Proposed Regulations Would Allow Members of Health Care Sharing Ministries to Recognize Tax Savings
On June 8, 2020, IRS and Treasury issued proposed regulations (REG-109755-19) that will (once they become final) open the door for those involved with health care sharing ministries and direct primary care arrangements to realize tax savings for the cost of these programs.
On June 27, 2019, President Trump issued Executive Order 13877, directing the Secretary of the Treasury to “propose regulations to treat expenses related to certain types of arrangements, potentially including direct primary care arrangements and healthcare sharing ministries, as eligible medical expenses under Section 213(d)” of the Internal Revenue Code. The new guidance, which will not apply until the first tax year after final regulations are published, responds to that order.
Health Care Sharing Ministry
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.[i]
The proposed regulations provide that payments for membership in a health care sharing ministry that shares expenses for medical care, as defined in IRC § 213(d)(1)(A), are payments for medical insurance under IRC § 213(d)(1)(D). This determination, the proposed regulations state, has no bearing on whether a health care sharing ministry is considered an insurance company. It is not. The guidance states that amounts paid for medical insurance under IRC § 213(d)(1)(D) need not be paid to an insurance company to be payments for medical insurance under IRC § 213.
Direct Primary Care Arrangement
The proposed regulations define a “direct primary care arrangement” (DPCA) as a contract between an individual and one or more primary care physicians under which the physician or physicians agree to provide medical care for a fixed annual or periodic fee without billing a third party. DPCAs, as defined in the proposed regulations, may encompass a broad range of facts. Depending on the facts, the guidance states, a payment for a DPCA may be a payment for medical care under IRC § 213(d)(1)(A) or it may be a payment for medical insurance under IRC § 213(d)(1)(D). The guidance provides the following example:
Payments for a DPCA 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).
IRS is seeking comments on both definitions.
Medical Expense Deduction
IRC § 213 allows taxpayers to take an itemized deduction for expenses for medical care, including insurance for medical care, to the extent the expenses exceed 7.5% of adjusted gross income. The proposed regulations provide that expenditures for DPCA and health care sharing ministry memberships are amounts paid for medical care as defined in IRC § 213(d), and that the amounts paid for those arrangements may be deductible medical expenses under § 213(a). This is true regardless of whether the DPCA is for medical care under IRC § 213(d)(1)(A) or medical insurance under IRC § 213(d)(1)(D). As noted above, health care sharing ministry payments are considered by the regulations to be payments for medical insurance, not medical care.
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 (such as Medicare, Medicaid, CHIP, and TRICARE) are amounts paid for medical insurance under IRC § 213(d)(1)(D). Thus, to the extent these programs requires individuals to pay premiums or enrollment fees for coverage, those amounts are eligible for the medical expense deduction as well.
Health Reimbursement Arrangements (HRAs)
Health reimbursement arrangements (HRAs), including QSEHRAs (qualified small employer health reimbursement arrangements), an HRA integrated with a traditional group health plan, an HRA integrated with individual health insurance coverage or Medicare (ICHRAs), or an excepted benefit HRA, generally may reimburse expenses for medical care, as defined under IRC § 213(d).
Health Care Sharing Ministries
Current regulations do not allow health care sharing ministry membership payments to be reimbursed by an HRA. The proposed regulations, however, would allow HRAs, including an HRA integrated with a traditional group health plan, an individual coverage HRA, a QSEHRA, or an excepted benefit HRA, to reimburse payments for membership in a health care sharing ministry as a medical care expense under IRC § 213(d). Although not specifically mentioned, the new definition would also apply to standalone HRAs allowed under the “fewer than two participants who are current employees” exception to the market reform rules. These are sometimes called retiree-only HRAs.
Direct Primary Care Arrangements
The regulations also provide that an HRA, including a QSEHRA, an HRA integrated with a traditional group health plan, an ICHRA, or an excepted benefit HRA, may provide reimbursements for DPCA fees.
Health Savings Accounts (HSAs)
Health Savings Accounts or HSAs are a different matter. IRC § 223 permits eligible individuals to establish and contribute to HSAs. In general, an HSA is a tax-exempt trust or custodial account established exclusively for the purpose of paying qualified medical expenses of the account beneficiary who, for the months for which contributions are made to an HSA, is covered under a high deductible health plan (HDHP).
Legislative history accompanying § 223 provides that “[e]ligible individuals for HSAs are individuals who are covered by a high deductible health plan and no other health plan that is not a high deductible health plan.” (emphasis added).
Health Care Sharing Ministries
The proposed regulations state that a health care sharing ministry is “medical insurance” not permitted for those contributing to an HSA. As such, membership in a health care sharing ministry would preclude an individual from contributing to an HSA.
Direct Primary Care Arrangements
The proposed regulations also provide that an individual generally is not eligible to contribute to an HSA if that individual is covered by a direct primary care arrangement.
However, the guidance goes on to provide an exception to the rule:
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. 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 an HSA.
[i] This definition is from section 5000A(d)(2)(B)(ii), which provides that the individual shared responsibility does not apply to these members.
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