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AHLA's Speaking of Health Law
Form 990: What Health Care Organizations Need to Know
Nicholas Kump, Senior Associate, King & Spalding LLP, speaks with Kim Baltz, Director of Tax, Bon Secours Mercy Health, and Zack Fortsch, RSM US LLP (retired), about how health care organizations can navigate the Form 990. They discuss why the Form 990 is important, logistics for completing and submitting the Form 990, key parts and schedules in the Form 990, and requirements after the Form 990 is submitted. Nicholas, Kim, and Zack helped produce AHLA's Guide to Form 990. From AHLA’s Tax and Finance Practice Group.
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Speaker 2:This episode of A HLA speaking of health law is brought to you by A HLA members and donors like you. For more information, visit american health law.org.
Speaker 3:Welcome, everyone. My name is Nicholas Cump , and I am a senior associate at King and Spalding in Sacramento. I'm also vice chair of ALA's Tax and Finance Practice Group. I am joined today by two fellow healthcare industry professionals, Kim Baltz and Zach for welcome Kim. And Zach , did you guys wanna introduce yourself?
Speaker 4:Sure. I'll, I'll go first. I'm Kim Baltz . I'm a director of Tax with Bon Secco Mercy Health. I've been , um, in the healthcare industry specifically now for about nine and a half years. Prior to that, I was in public accounting , uh, where I spent a , a lot of my time providing consulting services in the state and local tax area to the healthcare industry. So , um, I've been working with, with healthcare clients for really the majority of my career now. Um, and in terms of a HLA, I have presented the A HLA tax conference in the past, and I know Nick's gonna go through a little bit of, of what we're planning to cover today, but excited to be here to talk about the Form nine 90 and the A HLA nine 90 toolkit. Um, and, you know, share some of the experiences that we have seen , uh, here within, within our ministry. Zach ?
Speaker 5:Thanks, Kim. Uh , my name is Zach Fork . I am a retired RSM tax partner. Um, prior to retirement, I was the firm's national healthcare tax partner, and I was our Great Lakes region nonprofit tax leader. I am a member of the A HL committee involved with developing the Form nine 90 toolkit, and we hope that you'll really enjoy our presentation during this podcast today. Thanks.
Speaker 3:Thanks, Zach and Kim? Yeah, the, the three of us have been working together since last spring with several other healthcare professionals on a toolkit for A HLA related to the Form nine 90. For those in the audience that , uh, don't know it or aren't as familiar with it, the , the Form nine 90 is the annual IRS filing for nonprofit entities, including, most importantly for today's podcast is , uh, tax Exempt Hospitals. Our toolkit is available on the A HLA website, but we wanted to do this podcast to provide helpful information to people that might not think to necessarily look at the toolkit. Um, with that in mind, we have a couple things we wanna make sure we discuss today. First, A HLA has a broad membership base, so we want to start with what the Form nine 90 is and why it's important to everyone listening to this podcast, not just the tax department. Next, we'll discuss the logistics of completing the Form nine 90, including the departments involved in the different ways hospitals approach it. And then last, we want to provide a high level explanation of some of the key parts of the Form nine 90 and where the tax departments spend most of their time. We hope to make this podcast as helpful as possible for the audience. So audience, please let us know if there are issues you're interested in exploring more. You can reach out to me directly at n comp@kslaw.com . That's my first initial n and last name, p@kslaw.com . And I can share the feedback with my colleagues here and make sure we incorporate the feedback into future podcasts. So, with that, let's , uh, let's dive in. Before getting into too many details of the form, we should try to level set here to make sure everyone's on the same page with what we're talking about. Kim, can you start us off by just telling us what the Form nine 90 is?
Speaker 4:Yes, thanks, Nick. So you mentioned it briefly in your introduction there. So the Form nine 90 is the IRS's primary tool for gathering information about tax exempt organizations. So even though it's considered an IRS tax return, it's really informational , um, in its nature, which is a little bit different than what a for-profit would file in terms of its annual tax return. So the information on the nine 90 being more informational , uh, it will go over information about the , uh, tax exempt organization's policies, its procedures, the governance structures , um, descriptions and narratives around compensation arrangements. And , um, and it doesn't in fact include the, the financials of the organization, but a little bit differently than when you think of a , a tax return, where you, you have an end , um, you know, revenue expenses, and then ultimately what you're paying in tax liability. The Form nine 90 is, is much more informational and robust in terms of policies and procedures. The majority of the Form nine 90 and its supporting schedules are based on narratives that are really telling the not-for-profit story of how it's fulfilling its mission. And Nick's gonna go into some more detail around the importance of the nine 90, but that's really our key takeaway within our tax department. When we're preparing the nine 90, we're telling our story in terms of the mission and how we fulfill that mission .
Speaker 3:Yeah, interesting. Thanks, Kim. So, so which entities much must fill out the form nine 90.
Speaker 4:The nine 90 is required to be filed by most tax exempt organizations. Um, particular those that are, that fall under Section 5 0 1 a , and I know, we'll , I won't get too technical in terms of IRS code sections here, but those , um, organizations that fall under Section 5 0 1 A whose annual gross receipts exceed 200,000 and assets exceed 500,000 are required to file the Form nine 90. That's gonna include any organizations , um, that are recognized under Section 5 0 1 C , which is the most common , uh, non-exempt Charitable Trust and Section 5 27 political organizations. Now, I mentioned some filing thresholds there. Organizations that fall below the annual gross receipts and assets tests , um, are still required to file a Form nine 90, but there's a much shorter, much simpler form if you fall below those thresholds. So they, those organizations may have the option to file a Form nine 90 Easy , or a Form nine 90 N , um, and, and will be required to report quite, quite a bit less of information. So if you're below those thresholds, I would recommend taking a look at those to see if there's some shorter , uh, filing obligations that you may have. The part one through part 12 of the Form nine 90, those sections of the nine 90 are required to be completed by all organizations. Um, and then as you're completing those, those sections, there are specific questions that may trigger additional schedules that need to be completed. So depending on the responses to part four, which is really a yes or no type , um, list of questions, how you respond to those questions is going to open up a requirement to complete other schedules of the nine 90. So a lot of times you would hear individuals reference, you know, parts one through 12, and then schedules A, B, C, D, so on and so forth. Um, so a good example here would be if the organization accepts contributions that exceed 5,000 during the year, there's a question specifically to that on part four. If you answer yes, then it will require you to complete Schedule B about contributions that the organization receives. Similarly, for, for many of those that are listening, if you're, if you operate a hospital facility, a tax exempt hospital facility , um, you would mark that yes on part four, and then it will require you to complete Schedule H. So there's cur certain key sections that are required to be completed by everyone, and then other schedules that are, are required based on your actual activities of the organization. So the, because of that varying nature of the different parts and schedules that are on the Form nine 90, it really involves more departments than just truly tax. Um , so, you know, those, those functions, those answers to those questions, the narratives, the information that has to be reported on the nine 90 Go Beyond finance, they go beyond tax. And so , um, it's, it's really a lot of an information gathering exercise , um, to again, kind of tell that not-for-profit story of how it fulfills its mission, how it manages its policies and procedures , uh, and how it , uh, ensures that we're giving back to our communities.
Speaker 3:It definitely sounds like the type of form that a , a lot of entities are going to be having to file. Uh, Zach , can you tell us why this ends up being so important?
Speaker 5:Yes, thank you, Nick. Um , the , the reason why it's so important is tax exempt hospital organizations fulfill their compliance requirements by filing their Form nine 90 on an annual basis. The organization's Form nine 90 is also a public document that can be viewed on Internal Revenue Service website utilizing the tax exempt organization search tool. So really, the entire public can see your nine 90. Um, it's extremely important that the Form nine 90 be , um, complete and accurate. Like I said, everyone could see it. So if there's a mistake in the nine 90, others will see those mistakes. The annual filing can be reviewed by regulators such as the Internal Revenue Service, the Federal Trade Commission, if you're involved in murders and acquisitions with your hospital organization, along with State Attorney Generals. The Senate Finance Committee, along with the House Ways and Means Committee have taken a continual interest in the hospital sector and the Form nine 90. And then the media, including the LA Times, New York Times Wall Street Journal in the Washington Post have published numerous investigative stories about the hospital sector and often look at an organization's form nine 90.
Speaker 3:No one wants to be on the , uh, wrong side of that investigation or, or one of those articles <laugh> , uh, that's for sure. But, so now that we're sort of talking the same language about what the Form nine 90 is and, and why it's important, I want to shift into sort of how we go from zero to a complete form at the, at the end of the year. Kim, can you describe sort of how you've seen different structures and how the structure where you work at , uh, for completing and submitting the Form nine 90?
Speaker 4:Sure, Nick . So Bon Support , mercy Health is a complex healthcare organization. We have operations in multiple states. Um, we're filing over 40 form nine ninety's per year, but we have hundreds of different legal entities within our legal structure. Uh, the 9 99 nineties are gonna include activities of more than 35 hospitals. Most of those are wholly owned . We also have joint venture hospitals. We have thousands of physician practices within our medical group. We operate urgent cares surgery and imaging centers. We have a , um, main foundation with market level foundations and more. So there's really a lot of information , uh, a lot of different activities that are going onto our various form nine nineties . So our tax department, we currently have six people within our department, and we prepare all of the Form nine nineties internally within our group. Uh, and then we have a , uh, paid prepare review certain nine nineties and , um, sign those as a paid prepare . So, because we have so many different Form nine nineties , and the information that's going into those nine nineties really is pulling from so many different departments, it's really incredibly important that we have a preparation schedule where we outline kind of our timelines and both our internal and our external due dates. Uh, so we use an external , um, uh, public accounting firm, like I mentioned, to review those more complex returns. And we look at those , um, in terms of the steps that are going to be needed to, to prepare the return to the , prepare those various schedules and parts of the Form nine 90. So Zach mentioned, you know, that those , um, some of those returns are gonna be more highly scrutinized by the public, by the media, or by the stakeholders. And so there's key sections of the nine 90 that we're gonna talk about later that we spend the majority of our time on that we might have a little bit more of a focus on. Um, but we wanna make sure that we're giving ourselves enough time for all of the various steps to complete the nine 90 on a timely basis. So, you know, we talked about it's got distinct parts, it has distinct schedules. Many of those can be broken down and separated in terms of their preparation process. It's not like a , um, a , you know, a normal for-profit income tax return, where you really need to complete it from start to finish , uh, on the nine 90. Each of those parts and schedules can be separate and distinct. So our time , our team is gonna prioritize the preparation of those parts and schedules that drive from information that cross all of the nine nineties . Uh, we also prioritize those sections that have higher importance or higher risk to the organization. We'll talk about some of those later in this podcast as well. But some examples are the governance policies and procedures , um, that are being reported on part six, the identification of the individuals who are going to be disclosed and their compensation is gonna be disclosed on part seven and Schedule J. And then even Schedule H, which , uh, many of our listeners are, are interested in here around community benefit and 5 0 1 r compliance necessary for our tax exempt hospitals. So each of those sections of the nine 90 really can be prepared , um, kind of in individually. And so we have certain people within our team who specialize in some of those areas. And so we might break down the preparation of the nine 90 , uh, across our team members based on their expertise and skill levels. Um, so you , that also allows us to have the same person preparing all of the compensation disclosures or the same individual or team members that are preparing all of our Schedule H disclosures. And it allows us to make sure that we are kind of standardizing our responses and that we're looking at the information holistically across the entire ministry and across, across all of our nine 90 that we're preparing. So there's lots of information sharing here , sharing , um, and we really need to understand, you know, what the information is that we need from each department. And then, you know, within our team, kind of set deadlines to make sure that we're maintaining , um, you know, the timelines for the completion of the return.
Speaker 3:Y yeah . On that line about the timeline, can you give us a little more detail about , uh, how the sausage is made, so to speak here? Do you , you start with a , a baseline calendar for the filing and then work your way back? Uh, is there a , is there a master spreadsheet that you have where all of the pieces are included and then, you know, the , the people who are accountable are filled in and there's someone overseeing everybody's work?
Speaker 4:Yeah , so we do use a , uh, what I'll call kind of a master filing tracker spreadsheet. Um, we had, you know, several years ago looked into trying to, to find some technology for this. And there are tools out there that can help with workflow and timelines. Um, but we still use good old fashioned Excel to really track our , um, our deadlines here. But we have each of our nine nineties that's listed out. And the primary driver of the preparation calendar and timelines is really gonna be based on our board cycle, which of those nine ninety's are going to be reviewed in detail , uh, with our board members at one of their board meetings, and what are the meeting dates between when we start the preparation process and when the nine nineties are due. And so that becomes kind of our starting point. And then we work backwards , um, you know, through those kind of various sections of the nine 90 to figure out what the timelines are that need to be completed. And so a great example of this is our , um, our largest of our tax , our returns for Bon Support , mercy Health. We take that to one of the committees that's been delegated the authority to review and approve the Form nine 90 that board meets in August. And so then we look at, you know , okay, when are materials due? How long do we need to make sure that our paid preparer has time to review the nine 90? How long is it going to take to gather the information for the various reporting sections? And when is that information even available? Because sometimes that can factor into our timelines as well. And so , um, we really have to work very closely with the board, the various committees that are tasked with reviewing it, our governance teams and all those other departments to understand , um, the dates and when things are available so that we can track the timelines appropriately. But we are doing that through, through Excel.
Speaker 3:You , you mentioned technology. Do you use any sort of software to complete the Form nine 90? Or is there a share drive that , uh, that you're using there?
Speaker 4:Yeah , so most of the nine nineties , um, these days are required to be filed electronically. So we are using software to prepare the nine 90. We currently use what's called nine 90 Tracker. This horse historically called C Track . Um, it's a tool that is, is provided by K one X, but there's several different software providers for preparation of the Form nine 90 that could be available. Uh, so we prepare the nine 90 within that software, but we maintain an internal share drive where we're , um, keeping all of our work papers, our supporting documentation, any memos to the file, the PERM documents , um, or any other relevant information. And really, it's a , a best practice to make sure that you're maintaining documentation on , um, you know , uh, policies, procedures, how you're gathering the information within our group, we, we use the, you know, someone wins the lottery , um, and they're no longer here tomorrow. Do we have the proper documentation in place where we know why we made certain decisions, why we took certain positions on a return? How did we get that information? And we maintain all that , uh, internally on our shared drive.
Speaker 3:Thanks, Kim. So, so that's the in-house tax department perspective, Zach , how does that compare with what you've seen working on the preparer side?
Speaker 5:A lot of things are, are similar, I would say. Um, I agree with approach that Kim's organization utilizes to ful fulfill their tax filing requirements. Whether you are a large complex organization like Bonds , KERS , mercy Health, or a community-based hospital, every year should start with a plan. And the plan starts with the filing, the filing date. Most of the clients I dealt with were community-based hospitals or smaller health systems. We would develop work streams for each of these clients who make sure that the Form nine nineties were complete, accurate, and filed on a timely basis. For many of our clients, we were the tax department for some of our other clients, they would prepare the Form nine 90 and we would review and sign the tax return , um, similar to some of some of the returns that Kim's responsible for. In this instance, we would spend most of our time on the key areas such as Schedule H, J , K, and L and the related core parts of the return. We view these schedules as higher risk in terms of the organization and then, you know, in, in terms of how the public sees the organization. Um, our larger health systems often prepare the Form nine 90 and have outside accounting firms review for signature. One client that I did work with, they rotated the returns we would review on an annual basis so that you wouldn't , um, so it , it was a little bit, you wouldn't rely and do the same thing every year. They just wanted to change it up. So that , that's, that's one client i I worked with. They would prepare the returns and they would select the returns we would review on an annual basis.
Speaker 3:Are there any parts that are more often completed by the prepare that you've noticed in, in your work?
Speaker 5:I would say if, if we are on the outside accounting firm, we're pretty much preparing the whole Form nine 90. Usually based on , um, the information that the , the clients give us, we prepare the Form nine 90 and all the related schedules. Typically we would have, we, we would establish a timeline, we would prepare, they would review first review, we would update second review after the second review by the client, then we would go final. So that's typically how we would, but if we're preparing and signing the return, we're preparing the whole form, the all the core schedules, and also the core form nine 90 .
Speaker 3:Yeah, that makes sense. Thanks Zach . So now that we have sort of a, a basics of who's involved in the Form nine 90, what the Form nine 90 is at a high level, I want to shift gears and talk a little bit more about some of the more specific parts. We touched on it earlier, but the Form nine 90 is, is a large form with many sections and schedules as detailed in, in the toolkit we put together. This podcast could last for hours if we talked about , uh, <laugh> , all of those. So there's a couple key parts and schedules that we wanna make sure that we, we cover today for the audience and highlight. So we want to talk about first part six on the main form which relates to governance. And then we also want to go through Schedule H, which is the schedule for non-profit hospitals. One of the most important for this crowd , uh, part seven on the main form and Schedule J, which both relate to compensation. And then three more schedules that we're going to cover , uh, schedule K on tax exempt bonds, schedule L transactions with interested parties, and then Schedule R related parties. So with that roadmap , let's , uh, let's dive in and start with part six on the main form, Zach , we're starting with part six even before Schedule H for hospitals. So this must be a pretty important part of the form to start there. Can you explain to us why part six is so important?
Speaker 5:Uh , part six is a , is the governance , uh, section of the Form nine 90. And you know, I view it as one of the more important parts of the return that requires a constant focus , uh, of the organization. And it is a focus for regulators as well. It usually doesn't stay the same every year. Um, the mantra at Internal Revenue Services, a well-governed organization is a well run organization in order to get this form correctly or this part correct, we will often rely on, in-House general counsels , uh, external counsel to give us updates. We review narratives , uh, supplied by the client, and we review audit and finance committee minutes to determine if there are any changes in governance that should be disclosed on the Form nine 90 .
Speaker 3:Jim , anything to add from the, the in-house perspective on the, on the importance of part six and the in governance?
Speaker 4:I agree with everything that Zach has said. You know, we view this as a very important schedule as well because it really outlines, you know, a lot of our policies and procedures and how the organization is governed and managed. Um, and so we are working with our governance teams internally, just like Zach mentioned when he was working with clients. Um, but we're working with the governance teams to really look for any changes that are occurring throughout the year. Uh, so our governance teams are responsible for tracking any changes to the organizing documents. Uh, so they provide us with a summary of those changes , uh, throughout the year, no matter how small. And that allows us the opportunity to review those changes to determine if they rise to the level of a disclosure on the Form nine 90, or if there's any, any potential changes , um, that could impact our tax exempt status as well. So , um, you know, we really wanna stay well connected with our legal teams , uh, our compliance teams, the internal audit, and the , the human resources teams so that when it comes time to complete those narratives on part six and identify if there were any changes , uh, that were reported in a prior year, that we've really already talked through those changes. So we know how those are gonna impact the Form nine 90. So we will hold quarterly meetings , um, or, you know, share things through email so that we all know, you know, what changes have occurred and how that could potentially end up on the forum nine 90. And then, you know, what will that look like? What will the perception of that change be from, you know, a public perception from the legislators that are looking at our forum nine nineties . You know, is there any risk there on how those changes might be viewed? And so again, our goal is really to have addressed all of those items throughout the year as they're happening versus finding out about them when they're actually preparing the nine 90
Speaker 3:Mm-Hmm, <affirmative> . Okay. So moving from governance , uh, to Schedule H. This one I find easy to remember 'cause hospitals starts with H <laugh> , but Kim can, can you tell us what the importance of this Schedule H is?
Speaker 4:Yeah , so Schedule H for us is extremely important. Probably , um, you know, this in compensation are really our, our top two areas that we spend , uh, when we're preparing our Form nine nineties for our tax exempt hospital. So the Schedule H is required to be completed by any tax exempt hospital, and it really touches on the community benefit standard, which is a huge standard for Texas exempt hospitals. And that standard is looking at whether or not the hospital is organized and operated for the charitable purpose of promoting health. That's how we get our tax exemption. And so Schedule H really focuses on that , uh, in an effort by the IRS to make sure that we are , um, providing enough community benefit to justify our tax exempt status under that community benefit standard. Um, and so Schedule H is gonna provide information on the activities and the policies of the hospital facilities that covered by the filing entity, and then validate whether it's providing enough Ben benefit to the community to support , um, again, that, that charitable purpose of promoting health. So this section is gonna provide information , um, not only on our community benefit in terms of the, the dollars that we are, that we are providing to the community, but it also , uh, provides information regarding the hospital's financial assistance and billing and collection policies, the Community health needs assessment , um, and the implementation plan in terms of how we are putting into strategy, putting into action, how we're addressing those significant needs that are identified through that Community Health needs assessment. Those are all requirements under Section 5 0 1 R of tax exempt hospitals. And so there's , um, you know, several questions, several sections , uh, addressing how we are implementing those 5 0 1 R requirements. And the IRS is using that to verify compliance. Um, so the IRS will do desk audits, they'll do field audits where they're actually looking at these public documents, they're looking at our websites to make sure that at least based on how we're, we're completing these schedules on the Form nine 90, that we appear to be within compliance. So it's incredibly important to make sure that we're responding to those questions correctly. So I mentioned , um, the Schedule H reports, the community benefit dollars, that includes the gross, the offsetting revenue, and then the net community benefit dollars, and as well as the percentage of community benefit dollars as compared to total expenses. And that percentage is really highly referenced when you're looking at peer-to-peer comparison or our federal and state legislators, the IRS or other key stakeholders. Uh, when they're looking at Schedule H, they are really looking at that percentage. Again, are we doing enough to justify our tax exempt status? Are we fulfilling our mission by promoting , um, health, you know, and , and in a charitable manner within our, within our , uh, communities that we serve?
Speaker 3:That percentage and community benefit reporting has been in the news in in recent years, and a a focal point sometimes for regulators and legislators on hospitals nonprofit status. How has that community benefit reporting sort of changed and evolved over the years, if , if at all?
Speaker 4:That's a great question. So while there hasn't been a change in recent years on how or what information is reported on Schedule H, the form itself , um, really hasn't changed significantly. There's minor tweaks, you know, in the instructions here and there , um, on the forms themselves. But really where the change has occurred has been the significant increase in the focus on what amount of community benefit is being reported and whether, again, whether we're doing enough to justify the tax benefits that we receive by being tax exempt . Since the four 90 is open to the public, this really emphasizes the importance of capturing all of our community benefit , um, whether that is quantifiable , um, or, you know, whether we include that in the narratives about the things that we are doing as tax exempt hospitals. It really puts that increased focus on making sure that we are communicating those things. And again, telling our story. That's kind of, I keep going back to that, but that's really what this is all about, telling our story, what are we doing to, you know, benefit the community to promote health within our communities. There's also an increased focus on those Section 5 0 1 R policies, the financial assistance policy, the billing and collection policy, how aggressive are our hospitals being in their collection practices? That's really been a focus , um, of, you know, the, the media. Um, there's been a lot of journal articles about , um, hospitals taking extremely aggressive collection actions, not making their financial assistance policies known, not allowing patients to apply for financial assistance before sending them to collections or engaging in a , any of the extraordinary collection actions, legal actions, et cetera. So , um, again, the, the, while the meat of Schedule H itself hasn't changed, it's really that focus and that , um, importance on how we're answering these questions and the amount of detail that we're including in our narratives. Um, because those are going to be reviewed, they are gonna be picked up, you know, by, by the media and by our peers. So because of this, we really do recommend working closely with revenue cycle reimbursement, community health re mission departments, any other departments that could have , um, an impact on what's reported on Schedule H uh, or any other groups that are involved in capturing community benefit. 'cause that's not always done by finance, by the community health leads. You know, there's a lot of different people that are touching the programs and the strategies that are counted as community benefit. And so it's, it's really important to make sure that, that everyone is working closely together to capture that. We also, one other point I wanna make here is that we also work closely with our public relations and communications department on the information that's going to be on Schedule H , so that they can prepare responses in advance of any questions that might come in , um, from the public, from our peers, about the information that we're reporting on Schedule H. So again, that they're kind of aware and ready to respond , um, based on, you know, the trends that we're seeing and the increased focus on community benefit.
Speaker 3:That's a good point about public relations. My prior career, I , uh, was in the public relations field, so it's always good to hear that there's a priority on having them , uh, have a seat at the table. Um , but I think we , we can all talk about Schedule H all day on this, but moving us along to the next part here , um, I want to talk about part seven and Schedule J related to compensation. Kim, can you tell us about how those two pieces are related?
Speaker 4:Yeah , so part seven of the Core nine 90 , um, and then Schedule J, they're two distinct schedules, but they're really heavily connected to one another. The information really kind of feeds from each other. So part seven of the core part of the nine 90, again, that is required to be completed by all tax exempt organizations , um, requires organization to list by name, you know , report compensation paid to its current and former officers, directors, trustees, key employees, and the highest compensated employees, as well as any and payments to your top five independent contractors. Um, so, you know, I mentioned that part seven is required to be completed by everyone in contrast Schedule J is, is , um, not always necessary to be completed. And so I would again, kind of encourage organizations to look at the rules and the requirements around when Schedule J is required to be completed. Because this section, this schedule really contains questions about the organization's executive compensation practices and policies. So the IRS is going to use that schedule to assess the risk that an organization has engaged in an excess benefit transaction. And what does that mean? Well, we're , the IRS is really looking to see, did the organization pay compensation to a disqualified person, one of those people that is reported on part seven. Um, and those, again, those terms are, are defined in the instructions and within our toolkit, but did the organization pay compensation to one of those identified individuals that exceeds the service that that person provided to the organization? So are we paying that individual too much? Are we paying them too much above what they're providing , uh, for the organization? Any, any compliance issues with an excess benefit transaction that can jeopardize an organization's tax exempt status? And so , um, many of the questions that are on Schedule J are providing the IRS insight into what our policies and procedures are around how we determine compensation for those identified individuals and whether there's a risk , uh, that we would've engaged in an excess benefit transaction. So Schedule J is incredibly important. Um, again, these sections are areas that, that , um, are highly scrutinized, you know, and picked up, you know, when in media coverage. Um, so you know, the, the differences between the forms, you know, they are connected to each other. Part seven is going to summarize compensation paid to those individuals, whereas Schedule J is gonna break that down into various components, detailed categories like base compensation bonus, other reportable compensation, deferred compensation, and non-taxable benefits. And those terms are all defined in the instructions. Uh , there's actually a great table in the instructions to the Form nine 90 that outlines many of the common types of compensation and which bucket those really fall into. Uh, and it is important there to make sure that you are bucketing the compensation correctly. Um, so that way when individuals, you know, when somebody is picking this up and looking at, but the bonus column for an , for example, that you're not including something as bonus that really shouldn't be there because that's one that, that , um, our peers and the media are especially interested in. So the completion of those sections, it can be quite time consuming. There's a, a significant amount of information that needs to be gathered. It's not just the amounts that are reported on your W2, you know, I mentioned your deferred compensation, your non-taxable benefits. Some of those items, you know, could include contribu deferred contributions into a 4 57 cert plan. It could be a long-term incentive plan. You know, there's lots of different types of deferred compensation plans that organizations will use to incentivize their key employees. And so , um, you need to be aware of some of those contributions and, and things that are, are being offered to those individuals that aren't reported on your W2, and those fall into those other buckets. So , um, you have to again, work closely with other, other people in HR and executive compensation teams to make sure that you're aware of what all you know is being offered to your , uh, your executives and those individuals that are, are going to be disclosed on the nine 90. So in the nine 90 toolkit, we've outlined several items that should be considered , uh, and potentially be available to you as you begin kind of the preparation of, of both part seven and Schedule J.
Speaker 3:Yes, that's right. The toolkit has even more detail on, on all of these issues. Um, I wanna move on next to some of the, another couple schedules that are important for us. Um, Zach , can you tell us about Schedule K, which relates to , uh, tax exempt bonds? What is Schedule K?
Speaker 5:Uh, schedule K is is required to report detailed information on an organization's tax exempt bond borrowings, where there's an outstanding principle in excess of a hundred thousand dollars, and that was issued after December 31st, 2002. Um, we generally know there are changes required to the schedule , um, and it's usually disclosed in the annual financial statements where, where there's a new tax exempt bond offering. So we, we know that the, there's a new tactic and bond offering. It's usually disclosed in the financials and that we're going to have to update Schedule K. I would, I would say this schedule itself is probably one of the most technical forms in the nine 90. And , and our clients, and , and we prefer this, our clients usually re rely on bond counsel to review the responses in the schedule, along with relying on outside consultants to assist on reporting for private business use or arbitrage. So we view this as a , another high risk schedule that requires a number of eyes on the schedule itself to make sure that it is technically correct and also accurate.
Speaker 3:Yeah, tha thanks Zach . Another important schedule is Schedule L related to transactions with interested parties. Kim, what's the purpose of this schedule?
Speaker 4:Schedule L is used to report business transactions or financial arrangements between the filing organization and then any disqualified person. So I think of this kind of like your conflict of interest type schedule. Um, you know, are there any transactions between a disqualified person? So that's gonna include any current or former officer, director, trustee, or key employee. Um, those are the individuals that are listed on part seven, but it goes beyond just those individuals that are identified on part seven. This, the , um, business transactions or financial arrangements with disqualified persons includes those people, but it also includes family members of any person that's listed , uh, or any substantial contributor to the organization that is required to be disclosed on Schedule B , um, for contributions exceeding a certain dollar threshold. And then any entities that are controlled at least 35% by one of the individuals or the organ , other organizations that we've identified. So it goes beyond just the individual and looks at their family members , um, or, you know, ownership, interest investment activities, things like that, that those individuals could be engaged in. So tax exempt organizations are required to make a reasonable effort to identify any transactions that may require disclosure. Um, and so, you know, the most common effort that we see here is an annual questionnaire that we're distributing to members of the governing body and any individual who is gonna be disclosed on part seven that meets those requirements. Um, and looking at the responses of those to determine if there is a potential disclosure needed. There are other ways to do that. Um, and we, again, we've outlined some of those recommendations in the toolkit, but the most common is that questionnaire , uh, we get the question a lot, you know, what happens if somebody doesn't respond? Well, the tax exempt organization's requirement is to make that reasonable effort. It's not to ensure a hundred percent compliance. And so, you know, while it's incredibly important to do that , um, and the organization to should take steps to try to get to a hundred percent response, that doesn't always happen. So for us, internally, we're gonna send that questionnaire. We're gonna follow up with individuals who haven't responded. We're also gonna work with our governance teams to see if there were other conflict of interest or other types of questionnaires and disclosures necessary for individuals to sit on a particular board. Um, and we're gonna gather all that information to determine what potential disclosure disclosures there might be.
Speaker 3:Thanks, Kim. Last one more schedule that we want to talk about here. Uh, schedule R related to , uh, related parties. Zach , what's the purpose of this schedule?
Speaker 5:Uh, schedule R is used to report the organization's related organizations in unrelated partnerships. In addition to reporting transactions between related organizations , uh, it's, it's important to understand how they define a related organization and also unrelated partnerships. You could have an unrelated partnership such as a joint venture, but it still may be require reporting on this schedule. I kind of look at this schedule, schedule R as a roadmap for the Internal Revenue Service to use for audit purposes. It gives them a better understanding of the organization structure and the transactions that are going on within the organization itself. Um, when we're preparing Schedule R, we usually take a number of steps to make sure it is prepared accurately and completely. Um, we ask for the organization's organization chart at the end of the year, compare it to last year. We review the audited financial statements for changes in entities during the year, and we also request from our clients a listing of transactions between related parties that is, that is supplied by them. Um, again, it's up to, in terms of preparing this schedule, it's important to understand the definition of related organizations and how transactions between related organizations may or may not be subject to unrelated business income tax.
Speaker 3:Thanks, Zach, that that covers what we have time for today in terms of the key parts in the schedules. But once a form is complete and submitted for the year, that isn't the end of the story. Um, is Kim, is there a requirement that the Form nine 90 be publicly available?
Speaker 4:Yes. So exempt organizations are required to make the Form nine 90 available for public inspection for a three year period. So, you know, Zach had mentioned , um, earlier in the podcast that the returns are available on their IRS website. Um, you can also access those through various public databases like GuideStar and ProPublica are the two that I hear referenced the most often. Uh, but there can be a lag time from the time that the nine 90 is filed to when it's available , uh, through the IRS or through one of those public sites. So we do from time to time, get a request to provide copies of the nine 90. Uh, we are required to respond to those requests. You're required to respond immediately if it's, if it's requested in person and within 30 days from any written requests. Uh , organizations are not required to post a copy on your website. So that's really a business decision on whether you want to do so. Um, at Bon Mercy Health, we do not post them on our website and instead would respond when they're requested. Uh, it's also important to note that , um, not only is the nine 90 open to public inspection, but taxes exempt hospitals have additional requirements for under Section 5 0 1 R for posting their financial assistance policy, the billing and collection policy, the community health needs assessments, and all of those other various documents that are related to those , um, that we kind of discussed when we were talking about Schedule H. All of those documents must be posted on a hospital website and available to the public as well. So it goes beyond just the form nine 90. But yes, you are required to make that the nine 90 available to the public.
Speaker 3:Uh , Zach , aside from, you know, making the form available online, what other steps are taken with regard to the Form nine 90 after it's submitted that you've seen?
Speaker 5:I I , I think the , probably one of the most important steps is to ensure that the final version of the Form nine 90 is retained in the shared tax directory. Um , the filing copy is locked down along with the corresponding work papers. Um, tax returns and work papers should be also retained in accordance with your document retention and destruction policy. And there is actually a question in the Form nine 90 about document retention and destruction , uh, for one of our clients that I've worked with, internal audit performed procedures to make sure that the filing copies of all tax returns were locked down and final work papers that were used for the returns were retained and were initialed by the preparers and the reviewers. So that was , so that was an additional step that we've seen internal audit due at large complex healthcare organizations.
Speaker 3:Thanks, Zach . I think that takes us to the end of our program today. So I want to thank the guests, Zach and Kim for joining us. Um, we covered a lot of ground today, starting with the basics of the Form nine 90, who completes it, why it's important to everyone affiliated with the tax exempt hospitals, not just the tax department. You can learn more about all these issues through the Form nine 90 toolkit , which is available on the A HLA website. And if anyone is interested in a deeper dive into any of these issues we've discussed, please reach out to me as mentioned at the beginning, my email is nk mp@kslaw.com . We hope you've enjoyed the podcast and look forward to hearing from you all. Thank you everyone for listening.
Speaker 2:Thank you for listening. If you enjoy this episode, be sure to subscribe to a HLA speaking of health law wherever you get your podcasts. To learn more about a HLA and the educational resources available to the health law community, visit American health law org .