On June 10, 2020, the Internal Revenue Service (IRS) published proposed regulations on how it may treat amounts paid for certain medical care arrangements, including direct primary care (DPC) arrangements.
This is 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 as eligible medical expenses under Section 213. Section 213 governs tax treatment of healthcare-related payments.
What Is a Direct Primary Care Arrangement?
The proposed regulations define a DPC arrangement as a contract between an individual and one or more primary care physicians to provide medical care for a fixed annual or periodic fee without billing a third party. Depending on the facts, a DPC arrangement may be considered a payment for medical care or may be considered a payment for medical insurance. Regardless, amounts paid for the arrangement will qualify as an expense for medical care under Section 213.
Direct Primary Care Arrangements and HSAs
Characterization of a DPC arrangement as medical insurance has implications for purposes of the rules for health savings accounts (HSAs). If an individual enters into a DPC arrangement, the type of coverage provided by the DPC arrangement will impact whether he or she is eligible to contribute to an HSA. DPC 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 preclude an individual from contributing to an HSA.
However, in the limited circumstances in which an individual is covered by a DPC 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.
Funding Direct Primary Care Arrangements Through HRAs
The proposed rules also state that because payments for a DPC arrangement are for medical care, a health reimbursement arrangement (HRA) provided by an employer generally may reimburse an employee for DPC arrangement payments. It is important to note that HRAs are a type of group health plan, most of which are subject to the Affordable Care Act prohibition on lifetime and annual dollar limits, as well as the requirement to provide coverage for certain preventive services without cost sharing. Because an HRA cannot comply with these requirements by itself, unless an applicable exception applies, it must be integrated with coverage that otherwise satisfies those requirements.
Additional Medical Care Arrangements
Additional medical care arrangements addressed in these proposed regulations include healthcare sharing ministries and certain government-sponsored healthcare programs, such as Medicare, Medicaid and the Children’s Health Insurance Program (CHIP).
These new IRS regulations do not apply unless and until they become final.
Reach out to your Hylant representative for further information.
The above information does not constitute advice. Always contact your employee benefits broker or trusted adviser for insurance-related questions.