June 11, 2020 IRC Section 213 proposed regulations would expand amounts eligible for medical expense deductions The IRS released proposed regulations (REG-109755-19) that would allow amounts paid for certain medical care arrangements, including direct primary care arrangements, health care sharing ministries, and certain government-sponsored health care programs, to be included in medical care expenses under IRC Section 213 that can be claimed as itemized deductions on an individual's tax return. The text of the proposed regulations states that they are proposed to apply to tax years ending on or after the date final regulations are published (2020 at the earliest). The Preamble, however, states that the regulations would apply to tax years beginning on or after the publication of final regulations (2021 at the earliest). Comments are due on August 10, 2020. Background In June 2019, President Trump issued Executive Order 13877, directing the Treasury Secretary to propose regulations to treat expenses related to certain types of arrangements, including direct primary care arrangements and health care sharing ministries, as eligible medical expenses under IRC Section 213(d). For 2020, IRC Section 213 allows individual taxpayers to claim an itemized deduction for health care expenses (including medical insurance costs) if they exceed 7.5% of adjusted gross income. For 2021 and later years, the threshold is raised to 10% of adjusted gross income. The regulations under IRC Section 213 were last amended in 1979. Health care sharing ministries are arrangements under which members share medical expenses in accordance with ethical or religious beliefs. Provided that the arrangement meets certain criteria, the participants are exempt from the requirement to maintain minimum essential coverage. Direct primary care is a subscription payment model for medical care, which may include only care for a specific condition or may provide more comprehensive access to services. This relatively new model has not previously been defined and has no special treatment under the Affordable Care Act or the Internal Revenue Code. As a result, it has been unclear whether the participation fee may be treated as a medical expense and whether participation affects an individual's eligibility to contribute to a health savings account (HSA). Definition of medical expenses The proposed regulations would amend Treas. Reg. Section 1.213-1 to include the costs for the following as amounts paid for medical care defined in IRC Section 213(d), and therefore as deductible medical expenses under IRC Section 213(a):
The Preamble to the proposed regulations includes a footnote indicating that, according to the Department of Labor, "an employer's funding of a benefit arrangement, in most circumstances, is sufficient to treat an arrangement that provides health benefits to employees as an ERISA-covered plan." The proposed regulations define a health care sharing ministry to include an organization that:
Provided that these conditions are met, the proposed regulations designate the organization as medical insurance under IRC Section 213(d)(1)(D). The proposed regulations designate payments for a direct primary care arrangement as medical care, defining the arrangement as a contract between an individual and one or more primary care physicians under which the physicians provide medical care for a fixed periodic fee without billing a third party. HSAs and HRAs HSAs are tax-exempt savings vehicles that may be used to accumulate funds for paying qualified medical expenses on a tax-free basis. Up to prescribed limits, contributions to HSAs are deductible above-the-line expenses, but contributions are allowed only if the account holder is covered under a high deductible health plan and has no other health coverage (except for certain other permitted insurance). The proposed regulations designate a health care sharing ministry as medical insurance and the Preamble notes that membership in such a ministry would preclude an individual from contributing to an HSA. Regarding direct primary care, the proposed regulations are less definitive, designating the arrangement as medical care but not insurance. However, the Preamble to the proposed regulations states that most direct primary care arrangements provide coverage beyond what is allowed in conjunction with an HSA. Moreover, the Preamble appears to suggest that any employer payment of a direct primary care fee, regardless of the nature of the coverage, will disqualify the employee from making HSA contributions. As such, individuals generally are not eligible to contribute to an HSA if they are covered by either a direct primary care arrangement or health care sharing ministry. A health reimbursement arrangement generally may reimburse expenses for medical care under IRC Section 213(d), and thus may reimburse expenses for direct primary care arrangement fees and health care sharing ministry memberships. Implications For several years, taxpayer representatives have been asking the Treasury Department and the IRS to clarify the tax treatment of direct primary care arrangements in a taxpayer-favorable manner. Most of the focus has been on the HSA rules. The proposed regulations would clarify that amounts spent on direct primary care arrangements count as qualified medical expenses under the HSA rules. Perhaps more importantly, however, the Preamble to the proposed regulations suggests that coverage by a direct primary care arrangement generally would make an individual ineligible to make HSA contributions. Commenters are likely to focus much of their attention on this aspect of the proposed regulations, which promises to be unpopular. ———————————————
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