[Federal Register Volume 85, Number 112 (Wednesday, June 10, 2020)]
[Proposed Rules]
[Pages 35398-35404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-12213]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-109755-19]
RIN 1545-BP31
Certain Medical Care Arrangements
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations relating to
section 213 of the Internal Revenue Code (Code) regarding the treatment
of amounts paid for certain medical care arrangements, including direct
primary care arrangements, health care sharing ministries, and certain
government-sponsored health care programs. The proposed regulations
affect individuals who pay for these arrangements or programs and want
to deduct the amounts paid as medical expenses under section 213.
DATES: Written or electronic comments and requests for a public hearing
must be received by August 10, 2020. Requests for a public hearing must
be submitted as prescribed in the ``Comments and Requests for a Public
Hearing'' section.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically. Submit electronic submissions via the Federal
eRulemaking Portal at www.regulations.gov (indicate IRS and REG-109755-
19) by following the online instructions for submitting comments. Once
submitted to the Federal eRulemaking Portal, comments cannot be edited
or withdrawn. The IRS expects to have limited personnel available to
process public comments that are submitted on paper through mail. Until
further notice, any comments submitted on paper will be considered to
the extent practicable. The Department of the Treasury (Treasury
Department) and the Internal Revenue Service (IRS) will publish for
public availability any comment submitted electronically, and to the
extent practicable on paper, to its public docket. Send paper
submissions to: CC:PA:LPD:PR (REG-109755-19), Room 5203, Internal
Revenue Service, P.O. Box 7604, Ben Franklin Station, Washington, DC
20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
call Richard C. Gano IV of the Office of Associate Chief Counsel
(Income Tax and Accounting), (202) 317-7011 (not a toll-free call);
concerning the preamble discussion of health reimbursement arrangements
or health savings accounts, call William Fischer of the Office of
Associate Chief Counsel (Employee Benefits, Exempt Organizations, and
Employment Taxes), (202) 317-5500 (not a toll-free call); concerning
the submission of comments and/or requests for public hearing, call
Regina Johnson, (202) 317-5177 (not a toll-free call).
SUPPLEMENTARY INFORMATION:
Background
1. Executive Order 13877
On June 24, 2019, President Trump issued Executive Order 13877,
``Improving Price and Quality Transparency in American Healthcare to
Put Patients First'' (84 FR 30849 (June 27, 2019)). The Executive Order
states that it is the policy of the Federal Government to ensure that
patients are engaged with their healthcare decisions and have the
information requisite for choosing the healthcare they want and need.
In furtherance of that policy, section 6(b) of the Executive Order
directs the Secretary of the Treasury, to the extent consistent with
law, 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 Code. The proposed regulations
have been developed in response to this Executive Order.
2. Deduction for Medical Expenses
Section 213(a) allows a deduction for expenses paid during the
taxable year, not compensated for by insurance or otherwise, for
medical care of the taxpayer, the taxpayer's spouse, or the taxpayer's
dependent (as defined in section 152, determined without regard to
subsections (b)(1), (b)(2), and (d)(1)(B) of section 152), to the
extent the expenses exceed 10 percent of adjusted gross income (AGI)
(7.5 percent of AGI for a taxable year beginning before January 1,
2021).\1\ A section 213 deduction is allowable only with respect to
medical expenses actually paid during the taxable year, regardless of
when the incident or event that occasioned the expenses occurred, and
regardless of the method of accounting used by the taxpayer for filing
income tax returns. Section 1.213-1(a)(1) of the Income Tax
Regulations.
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\1\ Section 103 of the Taxpayer Certainty and Disaster Tax
Relief Act of 2019, enacted as part of the Further Consolidated
Appropriations Act, 2020, Public Law 116-94, 133 Stat. 2534, Div. Q,
Title I (2019)), amending section 213(f) to reduce the threshold for
the deduction to 7.5 percent of AGI for tax years beginning before
January 1, 2021.
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3. Definition of Medical Care Under Section 213(d)(1)
For purposes of determining whether medical expenses are deductible
under section 213, section 213(d)(1) defines ``medical care'' as
amounts paid for (A) the diagnosis, cure, mitigation, treatment, or
prevention of disease, or for the purpose of affecting any structure or
function of the body (referred to in this preamble as ``medical care
under section 213(d)(1)(A)''); (B) transportation primarily for and
essential to obtaining medical care referred to in (A); (C) qualified
long-term care services; or (D) insurance covering medical care and
transportation as described in (A) and (B), respectively (referred to
in this preamble as ``medical insurance''), including supplementary
medical insurance for the aged (Medicare Part B), and any qualified
long-term care insurance contract. See also Sec. 1.213-1(e).
A. Medical Care Under Section 213(d)(1)(A)
Deductions for amounts paid for medical care under section
213(d)(1)(A) are confined strictly to expenses incurred primarily for
the prevention or alleviation of a physical or mental defect or illness
and for operations or
[[Page 35399]]
treatment affecting any portion of the body. Section 1.213-1(e)(1)(ii).
Thus, payments for the following are payments for medical care under
section 213(d)(1)(A): Hospital services; nursing services; medical,
laboratory, surgical, dental and other diagnostic and healing services;
obstetrical expenses, expenses of therapy, and X-rays; prescribed drugs
or insulin; and artificial teeth or limbs. Section 213(b) and Sec.
1.213-1(e)(1)(ii). However, an expenditure which is merely beneficial
to the general health of an individual, such as an expenditure for a
vacation, is not an expenditure for medical care. Section 1.213-
1(e)(1)(ii). Amounts paid for illegal operations or treatments are not
deductible. Id.
B. Medical Insurance Under Section 213(d)(1)(D)
Expenditures for medical insurance described in section
213(d)(1)(D) are amounts paid for medical care only to the extent such
amounts are paid for insurance covering the diagnosis, cure,
mitigation, treatment, or prevention of disease; for the purpose of
affecting any structure or function of the body; or for transportation
primarily for and essential to medical care. Section 1.213-
1(e)(4)(i)(a). Amounts are considered payable for other than medical
care under a contract if the contract provides for the waiver of
premiums upon the occurrence of an event. Id. In the case of an
insurance contract under which amounts are payable for other than
medical care (as, for example, a policy providing an indemnity for loss
of income or for loss of life, limb, or sight), (1) no amount may be
treated as paid for medical insurance unless the charge for such
insurance is either separately stated in the contract or furnished to
the policyholder by the insurer in a separate statement, (2) the amount
treated as paid for medical insurance may not exceed such charge, and
(3) no amount may be treated as paid for medical insurance if the
amount specified in the contract (or furnished to the policyholder by
the insurer in a separate statement) as the charge for such insurance
is unreasonably large in relation to the total charges under the
contract (considering the relationship of the coverages under the
contract together with all the facts and circumstances). Id.
In determining whether a contract constitutes an ``insurance''
contract for purposes of section 213, it is irrelevant whether the
benefits are payable in cash or in services. Section 1.213-
1(e)(4)(i)(a). For example, amounts paid for hospitalization insurance,
for membership in an association furnishing cooperative or so-called
free-choice medical service, or for group hospitalization and clinical
care are payments for medical insurance. Id. In addition, premiums paid
for Medicare Part B are amounts paid for medical insurance. Id.
Explanation of Provisions
In developing the proposed regulations, the Treasury Department and
the IRS considered how to carry out the objectives of Executive Order
13877 in a way permitted by law and supported by sound policy. The
Treasury Department and the IRS undertook a review of direct primary
care arrangements and health care sharing ministries by meeting with
practitioners and individuals who operate the arrangements to analyze
the facts of those arrangements. After gathering information on those
arrangements and considering the relevant legal authorities, the
Treasury Department and the IRS propose that expenditures for direct
primary care arrangements and health care sharing ministry memberships
are amounts paid for medical care as defined in section 213(d), and
that amounts paid for those arrangements may be deductible medical
expenses under section 213(a). 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, are amounts paid for medical insurance under section
213(d)(1)(D).\2\ These proposed regulations do not affect the tax
treatment of any medical care arrangement that currently qualifies as
medical care under section 213(d).
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\2\ The proposed regulations and this preamble do not address
any issues under Title I of the Employee Retirement Income Security
Act of 1974, as amended (ERISA) that are within the interpretive and
regulatory jurisdiction of the U.S. Department of Labor. For
example, the proposed regulations and this preamble do not address
whether any particular arrangement or payment constitutes, or is
part of, an employee welfare benefit plan within the meaning of
ERISA section 3(1). Rather, the Department of Labor advised the
Treasury Department and the IRS that 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. Compare 29 CFR 2510.3-1(l), which provides a
safe harbor from ERISA-coverage for certain reimbursements for non-
group health insurance premiums solely for individual health
insurance coverage as defined in 29 CFR 2590.701-2 that does not
consist solely of excepted benefits as defined in 29 CFR
2590.732(c).
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1. Definition of Direct Primary Care Arrangement
The proposed regulations define a ``direct primary care
arrangement'' as a contract between an individual and one or more
primary care physicians under which the physician or physicians agree
to provide medical care (as defined in section 213(d)(1)(A)) for a
fixed annual or periodic fee without billing a third party. The
proposed regulations define a ``primary care physician'' as an
individual who is a physician (as described in section 1861(r)(1) of
the Social Security Act (SSA)) who has a primary specialty designation
of family medicine, internal medicine, geriatric medicine, or pediatric
medicine. The definition is adopted from paragraph (I) of the
definition of ``primary care practitioner'' in section 1833(x)(2)(A)(i)
of the SSA. The Treasury Department and the IRS request comments on the
definition of primary care physician and on the definition of direct
primary care arrangement.
The Treasury Department and the IRS also request comments on
whether to expand the definition of a direct primary care arrangement
to include a contract between an individual and a nurse practitioner,
clinical nurse specialist, or physician assistant (as those terms are
defined in section 1861(aa)(5) of the SSA) who provides primary care
services under the contract. The Treasury Department and the IRS
request comments on how to define primary care services provided by a
non-physician practitioner, including whether the definition of primary
care services in section 1833(x)(2)(B) of the SSA is appropriate.
In addition, the Treasury Department and the IRS understand that
other types of medical arrangements between health practitioners and
individuals exist that do not fall within the definition of direct
primary care. For example, an agreement between a dentist and a patient
to provide dental care, or an agreement between a physician and a
patient to provide specialty care, would not be a direct primary care
arrangement but nonetheless may be the provision of medical care under
section 213(d). The Treasury Department and the IRS request comments on
whether the final regulations should clarify the treatment of other
types of arrangements that are similar to direct primary care
arrangements but do not meet the definition in the proposed
regulations.
2. Definition of Health Care Sharing Ministry
For the purposes of section 213, 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
[[Page 35400]]
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. This definition is from
section 5000A(d)(2)(B)(ii), which provides that the individual shared
responsibility payment (which is zero after December 31, 2018) does not
apply to an individual who is a member of a health care sharing
ministry. The Treasury Department and the IRS request comments on the
definition of a health care sharing ministry.
3. Analysis of Medical Care Under Section 213(d)(1)(A)
Direct primary care arrangements, as defined in the proposed
regulations, may encompass a broad range of facts. Depending on the
facts, a payment for a direct primary care arrangement may be a payment
for medical care under section 213(d)(1)(A) or, as discussed below, may
be a payment for medical insurance under section 213(d)(1)(D). For
example, payments for a direct primary care arrangement 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).
However, so long as a direct primary care arrangement meets the
definition set forth in the proposed regulations, amounts paid for the
arrangement will qualify as an expense for medical care under section
213(d), regardless of whether the arrangement is for medical care under
section 213(d)(1)(A) or medical insurance under section 213(d)(1)(D).
Health care sharing ministries, unlike direct primary care
arrangements, do not themselves provide any medical treatment or
services that would qualify as medical care under section 213(d)(1)(A).
Instead, membership in a health care sharing ministry entitles members
to share their medical bills through the ministry and potentially
receive payments from other members to help with their medical bills.
The membership payments are not payments for medical care under section
213(d)(1)(A). However, as further explained below, these proposed
regulations provide that amounts paid for membership in a health care
sharing ministry may be payments for medical insurance under section
213(d)(1)(D).
4. Analysis of Medical Insurance Under Section 213(d)(1)(D)
Section 213(d)(1)(D) does not define the term ``insurance.'' When a
federal statute uses a term without an accompanying definition, the
meaning of the term must be determined from the ordinary use of the
term, in conjunction with any guidance found in the structure of the
relevant statute and its legislative history. See Group Life & Health
Insurance Co. v. Royal Drug. Co., 440 U.S. 205, 211 (1979).
The predecessor to section 213, section 23x, was originally enacted
in 1942 and allowed a deduction for medical care expenses, including
amounts paid for health insurance. Although the statutory language did
not define ``insurance'' for purposes of the medical expense deduction,
the legislative history specifically states that amounts paid for
health insurance are included in the category of medical expenses, and
that payments for ``hospitalization insurance, or for membership in an
association furnishing cooperative or so-called free-choice medical
service, or group hospitalization and clinical care are intended, for
purposes of this section, to be included as amounts which may be
deducted.'' This language from the legislative history was incorporated
into the section 213 regulations in 1957 and remains unchanged. See
Sec. 1.213-1(e)(4)(i)(a). Based on that legislative history, the
Treasury Department and the IRS conclude that Congress intended that
``insurance'' for section 213 purposes be read broadly. Indeed, the
Treasury Department and the IRS have interpreted ``insurance'' broadly
over the years in guidance under section 213. See, e.g., Rev. Rul. 79-
175, 1979-1 C.B. 117 (premiums paid for Medicare Part A coverage are
amounts paid for medical insurance); Rev. Rul. 74-429, 1974-2 C.B. 83
(nonrefundable fixed amount paid by a taxpayer for an agreement with an
optometrist to replace the taxpayer's contact lenses for one year if
they became lost or damaged is an amount paid for medical insurance);
Rev. Rul. 68-433, 1968-2 C.B. 110 (insurance premiums paid for a policy
that provides only for reimbursement of the cost of prescription drugs
are amounts paid for medical insurance). Further, IRS Publication 502
(Medical and Dental Expenses) states the long-standing IRS position
that amounts paid for membership in an HMO are treated as medical
insurance premiums.
The Treasury Department and the IRS also conclude that the general
insurance principles used for subchapter L purposes are not controlling
for purposes of determining whether payment for an arrangement is
treated as an amount paid for medical insurance under section 213.
Subchapter L does not define insurance. It provides a definition of the
term ``insurance company'' for purposes of determining whether an
entity is an insurance company for federal income tax purposes.
However, there is no requirement in section 213 that amounts be paid to
an insurance company to qualify as payments for medical insurance.
Further, the legislative history of section 213 indicates that medical
insurance is not limited to traditional health insurance provided by an
insurance company. Thus, although payments to an insurance company for
medical care may be amounts paid for medical insurance under section
213(d)(1)(D), amounts need not be paid to an insurance company to be
payments for medical insurance under section 213.
As noted above, depending on the specific facts regarding an
arrangement, a payment for a direct primary care arrangement may be a
payment for medical care under section 213(d)(1)(A) or may be a payment
for medical insurance under section 213(d)(1)(D). Regardless of the
characterization of an arrangement as medical care under section
213(d)(1)(A) or medical insurance under section 213(d)(1)(D), an amount
paid for the arrangement will qualify as a medical expense under
section 213. However, the characterization of a direct primary care
arrangement as medical insurance under section 213(d)(1)(D) has
implications for purposes of the rules for health savings accounts
(HSAs) under section 223. Specifically, as explained later in this
preamble, if an individual enters into a direct primary care
arrangement, the type of coverage provided by the arrangement will
impact whether or not he or she is an eligible individual for purposes
of section 223.
Under these proposed regulations, payments for membership in a
health care sharing ministry that shares expenses for medical care, as
defined in section 213(d)(1)(A), are payments for medical insurance
under section 213(d)(1)(D). The purpose of a health care sharing
ministry is for members to share the burden of their medical expenses
with other members. Members assist in the payment of other members'
[[Page 35401]]
medical bills, and possibly receive reimbursement for their own medical
bills in return. Whether this is done by making membership payments to
the ministry or by sending the payments directly to other members, the
substance of the transaction is the same. Similar to traditional
medical insurance premiums, amounts paid for membership in a health
care sharing ministry allow members who incur expenses for medical care
under section 213(d)(1)(A) to submit claims for those expenses and
potentially receive payments to help cover those expenses.
Accordingly, the proposed regulations provide that medical
insurance under section 213(d)(1)(D) includes health care sharing
ministries that share expenses for medical care under section
213(d)(1)(A). This proposal under section 213 has no bearing on whether
a health care sharing ministry is considered an insurance company,
insurance service, or insurance organization (health insurance issuer)
for other purposes of the Code, ERISA, the Public Health Service Act
(PHS Act), or any other Federal or State law. In addition, the proposed
regulations incorporate the long-standing position of the IRS treating
amounts paid for membership in an HMO as medical insurance premiums for
section 213 purposes. In contrast, amounts paid to an HMO or a provider
to cover coinsurance, copayment, or deductible obligations under an
HMO's terms are payments for medical care under section 213(d)(1)(A).
Regardless of their classification, both HMO amounts paid are eligible
for deduction as a medical expense under section 213(a).
Finally, the proposed regulations clarify that amounts paid for
coverage under certain government-sponsored health care programs are
treated as amounts paid for medical insurance under section
213(d)(1)(D). The proposed regulations incorporate the guidance in
section 213(d)(1)(D) and Rev. Rul. 79-175, respectively, that Medicare
Parts A and B are medical insurance, and clarify that Medicare Parts C
and D are medical insurance, for purposes of section 213. The proposed
regulations also provide that Medicaid, the Children's Health Insurance
Program (CHIP), TRICARE, and certain veterans' health care programs are
medical insurance under section 213(d)(1)(D). Thus, to the extent a
particular government-sponsored health program requires individuals to
pay premiums or enrollment fees for coverage under the program, those
amounts are eligible for deduction as a medical expense under section
213. The Treasury Department and the IRS request comments on whether
amounts paid for other government-sponsored health care programs should
be treated as amounts paid for medical insurance, and if so, which
specific government-sponsored health care programs should be treated as
medical insurance.
5. Direct Primary Care Arrangements, Health Reimbursement Arrangements
(HRAs), and HSAs
A. Direct Primary Care Arrangements and HRAs
An HRA (other than a qualified small employer health reimbursement
arrangement (QSEHRA)) is a type of account-based group health plan
funded solely by employer contributions (with no salary reduction
contributions or other contributions by employees) that reimburses an
employee solely for medical care expenses incurred by the employee
(and, at the discretion of the plan sponsor, the employee's family), up
to a maximum dollar amount for a coverage period. See Notice 2002-45,
2002-2 C.B. 93 and Rev. Rul. 2002-41, 2002-2 C.B. 75. Because an HRA
cannot by itself satisfy the prohibition on lifetime and annual dollar
limits for group health plans under PHS Act section 2711 or the
requirement to provide coverage for certain preventive services without
cost sharing under PHS Act section 2713 (both of which are incorporated
by reference in section 9815), unless an applicable exception applies,
it must be integrated with coverage that otherwise satisfies those
requirements. See Sec. 54.9815-2711. A QSEHRA is a type of HRA, except
that it generally is not a group health plan and is subject to
additional specific requirements, including the requirement that it may
be provided only by an employer that is not an applicable large
employer, as defined in section 4980H(c)(2). See section 9831. Because
QSEHRAs are generally not group health plans, there is no need for them
to be integrated with other coverage.\3\
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\3\ However, under section 9831(d)(2)(B)(ii), a QSEHRA may only
provide reimbursements to an eligible employee after the eligible
employee provides proof of coverage, and consistent with section
106(g), the coverage must qualify as minimum essential coverage as
defined in section 5000A(f).
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An HRA, including a QSEHRA, an HRA integrated with a traditional
group health plan, an HRA integrated with individual health insurance
coverage or Medicare (individual coverage HRA), or an excepted benefit
HRA, generally may reimburse expenses for medical care, as defined
under section 213(d). Thus, an HRA may provide reimbursements for
direct primary care arrangement fees.
B. Direct Primary Care Arrangements and HSAs
Section 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). See section 223(d); Notice 2004-2,
2004-1 C.B. 269, Q&A 1. An eligible individual is, with respect to any
month, any individual if (i) such individual is covered under an HDHP
as of the first day of such month, and (ii) such individual is not,
while covered under an HDHP, covered under any health plan which is not
an HDHP, and which provides coverage for any benefit which is covered
under the HDHP. See section 223(c)(1); Notice 2004-2, Q&A 2. An HDHP is
a health plan that satisfies the minimum annual deductible requirement
and maximum out-of-pocket expenses requirement under section
223(c)(2)(A), and meets certain other requirements. See section
223(c)(2); Notice 2004-2, Q&A 3.
Section 223(c)(1)(B) provides that, in addition to coverage under
an HDHP, an eligible individual may have ``disregarded coverage,''
which includes only certain permitted insurance under section
223(c)(3), and coverage (whether through insurance or otherwise) for
accidents, disability, dental care, vision care, long-term care, or
certain health flexible spending arrangements. Section 223(c)(3)
provides that permitted insurance is insurance relating to liabilities
incurred under worker's compensation laws, tort liabilities, or
liabilities relating to ownership or use of property, insurance for a
specified disease or illness, and insurance paying a fixed amount per
day (or other period) of hospitalization. In addition, section
223(c)(2)(C) provides that an HDHP may provide preventive care before
the minimum annual deductible for an HDHP is met.
The legislative history to section 223 states 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.'' H.R. Conf. Rep. No. 391, 108th Cong., 1st
Sess. 841 (2003). The legislative history also states that, ``[a]n
individual with other coverage in addition to a high deductible health
plan is still eligible for an HSA if such other coverage is certain
permitted insurance or permitted coverage.'' Id.
[[Page 35402]]
In Rev. Rul. 2004-38, 2004-1 C.B. 717, an individual was covered by
a health plan that satisfied the requirements to be an HDHP under
section 223(c)(2) (including the minimum annual deductible under
section 223(c)(2)(A)), but the plan did not include coverage for
prescription drugs. The individual was also covered by another plan (or
rider) providing prescription drug benefits that required copays but
was not subject to the minimum annual deductible under section
223(c)(2)(A). Rev. Rul. 2004-38 held that an individual covered by an
HDHP that does not cover prescription drugs, and who is also covered by
a separate plan (or rider) that provides prescription drug benefits
before the minimum annual deductible is met, is not an eligible
individual under section 223(c)(1)(A) and may not contribute to an HSA.
Accordingly, if an individual has coverage that is not disregarded
coverage or preventive care, and that provides benefits before the
minimum annual deductible is met, the individual is not an eligible
individual. See also Notice 2008-59, 2008-2 C.B. 123, Q&A 2 and 3.
The Treasury Department and the IRS understand that direct primary
care arrangements typically provide for an 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. This type of DPC arrangement would constitute a health
plan or insurance that provides coverage before the minimum annual
deductible is met, and provides coverage that is not disregarded
coverage or preventive care. Therefore, an individual generally is not
eligible to contribute to an HSA if that individual is covered by a
direct primary care arrangement. However, 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 a
HSA.
6. Health Care Sharing Ministries, HRAs, and HSAs
Under the regulations authorizing individual coverage HRAs, health
care sharing ministries cannot integrate with an individual coverage
HRA. However, under these proposed regulations, an HRA, including an
HRA integrated with a traditional group health plan, an individual
coverage HRA, a QSEHRA, or an excepted benefit HRA, may reimburse
payments for membership in a health care sharing ministry as a medical
care expense under section 213(d). Because the proposed regulations
provide that health care sharing ministries are medical insurance under
section 213(d)(1)(D) that is not permitted insurance, membership in a
health care sharing ministry would preclude an individual from
contributing to an HSA.
Proposed Applicability Date
These regulations are proposed to apply for taxable years that
begin on or after the date of publication of a Treasury decision
adopting these rules as final regulations in the Federal Register.
Special Analyses
I. Regulatory Planning and Review
This regulation is subject to review under section 6 of Executive
Order 12866 pursuant to the April 11, 2018, Memorandum of Agreement
(``April 11, 2018 MOA'') between the Treasury Department and the Office
of Management and Budget (``OMB'') regarding review of tax regulations.
The Acting Administrator of the Office of Information and Regulatory
Affairs (``OIRA''), OMB, has waived review of this proposed rule in
accordance with section 6(a)(3)(A) of Executive Order 12866. OIRA will
subsequently make a significance determination of the final rule under
Executive Order 12866 pursuant to the terms of section 1 of the April
11, 2018 MOA.
II. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 (UMRA)
requires that agencies assess anticipated costs and benefits and take
certain other actions before issuing a final rule that includes any
Federal mandate that may result in expenditures in any one year by a
state, local, or tribal government, in the aggregate, or by the private
sector, of $100 million (updated annually for inflation). This proposed
rule does not include any Federal mandate that may result in
expenditures by state, local, or tribal governments, or by the private
sector in excess of that threshold.
III. Executive Order 13132: Federalism
Executive Order 13132 (entitled ``Federalism'') prohibits an agency
from publishing any rule that has federalism implications if the rule
either imposes substantial, direct compliance costs on state and local
governments, and is not required by statute, or preempts state law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive Order. This proposed rule does not have
federalism implications and does not impose substantial direct
compliance costs on state and local governments or preempt state law
within the meaning of the Executive Order.
IV. Regulatory Flexibility Act
Pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter 6), it
is hereby certified that these proposed regulations will not have a
significant economic impact on a substantial number of small entities.
The proposed regulations directly affect individuals and not entities.
Accordingly, the proposed rule will not have a significant economic
impact on a substantial number of small entities.
In accordance with section 7805(f), this notice of proposed
rulemaking has been submitted to the Chief Counsel of the Office of
Advocacy of the Small Business Administration for comment on its impact
on small business.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to comments that are submitted timely to
the IRS as prescribed in this preamble in the ADDRESSES section. The
Treasury Department and the IRS request comments on all aspects of the
proposed regulations. Any electronic comments submitted, and to the
extent practicable any paper comments submitted, will be made available
at www.regulations.gov or upon request.
A public hearing will be scheduled if requested in writing by any
person who timely submits electronic or written comments. Requests for
a public hearing are also encouraged to be made electronically. If a
public hearing is scheduled, notice of the date, time, and place for
the public hearing will be published in the Federal Register.
Announcement 2020-4, 2020-17 IRB 1, provides that until further notice,
public hearings conducted by the IRS will be held telephonically. Any
telephonic hearing will be made accessible to people with disabilities.
[[Page 35403]]
Statement of Availability of IRS Documents
IRS revenue procedures, revenue rulings, notices, and other
guidance cited in this preamble are published in the Internal Revenue
Bulletin and are available from the Superintendent of Documents, U.S.
Government Publishing Office, Washington, DC 20402, or by visiting the
IRS website at http://www.irs.gov.
Drafting Information
The principal author of these proposed regulations is Richard C.
Gano IV of the Office of Associate Chief Counsel (Income Tax and
Accounting). However, other personnel from the Treasury Department and
the IRS participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 continues to read in
part as follows:
Authority: 26 U.S.C. 7805 * * *
0
Par. 2. Section 1.213-1 is amended by:
0
1. Redesignating paragraphs (e)(1)(v) and (vi) as (e)(1)(vi) and (vii)
respectively.
0
2. Adding a new paragraph (e)(1)(v).
0
3. Redesingnating newly redesignated paragraphs (e)(1)(vi)(a) through
(c) as (e)(1)(vi)(A) through (C).
0
4. Redesignating paragraphs (e)(4)(i)(a) and (b) as (e)(4)(i)(B) and
(C) respectively.
0
5. Adding a new paragraph (e)(4)(i)(A).
0
6. Revising newly redesignated paragraph (e)(4)(i)(B).
0
7. In newly redesignated paragraph (e)(4)(i)(C):
0
i. Adding a subject heading;
0
ii. Redsignating the introductory text as paragraph (e)(4)(i)(C)(1)
introductory text and paragraphs (e)(4)(i)(C)(1) and (2) as paragraphs
(e)(4)(i)(C)(1)(i) and (ii);
0
iii. Removing the words ``(a) of this subdivision'' and add in their
place the words ``paragraphs (e)(4)(i)(A) and (B) of this section'' in
newly redesignated paragraph (e)(4)(i)(C)(1) introductory text;
0
iv. Designating the undesignated paragraph following newly redsignated
paragraph (e)(4)(i)(C)(1)(ii) as paragraph (e)(4)(i)(C)(2); and
0
v. Removing ``subdivision (b)'' and adding in its place ``paragraph
(e)(4)(i)(C)'' in newly designated paragraph (e)(4)(i)(C)(2)
The additions and revision read as follows:
Sec. 1.213-1 Medical, dental, etc., expenses.
* * * * *
(e) * * *
(1) * * *
(v)(A) Direct primary care arrangements. Expenses paid for medical
care under section 213(d) include amounts paid for a direct primary
care arrangement. A ``direct primary care arrangement'' is a contract
between an individual and one or more primary care physicians under
which the physician or physicians agree to provide medical care (as
defined in section 213(d)(1)(A)) for a fixed annual or periodic fee
without billing a third party. A ``primary care physician'' is an
individual who is a physician (as described in section 1861(r)(1) of
the Social Security Act) who has a primary specialty designation of
family medicine, internal medicine, geriatric medicine, or pediatric
medicine.
(B) Applicability date. The rules of this paragraph (e)(1)(v) apply
to taxable years ending on or after [the date of publication of the
Treasury decision adopting these rules as final regulations in the
Federal Register].
* * * * *
(4)(i)(A) Medical insurance contracts and programs--(1) In general.
In determining whether a contract constitutes an ``insurance'' contract
under section 213(d)(1)(D), it is irrelevant whether the benefits are
payable in cash or in services. For example, amounts paid for
hospitalization insurance, for membership in an association furnishing
cooperative or so-called free-choice medical service, for group
hospitalization and clinical care, or for membership in a health
maintenance organization (HMO) are payments for medical insurance under
section 213(d)(1)(D).
(2) Health care sharing ministries.--Amounts paid for membership in
a health care sharing ministry that shares expenses for medical care,
as defined in section 213(d)(1)(A), are payments for medical insurance
under section 213(d)(1)(D). A health care sharing ministry is an
organization:
(i) Which is described in section 501(c)(3) and is exempt from
taxation under section 501(a);
(ii) 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;
(iii) Members of which retain membership even after they develop a
medical condition;
(iv) 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
(v) 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.
(3) Government-sponsored health care programs. Amounts paid for
coverage under government-sponsored health care programs may be amounts
paid for medical insurance under section 213(d)(1)(D). Taxes imposed by
any governmental unit that fund such a program, however, do not
constitute amounts paid for medical insurance. The following
government-sponsored health care programs are medical insurance under
section 213(d)(1)(D):
(i) The Medicare program under Title XVIII of the Social Security
Act (42 U.S.C. 1395c and following sections), including Parts A, B, C,
and D;
(ii) Medicaid programs under title XIX of the Social Security Act
(42 U.S.C. 1396 and following sections);
(iii) The Children's Health Insurance Program (CHIP) under title
XXI of the Social Security Act (42 U.S.C. 1397aa and following
sections);
(iv) Medical coverage under chapter 55 of title 10, U.S.C.,
including coverage under the TRICARE program; and
(v) Veterans' health care programs under chapter 17 or 18 of Title
38 U.S.C.
(4) Applicability date. The rules of this paragraph (e)(4)(i)(a)
apply to taxable years ending on or after [the date of publication of
the Treasury decision adopting these rules as final regulations in the
Federal Register].
(B) Insurance contract covering more than medical care. Amounts are
paid for medical insurance under section 213(d)(1)(D) only to the
extent that such amounts are paid for insurance covering expenses of
medical care referred to in paragraph (e)(1) of this section or for any
qualified long-term care insurance contract as defined in section
7702B(b). Amounts will be considered payable for other than medical
insurance under a contract if the contract provides for the waiver of
premiums upon the
[[Page 35404]]
occurrence of an event. In the case of an insurance contract under
which amounts are payable for other than medical insurance (as, for
example, a policy providing an indemnity for loss of income or for loss
of life, limb, or sight)--
(1) No amount shall be treated as paid for medical insurance under
section 213(d)(1)(D) unless the charge for such insurance is either
separately stated in the contract or furnished to the policyholder by
the insurer in a separate statement,
(2) The amount taken into account as the amount paid for such
medical insurance shall not exceed such charge, and
(3) No amount shall be treated as paid for such medical insurance
if the amount specified in the contract (or furnished to the
policyholder by the insurer in a separate statement) as the charge for
such insurance is unreasonably large in relation to the total charges
under the contract. In determining whether a separately stated charge
for insurance covering expenses of medical care is unreasonably large
in relation to the total premium, the relationship of the coverage
under the contract together with all of the facts and circumstances
shall be considered.
(C) Premiums paid after taxpayer attains the age of 65. * * *
* * * * *
Sunita Lough,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2020-12213 Filed 6-8-20; 4:15 pm]
BILLING CODE 4830-01-P