I. INTRODUCTION
The Omnibus Budget Reconciliation Act of 1987 combined Medicare requirements for skilled nursing facilities and Medicaid requirements for skilled nursing facilities and intermediate care facilities into a single set of “nursing facility” requirements. Nursing facilities covered by the Act participate in either or both Medicare and Medicaid programs and provide long-term residential care. Note that facilities for the mentally handicapped are not included in the law. The U.S. Department of Health and Human Services (HHS) adopted implementing regulations found at 42 C.F.R. Parts 405, 442, 447, 483, 488, 489, 498. The regulations focus on actual facility performance in meeting resident needs in a safe and helpful environment.
II. RESIDENT FUNDS MANAGEMENT
The management of nursing home resident’s personal funds is covered by law and its implementing regulations. Effective October 1, 1990, upon the written request of a resident, a facility is required to safeguard and manage the resident’s personal funds. When such funds exceed $50, the facility must deposit excess funds in an interest-bearing account or accounts separate from any of the facility’s operating accounts. All interest earned on the resident’s account must be credited to his or her account. Funds less than $50 must be maintained by the facility in a non-interest-bearing account or in a petty cash fund. The facility is required to establish and maintain a system ensuring complete and separate accounting of each resident’s personal funds entrusted to the facility on the resident’s behalf.
III. TYPES OF ACCOUNTS
The regulation allows, but does not require, individual interest-bearing accounts.
“Funds in excess of $50. The facility must deposit any resident’s personal funds in excess of $50 in an interest bearing account (or accounts) that is separate from any of the facility’s operating accounts, and that credits all interest earned on the resident’s account to his or her account.” See, 42 C.F.R. 483.10(c)(3)(i).
The regulation allows for pooled accounts (with subledgers for each resident’s interest earnings). Federal Reserve Regulation D Interpretations allow for NOW accounts in this situation.
“Funds held by a fiduciary. Under current provisions, funds held in a fiduciary capacity...may be held in the form of NOW accounts if all of the beneficiaries are otherwise eligible to maintain NOW accounts.” See, Regulation D, Interpretations section 204.130(e).
The bank should indicate clearly that pooled funds are owned by individual residents. This could be done by attaching a list of residents to the account agreement and by notations on withdrawals specifying for whom each withdrawal is made.
IV. TAX REPORTING REQUIREMENTS
If a bank opens individual accounts for nursing facility residents, it must obtain from each resident (or their attorney-in-fact or guardians) certified W-9s and file Form 1099s for individual account owners using their TINs.
If the bank opens a pooled account, information reporting requirements are dependent on whether the facility is exempt from 1099 reporting.
A. If the Facility is an “Exempt Recipient”
Both for profit and nonprofit corporations are “exempt recipients” of interest payments and exempt from both backup withholding requirements and 1099 reporting. “A payment of interest to a corporation or other exempt recipient . . . is generally not subject to information reporting.” See, 26 C.F.R. Part 35a.9999-1, Q&A-22.
“In the case of a payment to (an exempt recipient), no return shall be required to be made . . . “ See, 26 C.F.R. part 1.6049-4(c)(1)(ii).
Exempt recipients include:
IRS Publication 78 provides additional information that may help your bank determine exempt status.
Note that even when a facility is an exempt recipient, its residents are not. The facility must file 1099s as a “middleman” or “nominee” unless, among other things, it is required to file a fiduciary return (Form 1041) or is a nominee of a bank or trust company exercising trust powers and which files a fiduciary return. See, 26 C.F.R. 1.6049-4(c)(2). The facility should also obtain from each resident (or the resident’s attorney-in-fact or guardian) a certified W-9.
Banks should remind the nursing facility that it is being treated as the bank’s nominee for tax reporting purposes and that the bank will not perform information reporting for individual residents.
B. The Facility is Not an Exempt Recipient
If the facility is not an exempt recipient, a bank opening a pooled account must complete 1099 reporting for the facility using the facility’s name and TIN.
Nursing care facilities may be concerned that interest payments reported on Form 1099 are taxable income to the facility, even though the interest is actually owned by the residents. If the facility is only a conduit for funds, it should obtain W-9s and prepare 1099s for each resident with funds in the account. The facility’s own records, including records of the 1099s distributed to residents, should evidence that interest payments reported on Form 1099 as filed by the bank was not income to the facility.
V. CONCLUSION
When dealing with the above-described accounts, a bank would be well advised to refer the nursing care facility to its own tax professional in setting up such account arrangements. Since the tax and reporting ramifications are dependent upon several technical considerations, the assistance of either legal or accountant consultation may preclude any misunderstandings regarding responsibilities that could arise in the future.