IRS Proposes Regulations on Direct Primary Care, Other Medical Arrangements

The IRS has issued proposed regulations regarding the treatment under Code § 213 of amounts paid for direct primary care arrangements, health care sharing ministries, and certain other medical care arrangements. Here are highlights:

• Direct Primary Care Arrangements. The proposed regulations define a direct primary care arrangement as a contract between an individual and one or more primary care physicians (as further defined in the proposal) to provide medical care for a fixed annual or periodic fee without billing a third party. The preamble notes that payments for these arrangements could be for medical care under Code § 213(d)(1)(A) or for medical insurance under Code § 213(d)(1)(D), depending on the particular facts. (According to the preamble, payments for a direct primary care arrangement that provides solely for an annual physical exam or an “anticipated course of specified treatments of an identified condition” would fall into the first category.) Either way, the payments would be medical care expenses under Code § 213(d) and thus could be reimbursed by an HRA. The preamble cautions that individuals covered by direct primary care arrangements are not eligible to contribute to an HSA except in limited circumstances in which the arrangement does not provide insurance or provides only disregarded coverage or preventive care. Furthermore, if the employer pays the fee for the arrangement, the payment arrangement will be a group health plan that potentially disqualifies the individual from making HSA contributions.
• Health Care Sharing Ministries. Under the proposal, a health care sharing ministry is a Code § 501(c)(3) organization that meets specified requirements, including that its members share a common set of ethical or religious beliefs and share medical expenses among members in accordance with those beliefs. Payments for membership in health care sharing ministries that share expenses for medical care would be treated as payments for medical insurance. While such payments could be reimbursed by an HRA, membership would preclude an individual from contributing to an HSA.
• Other Medical Care Arrangements. The proposal clarifies that amounts paid for membership in an HMO or for coverage under certain government-sponsored health care programs (e.g., Medicare) are treated as payments for medical insurance. In contrast, payments to an HMO to cover coinsurance, copayments, or deductibles are considered payments for medical care.
• ERISA Issues Not Addressed. The preamble cautions that the proposal does not address issues within the DOL’s jurisdiction, such as whether an arrangement or payment constitutes or is part of an ERISA plan. However, it notes that the DOL has advised that in most circumstances, employer funding of an arrangement that provides health benefits to employees will create an ERISA plan.
• Applicability Date. The regulations are not applicable until they are published as final regulations.

EBIA Comment: Employers and administrators will welcome this guidance, which was issued in response to a 2019 executive order (see our Checkpoint article). Comments have been requested on a variety of issues and are due by August 10, 2020. We note that health FSAs are not mentioned in the proposal. However, they would seem to be prohibited from reimbursing amounts paid for direct primary care arrangements or health care sharing ministries to the extent these expenses are treated as payments for insurance. Also, while an HRA might reimburse direct primary care expenses, care should be taken to ensure that the arrangement does not otherwise fail to comply with health care reform’s mandates and requirements. For more information, see EBIA’s Consumer-Driven Health Care manual at Sections IX.D (“Eligible Individual Must Have HDHP Coverage and No Disqualifying Coverage”), XV.C (“What Is an HSA-Qualified Medical Expense?”), XXI.B.1.d (“Health Care Reform: Coverage Mandates and Other Rules”), and XXIV (“HRAs: Reimbursements”), and EBIA’s Cafeteria Plans manual at Section XX.H (“Health FSAs Cannot Reimburse Insurance Premiums”), which will be updated for this development.

Contributing Editors: Thanks to attorney John R. Hickman for his contributions to this article, with final editing by EBIA staff. Mr. Hickman is a partner in the Employee Benefits Practice Group with Alston & Bird in Atlanta, www.alston.com, and is a Contributing Author of EBIA’s Cafeteria Plans, Consumer-Driven Health Care, and Health Care Reform manuals, and a Contributor to EBIA’s HIPAA Portability, Privacy & Security manual.