Tax treatment of two health care options: direct primary care arrangements and health care sharing ministries

Proposed regulations clarify the tax treatment of two types of health care: direct primary care (DPC) arrangements and health care sharing ministries.

June 17, 2020

IRS news release IR-2020-116 announces proposed Treasury regulations that address the tax aspects of two types of medical care arrangements: direct primary care (DPC) arrangements and health care sharing ministries. The proposed regulations define each arrangement, clarify whether each qualifies for the medical expense deduction of §213(d), and explain the ramifications of participation in each for health reimbursement arrangements (HRAs) and health savings accounts (HSAs). In addition, the proposed regulations clarify that government-sponsored health insurance programs meet the definition of medical insurance.

Effective date

The rules covered in the proposed regulations apply to tax years beginning on or after the date the rules are adopted as final regulations and published in the Federal Register.

Medical care and medical insurance

Medical care (§213(d)(1)(A)) refers in part to the costs of diagnosis, treatment, cure, or prevention of illness and for the purpose of affecting any part or function of the body (i.e. costs that qualify for the itemized medical expense deduction). If medical insurance (§213(d)(1)(D)) covers these medical care expenses, it is treated as medical care as well. An expense treated as medical care or medical insurance qualifies for the medical expense deduction under §213(d) for taxpayers who choose to itemize deductions.

Direct primary care (DPC) arrangements

A direct primary care (DPC) arrangement is defined as a contract between an individual and one or more primary care physicians. The physician agrees to provide medical care for a fixed annual or periodic fee without billing a third party. A primary care physician is a physician with a primary specialty designation of family medicine, internal medicine, geriatric medicine, or pediatric medicine.

Medical expense deduction. DPC arrangements vary. They may provide an array of medical services, or only a course of treatment for a specific condition, or only an annual physical examination. As such, they may be considered medical care or medical insurance. As long as the DPC arrangement meets the definition in the proposed regulation, the cost is a qualified medical expense for purposes of the §213(d) medical expense deduction.

HRAs. An HRA generally pays or reimburses an employee’s expenses for medical care. This is true for the various types of HRAs, including qualified small employer HRAs, HRAs integrated with group health plans, HRAs integrated with individual coverage plans and Medicare, and excepted benefit HRAs. The proposed regulations permit HRAs to provide reimbursement for DPC fees.

HSAs. In addition to participating in a high deductible health plan (HDHP), to be eligible to contribute to an HSA an individual may not be covered under any other type of health plan other than a plan that provides only disregarded coverage or preventive care. A DPC arrangement that provides a full spate of services, including examinations, urgent care services, lab testing, and diagnosis and treatment of sickness or injury is considered a health plan that provides coverage before the HDHP deductible is met. An individual participating in this type of DPC arrangement is not eligible to contribute to an HSA.

A DPC arrangement that provides only disregarded coverage or preventive care, such as an arrangement that pays only for an annual physical exam, would not preclude the individual from contributing to an HSA. However, if an employer pays the DPC arrangement fee, that provides only disregarded coverage or preventive care, the individual is treated as participating in a health plan and is not eligible to contribute to an HSA.

Health care sharing ministry arrangements

A health care sharing ministry is a tax-exempt §501(c)(3) organization whose members share common ethical or religious beliefs and share medical expenses. Membership continues and medical expenses are paid regardless of where members reside, or whether they’re employed, or whether they develop a medical condition. The organization or its predecessor must have been in existence at all times since December 31, 1999 and is subject to annual independent audits.

Medical expense deduction. While health care sharing ministries do not directly provide medical services or treatment, members are entitled to share their medical bills and receive payments from other members to help with their medical bills. The proposed regulations note that this arrangement is similar to traditional medical insurance in that members submit claims and potentially receive payment for their claims. Accordingly, the proposed regulations provide that amounts paid for membership in a health care sharing ministry are payments for medical insurance and so constitute qualified medical expenses for the §213(d) medical expense deduction.

HRAs. Under the proposed regulations, an HRA may reimburse payments in a health care sharing ministry, including the various types of HRAs mentioned in the previous section.

HSAs. Because a health care sharing ministry is treated as medical insurance other than permitted insurance (i.e. for disregarded coverage or preventive care), membership precludes an individual from contributing to an HSA.

Government sponsored health care programs

The proposed regulations also clarify that government sponsored health care programs meet the definition of medical insurance for purposes of the medical expense deduction under §213(d). These include Medicare (Parts A, B, C, and D), Medicaid, Children’s Health Insurance Program (CHIP), TRICARE, and veterans’ health care programs.

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