The IRS has issued proposed regulations that would revise Reg. §1.213-1 to allow medical deductions in certain cases for payments for direct primary care arrangements and healthcare sharing ministry memberships.[1]

The preamble states:

…[T]he Treasury Department and the IRS propose that expenditures for direct primary care arrangements and health care sharing ministry memberships are amounts paid for medical care as defined in section 213(d), and that amounts paid for those arrangements may be deductible medical expenses under section 213(a). The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations (HMO) and certain government-sponsored health care programs, are amounts paid for medical insurance under section 213(d)(1)(D).[2]

Direct Primary Care Arrangements

The proposed regulations provide that a direct primary care arrangement would be treated as expenses paid for medical care under IRC §213(d), making them deductible under IRC §213(a).[3] The IRS defines such an arrangement as follows:

A “direct primary care arrangement” is a contract between an individual and one or more primary care physicians under which the physician or physicians agree to provide medical care (as defined in section 213(d)(1)(A)) for a fixed annual or periodic fee without billing a third party.[4]

A primary care physician is defined in the following sentence in the regulation:

A “primary care physician” is an individual who is a physician (as described in section 1861(r)(1) of the Social Security Act) who has a primary specialty designation of family medicine, internal medicine, geriatric medicine, or pediatric medicine.[5]

The IRS discusses in the preamble the treatment of direct primary care arrangements under current law and the IRS proposed change:

Direct primary care arrangements, as defined in the proposed regulations, may encompass a broad range of facts. Depending on the facts, a payment for a direct primary care arrangement may be a payment for medical care under section 213(d)(1)(A) or, as discussed below, may be a payment for medical insurance under section 213(d)(1)(D). For example, payments for a direct primary care arrangement that solely provides for an anticipated course of specified treatments of an identified condition, or solely provides for an annual physical examination, are payments for medical care under section 213(d)(1)(A). However, so long as a direct primary care arrangement meets the definition set forth in the proposed regulations, amounts paid for the arrangement will qualify as an expense for medical care under section 213(d), regardless of whether the arrangement is for medical care under section 213(d)(1)(A) or medical insurance under section 213(d)(1)(D).[6]

While this proposal is limited to primary care arrangements, the IRS in the preamble asks for comments on other types of health care arrangements, suggesting the final guidance may allow for these other types of arrangements to be considered medical expenses:

In addition, the Treasury Department and the IRS understand that other types of medical arrangements between health practitioners and individuals exist that do not fall within the definition of direct primary care. For example, an agreement between a dentist and a patient to provide dental care, or an agreement between a physician and a patient to provide specialty care, would not be a direct primary care arrangement but nonetheless may be the provision of medical care under section 213(d). The Treasury Department and the IRS request comments on whether the final regulations should clarify the treatment of other types of arrangements that are similar to direct primary care arrangements but do not meet the definition in the proposed regulations.[7]

Health Care Sharing Ministries

The preamble describes the current definition of a health care sharing ministry, found in IRC §5000A(d)(2)(B)(ii):

For the purposes of section 213, the proposed regulations define a health care sharing ministry as an organization: (1) which is described in section 501(c)(3) and is exempt from taxation under section 501(a); (2) members of which share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs and without regard to the State in which a member resides or is employed; (3) members of which retain membership even after they develop a medical condition; (4) which (or a predecessor of which) has been in existence at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999; and (5) which conducts an annual audit which is performed by an independent certified public accounting firm in accordance with generally accepted accounting principles and which is made available to the public upon request.[8]

The proposed regulations use this definition to add health care ministries to the list of medical insurance contracts and programs, providing:

(2) Health care sharing ministries. — Amounts paid for membership in a health care sharing ministry that shares expenses for medical care, as defined in section 213(d)(1)(A), are payments for medical insurance under section 213(d)(1)(D). A health care sharing ministry is an organization:

(i) Which is described in section 501(c)(3) and is exempt from taxation under section 501(a);

(ii) Members of which share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs and without regard to the State in which a member resides or is employed;

(iii) Members of which retain membership even after they develop a medical condition;

(iv) Which (or a predecessor of which) has been in existence at all times since December 31, 1999, and medical expenses of its members have been shared continuously and without interruption since at least December 31, 1999; and

(v) Which conducts an annual audit which is performed by an independent certified public accounting firm in accordance with generally accepted accounting principles and which is made available to the public upon request.[9]

While the existing definition found at IRC §5000A is being used in this regulation, the IRS does ask for comments in the preamble on this definition of a health care sharing ministry.[10]

Additional Clarification on Medical Insurance

The IRS has decided to rewrite Reg. §1.213-1(e)(4), which defines health insurance, in its entirety. The purpose appears primarily to clarify the rule and incorporate subregulatory guidance the IRS had issued over the years.

The general definition of insurance, found at Proposed Reg. §1.213-1(e)(4)(i)(A)(1), provided in the new proposed regulations reads as follows:

In determining whether a contract constitutes an “insurance” contract under section 213(d)(1)(D), it is irrelevant whether the benefits are payable in cash or in services. For example, amounts paid for hospitalization insurance, for membership in an association furnishing cooperative or so-called free-choice medical service, for group hospitalization and clinical care, or for membership in a health maintenance organization (HMO) are payments for medical insurance under section 213(d)(1)(D).

The proposed regulations also explicitly add references to various government programs, providing at Proposed Reg. §1.213-1(e)(4)(i)(A)(3):

Government-sponsored health care programs. Amounts paid for coverage under government-sponsored health care programs may be amounts paid for medical insurance under section 213(d)(1)(D). Taxes imposed by any governmental unit that fund such a program, however, do not constitute amounts paid for medical insurance. The following government-sponsored health care programs are medical insurance under section 213(d)(1)(D):

(i) The Medicare program under Title XVIII of the Social Security Act (42 U.S.C. 1395c and following sections), including Parts A, B, C, and D;

(ii) Medicaid programs under title XIX of the Social Security Act (42 U.S.C. 1396 and following sections);

(iii) The Children’s Health Insurance Program (CHIP) under title XXI of the Social Security Act (42 U.S.C. 1397aa and following sections);

(iv) Medical coverage under chapter 55 of title 10, U.S.C., including coverage under the TRICARE program; and

(v) Veterans’ health care programs under chapter 17 or 18 of Title 38 U.S.C.

The revision also adds rules that apply to insurance contracts that cover more than just medical care at Proposed Reg. §1.213-1(e)(4)(i)(B):

Insurance contract covering more than medical care. Amounts are paid for medical insurance under section 213(d)(1)(D) only to the extent that such amounts are paid for insurance covering expenses of medical care referred to in paragraph (e)(1) of this section or for any qualified long-term care insurance contract as defined in section 7702B(b). Amounts will be considered payable for other than medical insurance under a contract if the contract provides for the waiver of premiums upon the occurrence of an event. In the case of an insurance contract under which amounts are payable for other than medical insurance (as, for example, a policy providing an indemnity for loss of income or for loss of life, limb, or sight) –

(1) No amount shall be treated as paid for medical insurance under section 213(d)(1)(D) unless the charge for such insurance is either separately stated in the contract or furnished to the policyholder by the insurer in a separate statement,

(2) The amount taken into account as the amount paid for such medical insurance shall not exceed such charge, and

(3) No amount shall be treated as paid for such medical insurance if the amount specified in the contract (or furnished to the policyholder by the insurer in a separate statement) as the charge for such insurance is unreasonably large in relation to the total charges under the contract. In determining whether a separately stated charge for insurance covering expenses of medical care is unreasonably large in relation to the total premium, the relationship of the coverage under the contract together with all of the facts and circumstances shall be considered.

Direct Primary Care Arrangements and HSAs

In the preamble, the IRS discusses the interaction between direct primary care arrangements and HSAs, noting that most often the direct primary care arrangement will be disqualifying coverage for an HSA.

The Treasury Department and the IRS understand that direct primary care arrangements typically provide for an array of primary care services and items, such as physical examinations, vaccinations, urgent care, laboratory testing, and the diagnosis and treatment of sickness or injuries. This type of DPC arrangement would constitute a health plan or insurance that provides coverage before the minimum annual deductible is met, and provides coverage that is not disregarded coverage or preventive care. Therefore, an individual generally is not eligible to contribute to an HSA if that individual is covered by a direct primary care arrangement. [11]

The IRS does discuss a limited exception where coverage by a direct primary care arrangement would not bar contributions to an HSA if an individual otherwise has a qualifying high deductible health plan.

However, in the limited circumstances in which an individual is covered by a direct primary care arrangement that does not provide coverage under a health plan or insurance (for example, the arrangement solely provides for an anticipated course of specified treatments of an identified condition) or solely provides for disregarded coverage or preventive care (for example, it solely provides for an annual physical examination), the individual would not be precluded from contributing to an HSA solely due to participation in the direct primary care arrangement.[12]

But the IRS notes that even in this case, if an employer pays the direct primary care arrangement fee, the program would still be disqualifying coverage.

If the direct primary care arrangement fee is paid by an employer, that payment arrangement would be a group health plan and it (rather than the direct primary care arrangement), would disqualify the individual from contributing to a HSA.[13]

Health Care Sharing Ministries, HRAs and HSAs

The IRS also provided additional commentary in the preamble for the interaction of health care sharing ministries and HRAs and HSAs.

For health reimbursement arrangements (HRAs), the preamble has the following guidance:

Under the regulations authorizing individual coverage HRAs, health care sharing ministries cannot integrate with an individual coverage HRA. However, under these proposed regulations, an HRA, including an HRA integrated with a traditional group health plan, an individual coverage HRA, a QSEHRA, or an excepted benefit HRA, may reimburse payments for membership in a health care sharing ministry as a medical care expense under section 213(d).[14]

However, membership in a health care sharing ministry will bar any contribution to a health savings account (HSA):

Because the proposed regulations provide that health care sharing ministries are medical insurance under section 213(d)(1)(D) that is not permitted insurance, membership in a health care sharing ministry would preclude an individual from contributing to an HSA.[15]

[1] REG-109755-19, June 8, 2020, https://s3.amazonaws.com/public-inspection.federalregister.gov/2020-12213.pdf?utm_campaign=pi+subscription+mailing+list&utm_source=federalregister.gov&utm_medium=email (retrieved June 12, 2020)

[2] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions

[3] Proposed Reg. §1.213-1(e)(1)(v)(A)

[4] Proposed Reg. §1.213-1(e)(1)(v)(A)

[5] Proposed Reg. §1.213-1(e)(1)(v)(A)

[6] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 3.

[7] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 1.

[8] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 2.

[9] Proposed Reg. §1.213-1(e)(4)(i)(A)(2)

[10] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 2.

[11] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 5.

[12] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 5

[13] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 5

[14] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 6

[15] REG-109755-19, June 8, 2020, SUPPLEMENTARY INFORMATION, Explanation of Provisions, 6