Nonprofit hospitals grapple with tax overhaul's new levy on payouts to highest earners

Healthcare leaders will have to take a hard look at the impact of the Republican tax overhaul, enacted in December: The law imposes a 21% tax on nonprofit organizations that pay out salaries of $1 million or more.

Under the law, nonprofit hospitals will have to pay taxes on up to five of the highest salaries they pay out. However, how many employees trigger the salary tax varies among organizations depending on how they're structured, according to an article from The Wall Street Journal.  

Banner Health, for example, had 11 executives who made more than $1 million in 2015. But because its 28 hospitals are part of a single nonprofit, it will owe tax based only on the salaries of the five highest earners in that group, according to the WSJ. Meanwhile, a health system like Trinity Health, which operates 59 hospitals under 40 entities, will owe taxes on the top five $1 million-plus earners at each of those entities, the article said. 

The WSJ analysis suggests that 400 nonprofit providers, about 16% of those filing tax returns as nonprofits, employ at least one person making $1 million or more. The new taxes could raise $1.8 billion over the next 10 years, the Joint Committee on Taxation estimates, according to the article. 

Experts say the tax changes are not likely to prompt employers to cut executive compensation, a move that could hurt hospitals already struggling to attract top talent in a competitive employment market. Ralph DeJong, a partner at McDermott Will & Emery LLP, a law firm that specializes in nonprofit governance, told the newspaper the tax is just "the cost of doing business." 

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The Internal Revenue Service has taken a harder look at nonprofit hospitals over the past several years and last summer revoked a hospital's nonprofit status under 501(r) requirements outlined in the Affordable Care Act. The hospital—which was not named by the IRS—had "neither the will, the resources, nor the staff" to follow through with the updated charity care reporting requirements. The IRS is expected to review each hospital's compliance once every three years. 

Nonprofit hospitals have also come under fire of late for cutting back on charity care spending amid soaring profits under the ACA. These hospitals receive their significant tax breaks in exchange for showing that they are helping the local community, but they can boost charity care spending because there is limited guidance on what exactly falls into that category.