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IRS proposes rule on tax treatment of certain health care arrangements

Benefits Administration and Outsourcing Solutions|Health and Benefits

By Maureen Gammon , Anu Gogna , Benjamin Lupin and Kathleen Rosenow | July 2, 2020

As proposed, payments for DPC arrangements and HCSM memberships would qualify as medical care expenses for purposes of HRA reimbursement.

On June 8, 2020, the IRS released proposed regulations addressing the treatment of certain medical care arrangements under section 213 of the Internal Revenue Code. Section 213 allows taxpayers to take an itemized deduction for medical care expenses, including health insurance, that exceed a specified percentage of the taxpayer’s adjusted gross income (currently 7.5% but increasing to 10% for the 2021 tax year). Section 213 is also used to determine what medical expenses may be reimbursed from certain account-based plans, including health reimbursement arrangements (HRAs), health flexible spending accounts (FSAs), and health savings accounts (HSAs), on a tax-preferred basis.

The proposed regulations provide that payments for direct primary care (DPC) arrangements and health care sharing ministry (HCSM) memberships are medical care expenses under section 213, and, as such, may be reimbursed by an HRA. However, coverage under these arrangements could cause an individual to be ineligible to contribute to an HSA.

As proposed, the regulations will apply for taxable years that begin on or after the date final regulations are published. Comments on the proposed regulations are due by August 10, 2020.


On June 24, 2019, President Trump issued Executive Order 13877, Improving Price and Quality Transparency in American Healthcare to Put Patients First. It directs the Secretary of the Treasury to propose regulations to treat expenses related to certain types of arrangements, including DPC arrangements and HCSM membership, as eligible medical expenses under section 213. 

Proposed regulations

The proposed regulations provide that amounts paid for a DPC arrangement will qualify as medical expenses under section 213 regardless of whether they are for medical care or medical insurance (which depends on how the DPC arrangement is structured). The rule defines a DPC 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.

Payments for membership in an HCSM are considered payments for medical insurance under the proposed regulations. The definition of HCSM in the proposed regulations comes from the tax code, which provides that the individual shared responsibility payment (which is reduced to zero after December 31, 2018) does not apply to an individual who is a member of an HCSM. Generally, an HCSM is a tax-exempt organization (or a predecessor of which) that has been continuously in existence since December 31, 1999, and whose members share a common set of ethical or religious beliefs and share medical expenses in accordance with those beliefs, without regard to the state in which a member lives or works. While HCSMs themselves do not provide any medical care, members may receive payments from other members to help with their medical bills.

The proposed regulations also adopt the long-standing IRS position that amounts paid for membership in a health maintenance organization and amounts paid for coverage under certain government-sponsored health care programs (Medicare Parts A, B, C and D; Medicaid; Children’s Health Insurance Program; TRICARE; and certain veterans’ health care programs) are treated as amounts paid for medical insurance for section 213 purposes.

The proposed regulations do not address whether any particular arrangement or payment constitutes, or is part of, an employee welfare benefit plan for ERISA compliance purposes. They do note that the Department of Labor advised the Treasury Department and the IRS that an employer’s funding of a health benefit arrangement for employees, in most circumstances, qualifies it as an ERISA-covered plan.

HRA reimbursement

The proposed regulations provide that an HRA — including a qualified small employer HRA, an HRA integrated with a traditional group health plan, an HRA integrated with individual health insurance coverage or Medicare (individual coverage HRA or ICHRA), or an excepted benefit HRA — may reimburse DPC arrangement fees and payments for an HCSM membership, as they are considered section 213 medical expenses. 

HSA eligibility

An HSA-eligible individual is someone who is covered under an HSA-qualified high-deductible health plan (HDHP) and, at the same time, not covered under a non-HDHP that provides coverage for any benefit covered under the HDHP. If an individual has medical coverage that provides benefits before the HDHP minimum annual deductible is met, the individual will not be eligible to contribute to an HSA.

According to the proposed regulations, an individual covered under the type of DPC arrangement that provides for a wide 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 — generally would not be eligible to contribute to an HSA because 1) the arrangement constitutes a health plan or insurance that provides coverage before the HDHP minimum annual deductible is met, and 2) it provides a type of coverage that is not preventive care or disregarded for HSA eligibility purposes by IRS HSA guidance.

An individual participating in a DPC arrangement may contribute to an HSA if 1) the arrangement 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 2) it solely provides for disregarded coverage or preventive care (for example, it solely provides for an annual physical examination). However, if the DPC arrangement fee is paid by an employer, then that arrangement would be a group health plan and the individual would be disqualified from contributing to an HSA.

Health FSA and HSA reimbursements

The proposed regulations do not address whether a health FSA or HSA can reimburse DPC arrangement expenses or HCSM membership fees. While health FSAs may generally reimburse medical care expenses as defined under section 213, they are specifically prohibited from reimbursing health care coverage premium expenses. It appears that the health FSA would not be permitted to reimburse the expenses or fees for a DPC arrangement or HCSM membership that constitutes a health plan or insurance (as discussed above).

While a DPC arrangement or HCSM membership can affect an account holder’s eligibility to make HSA contributions, those eligibility rules do not apply for reimbursement purposes. However, insurance premiums are only qualified medical expenses for HSA purposes in certain limited situations, such as for COBRA premiums, premiums for health coverage maintained while the individual is receiving unemployment compensation, or premiums for any deductible health insurance (other than a Medicare supplemental policy) when the HSA holder is age 65 or older. As a result, it appears that expenses for DPC arrangements and HCSM membership fees would only be reimbursable if one of the exceptions applies. Additional guidance from the IRS is needed to clarify this issue.

Going forward

When the regulations are finalized, employers should:

  • Determine if they wish to allow the HRA to reimburse DPC arrangement fees and payments for an HCSM membership. The tax code would allow these expenses to be reimbursed on a tax-preferred basis, but the employer-sponsored HRA is not required to do so.
  • Avoid offering DPC arrangements to employees contributing to an HSA. An employee covered by such an arrangement should be aware that it may affect HSA eligibility and avoid establishing an HSA or making HSA contributions.
  • Be aware that DPC arrangement expenses or HCSM membership fees would only be reimbursable from an HSA on a tax-favored basis in limited circumstances; employers may want to communicate this to their employees and encourage them to consult an independent tax advisor. Unless the IRS issues additional guidance, employers should not allow their health FSA to reimburse DPC arrangement expenses or HCSM membership fees.
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Insider July 2020 PDF .3 MB

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

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