Several provisions of the Senate Finance Committee's long-anticipated federal nonprofit oversight legislation have begun to emerge with Tuesday's approval by the Senate Finance Committee of the Tax Relief Act of 2005. Two of the related "charity reform" provisions have direct implications for nonprofit, tax-exempt hospitals and health systems. One such provision would require large nonprofit organizations, with assets over $10 million, to obtain a certification from its outside independent auditor that its Form 990 filings accurately reflect the organization's unrelated business income tax liability for the taxable year. This could create a new and potentially expensive and burdensome obligation for many hospitals and their parent organizations. Another such provision would require some nonprofits, like health system parent organizations, to pay the greater of 5% of their asset value or 85% of their income to the organizations they support and would also limit the ability of the parent corporation to own for-profit subsidiaries. Absent any subsequent exception to this proposal, some health care systems might be required to reorganize their current corporate structure to minimize the effect of payout requirements and/or restrictions on owning for-profit businesses.
The catalyst for many of these provisions is a desire to respond to perceived abuses by charitable organizations, particularly those involving what are known as "Type III" supporting organizations. These new proposals are consistent with previous comments and suggestions from the Finance Committee and its chairman, Senator Charles F. Grassley. To a certain extent, they also reflect related recommendations made this summer by the nonpartisan Panel of the Nonprofit Sector in a report prepared for the Finance Committee. According to comments made within the past several weeks by Senator Grassley, other charity reform proposals (possibly including those relating to nonprofit governance and executive compensation) may be released in the near future.
Nonprofit hospitals and health systems should be prepared to monitor these emerging new charity reform proposals for their possible application to the health care industry.