IRS Proposes Rule on Direct Primary Care and Healthcare Sharing Ministries

June 23, 2020

On June 8, 2020, the IRS proposed regulations regarding the tax treatment of amounts paid for certain medical care arrangements, including direct primary care arrangements and healthcare sharing ministries. The proposal would allow individuals who pay for these arrangements to deduct the amounts paid as medical expenses.

As background, on June 24, 2019, President Trump issued Executive Order 13877, “Improving Price and Quality Transparency in American Healthcare to put Patients First.” As part of this transparency effort, the order directed the IRS to propose regulations to treat expenses related to certain medical arrangements as eligible medical expenses under Code Section 213(d). Code Section 213(d) defines medical care broadly to include amounts paid for “the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,” as well as insurance covering such medical care.

The proposed regulations define a direct primary care arrangement as a contract between an individual and one or more primary care physicians who agree to provide medical care for a fixed annual or periodic fee without billing a third party. Although this definition currently encompasses contracts only with medical doctors specializing in family medicine, internal medicine, geriatric medicine or pediatric medicine, comments are requested as to whether to expand the definition to include other professionals such as nurse practitioners and physician assistants.

A healthcare sharing ministry is defined as a nonprofit organization under Code Section 501(c)(3) that is tax exempt under Section 501(a) in which members share medical expenses in accordance with a common set of ethical or religious beliefs without regard to state residency or employment. Such a ministry must have been in existence since December 31, 1999 (to be grandfathered from health reform requirements), and conduct an annual audit by an independent certified public accounting firm.

Upon analysis, the IRS concludes that payments for direct primary care arrangements could qualify as medical care (for example, for an annual exam or specified treatments) or medical insurance (i.e., similar to a premium to cover such exams or treatments) depending upon the structure of the particular arrangement. Regardless of the classification, the expense would qualify as a deductible medical expense under Code Section 213(d). By contrast, payments for membership in a healthcare sharing ministry would only be considered medical insurance as the ministry is not providing the medical care, but instead receiving and paying claims for such care.

Furthermore, the regulations clarify that amounts paid for coverage under certain government-sponsored healthcare programs are treated as amounts paid for medical insurance. These include Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), TRICARE and certain veterans’ insurance programs. Therefore, amounts paid for enrollment fees or premiums under these programs would be eligible for deduction as a medical expense.

Generally, HRAs can reimburse expenses for medical care as defined under Section 213(d). Accordingly, the proposal indicates that an HRA integrated with a traditional group health plan, an individual health insurance coverage or Medicare (i.e., an ICHRA), an excepted benefit HRA, or a qualified small employer health reimbursement arrangement (QSEHRA) could provide reimbursements for direct primary care arrangement or healthcare sharing ministry fees.

With respect to HSAs, eligibility to contribute is conditioned upon an individual being covered by a high deductible health plan (HDHP) and having no other impermissible coverage that would pay medical expenses prior to satisfaction of the statutory HDHP deductible. Certain types of other coverage can be disregarded for this purpose, such as accident, dental, vision and preventive care. Direct primary care arrangements typically provide a variety of services such as physical exams, vaccination, urgent care and laboratory testing and, therefore, would be providing impermissible coverage before the HDHP statutory deductible is met. As a result, an individual covered by a direct primary care arrangement or healthcare sharing ministry would generally be ineligible to contribute to an HSA. However, there may be exceptions for arrangements that provide limited coverage, such as preventive care only.

Additionally, if an employer pays direct primary care arrangement fees, whether directly or through payroll deductions, the payment arrangement would be a group health plan that would disqualify an individual from contributing to an HSA.

Employers should be aware of the proposed regulations, for which the IRS is currently accepting public comments. Although the guidance clarifies that direct primary care fees can qualify as deductible medical care expenses, questions remain as to how employers can incorporate direct primary care arrangements in a compliant health benefits program. Hopefully, these concerns will be addressed in the final regulations, once issued. Please stay tuned to Compliance Corner for further updates.

Final Rule on Certain Medical Care Arrangements »