Tax News & Views: Health Care Edition

Analysis

Tax News & Views: Health Care Edition

October 2021 | Vol. 12 No. 85

Tax News & Views: Health Care Edition is a timely news summary bulletin authored by the Health Care Industry Group, Deloitte Tax LLP. The newsletter contains highlights from the latest tax developments in health care on Capitol Hill, at the White House, at the Internal Revenue Service, at the Treasury Department and in the courts. It is a valuable resource for tax and other professionals involved in the tax-exempt health care providers and health plans sectors, helping them remain current on tax developments that stand to have an impact on their businesses.

Disaster Relief Payments

In the wake of natural disasters and COVID-19, organizations that want to make disaster relief payments to employees may wish to utilize an existing charitable entity or set up a new disaster relief organization. Employers, charities, and governmental agencies are able to make disaster relief payments to individuals affected by disasters. This article provides a high-level summary of some tax considerations for charitable organizations that wish to make disaster relief payments. The article is not meant to be all-encompassing but provide some general perspective of exempt organizations making disaster relief payments. Employer-sponsored exempt organizations can be formed as public charities, private foundations or donor advised funds or existing organizations mad be utilized. Each type of exempt organizations has its own considerations and this article will focus on general considerations for making disaster relief payments.

Section 139 provides that gross income shall not include any amount received by an individual as a qualified disaster relief payment. A qualified disaster relief payment includes amounts paid to an individual that are designed to reimburse the individual for the individual’s expenses incurred as a result of a qualified disaster. A qualified disaster is defined under IRC section 139 as a disaster that:

  • Results from a terrorist or military actions,
  • Results from an accident involving a common carrier,
  • Is a Presidentially declared disaster, or
  • Is an event that the Secretary of the Treasury determines is catastrophic.

Disaster relief payments may be provided to individuals or businesses. Pursuant to IRC section 139, organizations may make qualified disaster relief payments to current employees and other individuals that are tax-free to the recipient. Qualified disaster relief payments include reasonable and necessary expenses due to a qualified disaster for personal, family, living or funeral expenses, expenses incurred for repair or rehabilitation of a personal residence, and expenses incurred for the repair or replacement of contents of a personal residence. Some examples of aid that may qualify as disaster relief payments include:

  • Medical supplies, medical insurance contributions, co-pays, medical testing;
  • Hospitalization and medical care (outpatient, in-home, urgent care, etc.);
  • Counseling/therapy expenses;
  • Funeral expenses;
  • Incremental childcare expenses;
  • Cleaning supplies and personal protection equipment;
  • Expenses incurred as a result of self-isolation or quarantine, either for self or as caretaker;
  • Expenses due to transportation alternatives required/in connection with COVID-19;
  • Aid to individual business owners who are financially needy or otherwise distressed;
  • Payments to businesses to combat community deterioration,; and
  • Payments to businesses to lessen the burdens of government.

Qualified disaster relief payments exclude payments for expenses covered by insurance or other reimbursements, income replacement payments, or nonessential, luxury items.

Organizations providing disaster relief payments must follow procedure in order to determine that recipients of disaster relief payments are needy or distressed. Payments cannot be made merely because an individual was in a disaster area. An organization needs to have a process in place to substantiate the payments that are made and follow certain qualification criteria. This qualification criteria for grants to individual employees from an employer-sponsored charitable organization must include:

  • A determination that the group of recipients is large and indefinite (e.g., applicable to current and future employees) in order to establish a charitable class;
  • The recipients must be selected on an objective determination of need; and
  • The selection of recipients must be by an independent selection committee, or adequate procedures are put in place to ensure that any benefit to the employer is incidental and tenuous. The selection committee is deemed to be independent if a majority of the members are not in a position to exercise substantial influence over the activities of the employer.

In addition, organization must document for its records the disaster relief payments made. The documentation to substantiate the charitable purpose of the relief payments to employees should contain the following information:

  • A description of the assistance provided,
  • Any costs from providing the assistance,
  • The charitable purpose for providing the assistance,
  • The organization’s criteria for disbursements of assistance,
  • The selection process for grant recipients,
  • The name, address, and amount received by each individual;
  • Any relationship between a recipient and officers, directors, key employees of, or substantial contributors to the charitable organization; and
  • The make-up of the selection committee approving the grants.

The organization is also required to report financial transactions on the annual Form 990 series return. The Form 990, Schedule I requires information to be reported for grants or other assistance provided to individuals. The Form 990-PF also reports information on disbursements to individuals. The Internal Revenue Service has provided guidance on its website for organizations that wish to make disaster relief payments including Publication 3833 that provides additional details on providing disaster relief through charitable organizations.

Tax News & Views: Health Care Edition - October 2021

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Priority Guidance Plan
On September 9, 2021, the Department of Treasury and the Internal Revenue Service released its 2021-2022 Priority Guidance Plan. The priority guidance plan provides a list of tax issues that that the Department of Treasury and Internal Revenue Service will address through regulations, revenue rulings, revenue procedures, notices and other published administrative guidance. The following items are included on the priority guidance plan for tax-exempt organizations:

  • Guidance revising Rev. Proc. 80-27 regarding group exemption letters. Notice 2020-36 was published on May 18, 2020 on group exemption letters.
  • Guidance on circumstances under which an LLC can qualify for recognition under IRC section 501(c)(3).
  • Final regulations on IRC section 509(a)(3) supporting organizations. Proposed regulations on supporting organizations were published on February 19, 2016.
  • Regulations under IRC section 512 regarding the allocation of expenses in computing unrelated business taxable income and addressing how changes made to IRC section 172 net operating losses by section 2303(b) of the CARES Act apply for purposes of IRC section 512(a)(6).
  • Guidance under IRC section 4941 regarding a private foundation’s investment in a partnership in which disqualified persons are also partners.
  • Regulations regarding the excise taxes on donor advised funds and fund management.
  • Regulations under IRC section 6104(c). Proposed regulations were published on March 15, 2011.
  • Regulations designating an appropriate high-level Treasury official under IRC section 7611. Proposed regulations were published on August 5, 2009.

 

IRS Tax-exempt statistics
The IRS has released information from a 2018 tax year study of tax-exempt organizations (excluding private foundations on the IRS website. The tables provided contains balance sheet, income statement and functional expense data from the Form 990, Return of Organization Exempt from Income Tax and Form 990-EZ, Short Form Return of Organization Exempt from Income Tax for organizations exempt under IRC section 501(c)(3) through 501(c)(9).

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Additional Resources

Deloitte Center for Health Solutions
The source for health care insights: The Deloitte Center for Health Solutions (DCHS) is the research division of Deloitte’s Life Sciences and Health Care practice. The goal of DCHS is to inform stakeholders across the health care system about emerging trends, challenges, and opportunities.

Health Forward blog
Connect to the forces of change across life sciences and health care today. Explore our latest leadership insights to stay ahead of industry trends and key issues on health care, medtech, and biopharma.

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Anne Fulton
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Mary Rauschenberg
Chicago and Washington National Tax
mrauschenberg@deloitte.com 
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