Proposed Regs Address Deductibility of Certain Medical Care Payments

(Parker Tax Publishing June 2020)

The IRS issued proposed regulations on 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 provide that (1) payments for direct primary care arrangements and health care sharing ministry memberships are amounts paid for medical care as defined in Code Sec. 213(d); and (2) clarify that amounts paid for certain arrangements and programs, such as health maintenance organizations and certain government-sponsored health care programs, are amounts paid for medical insurance under Code Sec. 213(d)(1)(D). REG-109755-19.

Background

Under Code Sec. 213(a), taxpayers can deduct expenses paid during the tax year, which are not compensated for by insurance or otherwise, for medical care of the taxpayer, the taxpayer's spouse or dependent, to the extent the expenses exceed 7.5 percent of adjusted gross income (AGI) (10 percent of AGI for a tax year beginning after 2020). For purposes of determining whether medical expenses are deductible, Code Sec. 213(d)(1)(A) defines medical care as amounts paid for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. Under Code Sec. 213(d)(1)(D), medical care includes insurance covering medical care, including supplementary medical insurance for the aged (Medicare Part B), and any qualified long-term care insurance contract.

Under Reg. Sec. 1.213-1(e)(1)(ii), deductions for amounts paid for medical care under Code Sec. 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 treatment affecting any portion of the body. Under Reg. Sec. 1.213-1(e)(4)(i)(a), expenditures for medical insurance described in Code Sec. 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.

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. 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).

In determining whether a contract constitutes an insurance contract for purposes of Code Sec. 213, Reg. Sec. 1.213-1(e)(4)(i)(a) provides that 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, or for group hospitalization and clinical care are payments for medical insurance. In addition, premiums paid for Medicare Part B are amounts paid for medical insurance.

IRS Expands Types of Deductible Medical Expenses

Last week, the IRS issued proposed regulations that treat expenditures for direct primary care arrangements and health care sharing ministry memberships as amounts paid for medical care as defined in Code Sec. 213(d). Thus, amounts paid for those arrangements may be deductible medical expenses under Code Sec. 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 Code Sec. 213(d)(1)(D). The proposed regulations do not affect the tax treatment of any medical care arrangement that currently qualifies as medical care under Code Sec. 213(d).

A direct primary care arrangement is defined 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. Under the proposed regulations, a primary care physician is an individual who is a physician with a primary specialty designation of family medicine, internal medicine, geriatric medicine, or pediatric medicine. A health care sharing ministry is defined in Code Sec. 5000A(d)(2)(B)(ii), which generally describes a health care sharing ministry as a tax-exempt organization whose members share a common set of ethical or religious beliefs and share expenses in accordance with those beliefs, regardless of the state in which a member resides or is employed.

According to the IRS, a payment for a direct primary care arrangement may be a payment for medical care or a payment for medical insurance under Code Sec. 213(d). As 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, regardless of whether the arrangement is for medical care under Code Sec. 213(d)(1)(A) or medical insurance under Code Sec. 213(d)(1)(D). Although membership payments to health care sharing ministries are not payments for medical care under Code Sec. 213(d)(1)(A), the proposed regulations provide that such payments are payments for medical insurance under Code Sec. 213(d)(1)(D).

The proposed regulations incorporate the long-standing position of the IRS which treats amounts paid for membership to an HMO as medical insurance premiums for purposes of Code Sec. 213. 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 Code Sec. 213(d)(1)(A). Regardless of their classification, both HMO amounts paid are eligible for deduction as a medical expense under Code Sec. 213(a). The proposed regulations also clarify that amounts paid for coverage under certain government-sponsored health care programs are treated as amounts paid for medical insurance. Thus, Medicare Parts A through D, Medicaid, the Children's Health Insurance Program (CHIP), TRICARE, and certain veterans' health care programs are medical insurance under the proposed regulations. Finally, the proposed regulations allow a health reimbursement arrangement to reimburse payments for membership in a health care sharing ministry as a medical care expense under Code Sec. 213(d). However, because the proposed regulations provide that health care sharing ministries are medical insurance under Code Sec. 213(d)(1)(D) that is not "permitted insurance" under Code Sec. 223(c)(3), membership in a health care sharing ministry would preclude an individual from contributing to a health savings account.

The proposed regulations were issued in response to Executive Order 13877, which 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 Code Sec. 213(d).

For a discussion of the deduction for medical care expenses, see Parker Tax ¶82,525. For a discussion of the deduction for health insurance premiums that cover medical care, see Parker Tax ¶82,545.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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