognition of goodwill / subsequent impairment test for goodwill
• Accounting for intangible assets (i.e., donor lists and donor relationships)
Expected final standard to be released in first quarter of 2009, effective for
2010.
PricewaterhouseCoopers
Slide 27
AICPA - HCO Audit Guide Overhaul
• Project underway for comprehensive overhaul of 1996 Health
Care audit guide
• Health Care Task Force discussing significant accounting
revisions/ new guidance with AcSEC (2004-present)
• Task Force must obtain clearance from AcSEC/ASB to
expose for public comment (expected in 2009)
• Current guide will continue to be updated for conforming
changes (on a more-or-less annual basis) until new guide is
issued and effective
Note: AcSEC’s conclusions discussed do not represent changes to the
GAAP currently contained in the Guide. AcSEC no longer has the
authority to create or modify GAAP. In order to become GAAP, the
proposed changes would require issuance of a FASB standard,
interpretation, or staff position (FSP)
PricewaterhouseCoopers
Slide 28
AICPA - HCO Audit Guide Revisions – Draft Framework
1.
Unique considerations of health
care industry
2.
General auditing considerations
3.
Basic financial statements
(NEW)
4.
5.
6.
9.
Net assets/equity
10. Patient service revenue and
receivables (expanded)
11. Managed care contracts
12. Contributions (NEW)
Cash and Investments (expanded) 13. Reporting entity
14. Continuing care retirement
Derivatives (NEW)
communities
Property & Equipment, Other
15. Auditor’s reports
Assets
7.
Tax exempt financing (NEW)
8.
Insurance and other liabilities
PricewaterhouseCoopers
Slide 29
FSP FAS 117-1
“Endowments of Not-for-Profit Organizations:
Net Asset Classification of Funds Subject to
an Enacted Version of UPMIFA,
and Enhanced Disclosures for All Endowment Funds”
What are UPMIFA and UMIFA?
• Model laws which govern management and spending of
donor-restricted endowment funds
- 1972 -- “Uniform Management of Institutional Funds Act
(UMIFA)
- 2006 – “Uniform Prudent Management of Institutional
Funds Act” (UPMIFA)
• UPMIFA is the “next generation” of endowment laws,
replacing UMIFA
• Laws are enforced by state attorneys general
PricewaterhouseCoopers
Slide 31
UPMIFA now enacted in 25 states & DC
Introduced in 7 others
PricewaterhouseCoopers
Slide 32
Why are such laws necessary?
• One important reason: To provide guidance on what
constitutes “prudent distributions” from an endowment when
donor’s instructions to “expend income, preserve principal” are
less than explicit
Examples
• “Principal must be maintained in perpetuity, but NPO can
spend the income. Income includes dividends, interest
and net appreciation on investments.” – EXPLICIT
• “Principal must be maintained in perpetuity, but NPO can
spend the income.” – AMBIGUOUS
PricewaterhouseCoopers
Slide 33
Overview of the New FSP
• Issued August 6, 2008
• Two major areas of impact
- Provides guidance on the net asset classification of donorrestricted endowment funds in states which have enacted
UPMIFA
• Does not impact “quasi-endowments”
- Imposes new disclosure requirements on endowments of all
NPO (regardless of whether governed by UPMIFA, UMIFA,
or some other regime)
• Effective for fiscal years ending after December 15, 2008
PricewaterhouseCoopers
Slide 34
Important new UPMIFA concepts
1. FSP 117-1 interprets UPMIFA to imply a time restriction on
funds that have not been appropriated for expenditure.
2. Key concept – “appropriated for expenditure”
3. Appropriated for expenditure “is deemed to occur upon
approval for expenditure.”
PricewaterhouseCoopers
Slide 35
Important new UPMIFA concepts (continued)
4. If both time and purpose restrictions exist, NPO must meet
the time restriction (i.e., “appropriate for expenditure”) before
the purpose restriction can be released.
5. If law or governing board interprets UPMIFA as requiring
retention of purchasing power, FSP 117-1 requires PRNA to
be adjusted accordingly.
PricewaterhouseCoopers
Slide 36
FSP 117-1’s Transition Guidance
• Early application permitted
• FSP must be applied retroactively
- Note: UPMIFA law is itself retroactive
• Net asset reclassifications from initial application of the FSP
are a cumulative change adjustment in the year in which the
law is effective.
- Reported in a separate line item, outside of any
operating measures or performance indicators
PricewaterhouseCoopers
Slide 37
Electronic Municipal Market Access (EMMA)
• EMMA is a municipal market version of the SEC’s
Electronic Data Gathering, Analysis, and Retrieval
(EDGAR) system that makes annual, quarterly, and
material events information of SEC registrant companies
publicly available
• Initially, submissions to EMMA would be voluntary;
however, the SEC recently mandated its use to replace
the current vendor-based system
• Effective July 1, 2009
PricewaterhouseCoopers
Slide 38
FSP FAS 132(R)-1, Employers’ Disclosures about
Postretirement Benefit Plan Assets
New disclosures include:
• Fair value of each major category of plan assets (based
on the types of assets held in the plan) as of each annual
reporting date for which a balance sheet is presented
• Nature and amount of concentrations of risk within or
across the categories of plan assets
• Disclosures regarding fair value measurements similar to
those required by FAS 157
Effective on a prospective basis for fiscal years ending after
December 15, 2009
PricewaterhouseCoopers
Slide 39
FAS 161, Disclosures about Derivative Instruments and
Hedging Activities
Effective for interim and annual reporting periods beginning after November
15, 2008, with early application encouraged
Amends/expands FAS 133 disclosure requirements to provide an enhanced
understanding of:
- How and why an entity uses derivative instruments
- How derivative instruments and related hedged items are accounted
for under FAS 133
- How derivative instruments affect an entity’s financial position, results
of operations, and cash flows
Does not change any financial statement presentation and classification
guidance in FAS 133
Encourages, but does not require, comparative disclosures at initial adoption
PricewaterhouseCoopers
Slide 40
FAS 161 – Example Tabular Disclosure
Table 1
Fair Values of Derivative Instruments
As of December 31
Derivatives Reported as Assets
2009
2008
Bal. Sheet
Fair
Bal. Sheet
Fair
Caption
Value
Caption
Value
Derivatives Reported as Liabilities
2009
2008
Bal. Sheet
Fair
Bal. Sheet
Fair
Caption
Value
Caption
Value
Interest rate swaps designated
as hedging instruments under
FAS 133
Other
Assets
XX,XXX
Other
Assets
XX,XXX
Other
Liab.
XX,XXX
Other
Liab.
XX,XXX
Interest rate swaps not
designated as hedging
instruments under FAS 133
Other
Assets
XX,XXX
Other
Assets
XX,XXX
Other
Liab.
XX,XXX
Other
Liab
XX,XXX
Total Derivatives
XX,XXX
XX,XXX
XX,XXX
XX,XXX
Table 2
Derivatives not designated as hedging instruments under FAS 133:
Classification of derivative gain (loss) in
Statement of Activities
Interest rate swaps:
Nonoperating revenue
Amount of gain (loss) recognized in
change in unrestricted net assets
2009
2008
XX,XXX
XX,XXX
Table 3
Derivatives in FAS 133 Cash Flow Hedging Relationships:
Classification of derivative
gain (loss) in Statement of
Operations
Interest rate swaps:
Nonoperating revenue
PricewaterhouseCoopers
Amount of gain (loss)
recognized in the PI
(ineffective portion)
2009
2008
XX,XXX
XX,XXX
Classification of
gain (loss)
reclassified from
below to above PI
Interest income
(expense)
Amount of gain (loss) Amount of gain (loss)
reclassified from below recognized outside the
to above the PI
PI
(effective portion)
(effective portion)
2009
2008
2009
2008
XX,XXX
XX,XXX
XX,XXX
XX,XXX
Slide 41
FASB Codification
• In response to complaints that GAAP is unwieldy and difficult to use,
the FASB initiated a project several years ago to codify and simplify
authoritative private-sector GAAP
• Does not change current GAAP, will eliminate the multiple levels of
GAAP
• In January 2008, the FASB launched a one-year verification phase of
the codification.
• After verification ends, the FASB will finalize the codification and it will
become the single authoritative source of GAAP for nongovernmental
organizations
PricewaterhouseCoopers
Slide 42
Other Hot Topics
• FAS 141R – Business Combinations
• FAS 160 – Noncontrolling Interests
• EITF Activities
• GASB 53 – Accounting and Financial Reporting for
Derivative Instruments
• IFRS Conversion
PricewaterhouseCoopers
Slide 43
Tax Update
Agenda
• Sen. Grassley/ Congressional Scrutiny of Tax-Exempt
Healthcare Organizations/ GAO Report
• The 2008 Redesigned Form 990
• Additional Tax Developments Affecting Hospitals and
Physicians
• Key State/Local Issues
PricewaterhouseCoopers
Slide 45
Sen. Grassley / Congressional Scrutiny - Tax-Exempt Hospitals
• Are hospitals doing enough to justify their exemption from tax?
• Lack of uniformity for defining and calculating community
benefit (including charity care)
• Concern as to whether “community benefit standard” is
sufficient to define a tax-exempt hospital
• Should there be a minimum floor for charity care / community
benefit?
PricewaterhouseCoopers
Slide 46
Do you believe that non-profit hospitals have a duty to provide
care to sick individuals, regardless of their ability to pay? - Key
Findings – PwC HRI 2008 Consumer Survey
Don't know/ don't care 4%
No in all circumstances 4%
Yes in certain
circumstances - 29%
Yes in all circumstances 63%
Source: PricewaterhouseCoopers’ Health Research Institute 2008
consumer survey.
PricewaterhouseCoopers
Slide 47
GAO Report
• Senator Grassley requested report because of concerns that
nonprofit hospitals are inconsistently interpreting and applying
the community benefit standard.
• Report found IRS’s community benefit standard allows broad
latitude regarding what constitutes community benefit.
• Key concerns for consistency are bad debt and unreimbursed
cost of Medicare.
• Schedule H is coming but may leave too much definitional
flexibility.
PricewaterhouseCoopers
Slide 48
Sen. Grassley and Charity Care
• The standard for hospital tax exemption remains under
scrutiny
• Key Proposed Reforms (Staff discussion draft document)
- Development and publication of charity care policy
- 5% minimum annual charity care requirement
- Community needs assessment every 3 years
- Maximum charges allowable to medically indigent who are
uninsured or under-insured
• Sen. Grassley may propose legislation in early 2009
PricewaterhouseCoopers
Slide 49
Interim IRS Report on Tax-Exempt Hospitals and Community
Benefit Project
• Released on July 19, 2007
• Interim report presents data gathered from the responses of
487 hospitals to compliance questionnaire and information
reported on Forms 990.
• Variations in how hospitals report:
- Expenditures in furtherance of community benefit
- Uncompensated care
- Bad debt expense
• Appropriate next steps could include:
- Education and guidance;
- Examinations and/or additional compliance check activity
• Final report anticipated shortly
PricewaterhouseCoopers
Slide 50
IRS FY 09 EO Work Plan and Annual Report – Key Focus Areas
• Annual Report – new initiative to provide statistical information
on the EO division
- Highlights that the IRS has almost doubled enforcement
contact between FY04 and FY08
• Compliance Initiatives
- Charitable Spending Initiative
• Long-range study focusing on sources and use of funds
• Will target organizations with “unusual” fundraising levels
or low programs service expenses combined with UBI
activity
PricewaterhouseCoopers
Slide 51
IRS FY 09 EO Work Plan and Annual Report – Key Focus Areas
• Compliance Initiatives, cont.
- Governance
• Checklist for examining agents to determine whether an
organization’s governance practices impacted the tax
compliance issues identified during examination
• Form 990 governance questions to be used in potential
compliance initiatives, including compensation and
transactions with interested persons
- Issuance of Public Reports from Compliance Checks
• College and University
• Nonprofit hospitals final report
PricewaterhouseCoopers
Slide 52
IRS FY 09 Tax Exempt Bonds Work Plan
• IRS’s Tax Exempt Bonds division (TEB) released its annual
work plan in early December and highlighted section 501(c)(3)
and hospital/healthcare bonds as being at high risk for
noncompliance.
• TEB has allocated additional resources for examinations of
these bonds.
• Potential problems, based upon the results from the TEB
compliance initiative, include:
- Inadequate record retention
- Failure to pay arbitrage rebate
- Substantial private use of facilities
PricewaterhouseCoopers
Slide 53
2008 Redesigned Form 990
• First major redesign since 1979
• Current Form 990 has failed to keep pace with IRS’ tax
administration needs for pertinent information and with the
increasing size, diversity, and complexity of the exempt sector
• The final version of the redesigned Form 990 and instructions
for 2008 were released in December
• Applies for 2008 filing year (tax years beginning in 2008, e.g.
FY ending 6/30/09)
PricewaterhouseCoopers
Slide 54
Structure of the Core Redesigned Form 990
• IRS guiding principles:
Enhancing transparency (additional disclosure, greater detail)
- Promoting tax compliance (motivates change, facilitates
enforcement)
- Minimize burden on filing organization (increased disclosure but
more organized)
• Core Form – (11 Pages) applies to all organizations
• Schedules – (16 Schedules) relevant only to some organizations
determined by:
- Activities
- Financial transactions
- Tax classification under Section 501(c)
PricewaterhouseCoopers
Slide 55
Structure of the Core Redesigned Form 990- Highlights
• Governance – Form 990, Schedule VI
• Compensation – Form 990, Schedule VII & Schedule J
• Hospitals – Schedule H
- Transition relief: for 2008 only Part V required (facility
information)
• Tax-exempt bonds – Schedule K
- Transition relief – for 2008 only Part I required (general
information regarding bond issues)
• Transactions with interested persons – Schedule L
PricewaterhouseCoopers
Slide 56
Structure of the Core Redesigned Form 990Form 990, Part VI – Governance, Management and Disclosure
Section A – Governing Body and Management
- Number of voting members of the governing body (the
number of those that are independent)
- Family or business relationships between officers, directors,
key employees
- Is there contemporaneous documentation of
board/committee meetings
- Was a copy of Form 990 provided to the organization’s
governing body before it was filed?
- All organizations must explain the process, if any, the
organization uses to review Form 990
PricewaterhouseCoopers
Slide 57
Structure of the Core Redesigned Form 990Form 990, Part VI – Governance, Management and Disclosure
Section B – Policies
• Is there a written conflict of interest policy
• Regarding conflict of interest, does the organization regularly
and consistently monitor and enforce compliance - if yes,
explain how
• Is there a written whistleblower policy
• Is there a written document retention and destruction policy
• For any joint ventures with a taxable entity, is there a written
policy to review investments in joint ventures and affiliates,
and have steps been taken to safeguard the organization’s
exempt status with respect to such arrangements
PricewaterhouseCoopers
Slide 58
Structure of the Core Redesigned Form 990Form 990, Part VI – Governance, Management and Disclosure
Section C – Disclosure
• How are the Forms 990, 990-T, and Form 1023 made
available to the public - the organization’s website, other
website, upon request
• Describe in Schedule O whether and how the organization’s
organizing/governing documents (conflict of interest policy and
financial statements) are made available to the public
PricewaterhouseCoopers
Slide 59
Structure of the Redesigned Form 990- Schedules
Schedule J - Compensation Information for Certain Officers, Directors,
Trustees, Key Employees and Highest Compensated Employees
Part I, Questions Regarding Compensation
• Did the organization provide any of the following (check-box reporting)
- First class or charter travel
- Companion travel
- Tax indemnification and gross-up payments
- Discretionary spending account
- Housing allowance or residence for personal use
- Payments for business use of personal residence
- Health or social club dues or initiation fees
- Personal services (e.g., maid, chauffeur, chef)
• Written policies on all of above expenses (if any checked) - if no, explain in
Part III of Schedule J
PricewaterhouseCoopers
Slide 60
Structure of the Redesigned Form 990- Schedules
Schedule J - Compensation Information, continued
• Check-box reporting on methodology to establish compensation of
CEO/Executive Director (compensation committee, independent
consultant, other 990s, written employment contract, compensation
survey/study, board/committee approval)
- Core Form – Part VI - Did process for CEO, Executive Director, or Top
Mgmt Official (other officers or key employees) include review/approval
by independent persons, comparability data, contemporaneous
substantiation
• Receipt of severance or change of control payment
• Participate in or receive payment from supplemental nonqualified
retirement plan or equity-based compensation arrangement
• Compensation paid/accrued contingent on revenues/net earnings of
organization or related organizations
• Other non-fixed payments
PricewaterhouseCoopers
Slide 61
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals
• Goal - Combat the lack of transparency
• Optional for 2008 (except for Part V, Facility Information)
- Best practice - “dry run” or “mock up” even though optional
• The definition of “Hospital” A facility that is, or is required to be, licensed, registered, or similarly
recognized by a state as a hospital, regardless of whether operated directly
or indirectly (through a JV or disregarded entity (“D/E”) taxed as a
partnership)
- Does not include hospitals that are located outside of the U.S.
- Does not include hospitals operated by a separate tax-exempt entity or
taxable corporation (unless part of group return)
PricewaterhouseCoopers
Slide 62
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part I - Charity Care and Certain Other Community
Benefits at Cost
•
•
•
•
Charity Care Policy?
Written?
Application to various hospitals
- For organizations with multiple hospitals
- If organization operates only one hospital, check “applied uniformly to
all”
Charity Care Eligibility Criteria
- Based upon the eligibility criteria that applies to the largest number of
the organization’s patients based on patient contacts or encounters
- Use of Federal Poverty Guidelines (“FPG”) for free care / discounted
care to low-income individuals
- If FPG not used, describe criteria
PricewaterhouseCoopers
Slide 63
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part I - Charity Care and Certain Other
Community Benefits at Cost
•
•
Charity Care and Certain Other Community Benefits Table (Part I,
Line 7)
– Charity care at cost; unreimbursed Medicaid, unreimbursed
costs – other means-tested government programs
– Other Benefits (community health improvement services &
operations; health professions education; subsidized
healthcare services; research; certain contributions)
– Does not include unreimbursed Medicare or bad debt – see
Part III
Reporting of total expense, direct offsetting revenue, net expense,
and % of total expense (no. of activities / programs and number of
persons served optional)
PricewaterhouseCoopers
Slide 64
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part II – Community Building Activities
•
Physical improvements and housing
•
Economic development
•
Community support
•
Environmental improvements
•
Leadership development and training for community members
•
Coalition building
•
Community health improvement advocacy
•
Workforce development
•
Other
PricewaterhouseCoopers
Slide 65
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part III – Bad Debt, Medicare, & Collection Practices
•
Section A – Bad Debt Expense - Requires organizations to:
- Report aggregate bad debt expense at cost
- Provide an estimate of how much bad debt expense, if any, is
attributable to persons who qualify for financial assistance under its
charity care policy (not included in Part I, Line 7 amounts)
• Organizations may use any reasonable methodology to estimate this
amount, such as: (i) record reviews; (ii) an assessment of charity
care applications that were denied due to incomplete documentation
(iii) analysis of demographics, or other analytical methods
- Provide a rationale for what portion of bad debt should constitute
community benefit
- Report whether the organization has adopted HFMA’s St. No. 15
- Provide the text of the bad debt footnote in the organization’s financial
statements
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Slide 66
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part III – Bad Debt, Medicare, & Collection Practices
•
•
Section B – Medicare
- Requires organizations to:
• Describe extent to which any Medicare shortfall (not already
reported on Schedule H) should constitute community benefit
• Indicate which costing method was used:
- Cost accounting
- Cost to charge ratio
- Other
Section C – Collection Practices
- Does the organization have a written debt collection policy?
- If yes, does the policy contain provisions on the collection practices to
be followed for patients who are known to qualify for charity care or
financial assistance?
PricewaterhouseCoopers
Slide 67
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part IV – Management Companies and Joint
Ventures
•
•
List any joint venture or other separate entity (whether taxed as a partnership
or a corporation) of which the organization is a partner or shareholder, or any
management company
- (1) for which officers, directors, trustees, or key employees of the
organization, and physicians who were employed or had staff privileges
with one or more of the organization’s hospitals, owned in the
aggregate more than 10% of the share of profits of such partnership or
stock of such corporation, and
- (2) that either (a) provided management services used by the
organization in its provision of medical care, or (b) provided medical
care, or owned or provided real, tangible personal, or intangible
property used by the organization or by others to provide medical care.
Information includes description of activity and profit percentage/ownership
percentage of officers, directors, trustees, or key employees; the organization;
and physicians
PricewaterhouseCoopers
Slide 68
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part V – Facility Information (Required for
2008)
• Organizations must separately list each “facility” that was
required to be licensed, registered, or similarly recognized as
a health care facility under state law, whether such facility is
operated directly by the organization or indirectly through a
disregarded entity or joint venture taxed as a partnership
• Must also indicate type of facility or describe
• Must list in Part VI the number of each type of facility, other
than those that are required to be licensed, registered, or
similarly recognized as a health care provider under state law
and reported in Part V, for which the organization reports
information on Schedule H
PricewaterhouseCoopers
Slide 69
Structure of the Redesigned Form 990- Schedules
Schedule H – Hospitals, Part VI – Supplemental Information
• Information regarding required descriptions throughout
Schedule H
• Other supplemental information
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Slide 70
Structure of the Redesigned Form 990- Schedules
Schedule K - Supplemental Information on Tax-Exempt Bonds
• Only Part I, description of bond issues, required for 2008 (remaining Parts
optional until 2009)
- Bonds issued before 2003 do not need to be reported
- Bonds issued after December 31, 2002 that refunded bonds issued
before January 1, 2003 need to be listed on Schedule K – but private
business use section (Part III) does not need to be completed with
respect to such refunding bonds or the bonds they refunded.
• Detail on proceeds of each bond issue (Part II)
• Focus on private use for each issue (Part III)
- % of financed property used in a private business use by entities other
than an IRC section 501(c)(3) organization or a state / local gov’t
- % of financed property used in a private business use as a result of
unrelated trade or business activity carried on by the organization,
another IRC section 501(c)(3) organization, or a state/ local gov’t
- Practices / procedures adopted regarding post-issuance compliance
• Arbitrage information (Part IV)
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Slide 71
Structure of the Redesigned Form 990- Schedules
Schedule L - Transactions with Interested Persons
• Part I, Excess Benefit Transactions (current form line 89b)
• Part II, Loans – To and From Interested Persons
• Part III, Grants or Assistance Benefiting Interested Persons
• Part IV, Business Transactions Involving Interested Persons
• An organization must report a business transaction with an
interested person if:
1. all payments during the year between the organization and the
person exceeded $100,000;
2. all payments during the year from a single transaction between
such parties exceeded the greater of $10,000 or 1% of the filing
organization's total revenues; or
3. compensation payments by the organization paid to a family
member of certain persons exceeded $10,000.
- Detail required includes amount and description of transaction
- Use of “reasonable efforts”
PricewaterhouseCoopers
Slide 72
Other Hot Topics – Hospitals and Physicians
Electronic Health Records - IRS Memorandum and Q&A
 Address certain of the federal tax issues associated with
hospitals providing financial assistance to staff physicians
involving EHRs.
 Purpose to provide a directive for handling examination and
exemption application cases involving hospitals that provide
medical staff physicians with financial assistance to acquire
and implement software that is used predominantly for
creating, maintaining, transmitting, or receiving EHRs for their
patients.
PricewaterhouseCoopers
Slide 73
EHRs - Memorandum "safe harbor“
• Sets forth several conditions (the "safe harbor") whereby the
IRS will not treat the benefits a hospital provides to its medical
staff physicians as impermissible private benefit or inurement
in violation of IRC section 501(c)(3).
• Does not apply to a hospital that allows its earnings to inure to
the benefit of one or more medical staff physicians through
arrangements that are other than Health IT Subsidy
Arrangements.
• As an initial requirement, benefits fall within the range of
Health IT Items and Services permissible under the HHS EHR
Regulations.
PricewaterhouseCoopers
Slide 74
EHRs - Memorandum "safe harbor“
• A hospital that is otherwise described in IRC section
501(c)(3) enters into Health IT Subsidy agreements with
its medical staff physicians for the provision of Health IT
Items and Services at a discount ("Health IT Subsidy
Arrangements").
- “Financial assistance" and "subsidy" do not include
cash payments
- Refer to arrangements in which the hospital provides
the physician with EHR-related software or information
technology and training services, and the physician
contributes a portion of the cost.
PricewaterhouseCoopers
Slide 75
EHRs - Memorandum "safe harbor”
• Health IT Subsidy Arrangements require both the hospital and
the participating physicians to comply with the HHS EHR
Regulations on a continuing basis.
• Health IT Subsidy Arrangements provide that, to the extent
permitted by law, the hospital may access all of the electronic
medical records created by the physician using the Health IT
Items and Services subsidized by the hospital.
- Physician may deny a hospital access if that access would
violate federal and state privacy laws or the physician's
contractual obligations to patients.
- Hospital and physician may also agree on reasonable
conditions to the hospital's access.
PricewaterhouseCoopers
Slide 76
EHRs - Memorandum "safe harbor”
• Hospital ensures that the Health IT Items and Services are
available to all of its medical staff physicians.
- Hospital may provide access to various groups of
physicians at different times according to criteria related to
meeting the health care needs of the community.
- Hospital should establish a plan for providing such access.
• Hospital provides the same level of subsidy to all of its medical
staff physicians or varies the level of subsidy by applying
criteria related to meeting the healthcare needs of the
community.
PricewaterhouseCoopers
Slide 77
EHRs - Arrangements inconsistent with the conditions set forth in
the Memorandum
-
-
-
Arrangement will fall outside the “safe harbor.”
Such arrangements will not necessarily generate impermissible private
benefit or inurement.
Memorandum is not meant to set forth the only permissible Health IT
Subsidy Arrangements between hospitals and physicians.
The facts and circumstances of the arrangement will need to be
reviewed to determine if it results in any impermissible private
inurement or benefit.
Q&A Guidance - Assuming the hospital meets of the conditions set forth
in the Memorandum, the agent will not treat such Health IT Subsidy
Arrangement as an excess benefit transaction.
PricewaterhouseCoopers
Slide 78
Other Hot Topics – Hospitals and Physicians
•
•
•
•
•
•
Incentive Compensation Arrangements
Joint Ventures
Practice Acquisitions / Divestitures
Independent Contractor vs. Employee
Medical Resident FICA Refund Claims
Cell Phones
PricewaterhouseCoopers
Slide 79
State/Local Issues
• Multiple state taxes can be sources of tax risk
- Real and personal property taxes
- Sales and use taxes
- Income and franchise taxes
- Abandoned and unclaimed property (AUP) laws in multiple
states in addition to home state must be followed
• Must maintain and defend tax exemptions (note – many states
require renewal of certain exemptions on a periodic basis)
• States are becoming more aggressive with respect to
collecting revenue
PricewaterhouseCoopers
Slide 80
Gwen Spencer
PricewaterhouseCoopers, LLP
Tel: (617) 530-4120
Email: gwen.spencer@us.pwc.com
David R. Merriam
PricewaterhouseCoopers LLP
Tel: (973) 236-4995
Email: david.r.merriam@us.pwc.com
This document was not intended or written to be used, and it cannot be used, for the purpose of
avoiding U.S. federal, state or local tax penalties.
© 2008 PricewaterhouseCoopers LLP. All rights reserved. "PricewaterhouseCoopers" refers to
PricewaterhouseCoopers LLP (a Delaware limited liability partnership) or, as the context requires, other member
firms of PricewaterhouseCoopers International Ltd., each of which is a separate and independent legal entity.
*connectedthinking is a trademark of PricewaterhouseCoopers LLP.
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