In the latest of a series of guidance that generally expands the availability and use of health reimbursement arrangements (HRAs), the IRS recently proposed regulations dealing with direct primary care arrangements. More commonly known as “concierge care,” a direct primary care arrangement allows an individual and a primary care physician enter a contract to cover the cost of medical care for a fee (without the involvement of a traditional third-party insurance company).
With interest in concierge care growing amidst the COVID-19 pandemic, the regulations could have a wide-ranging effect for clients interested in concierge care — they affect the medical expense deduction, availability of HRA reimbursements and eligibility for HSA participation.
While the rules might initially seem advantageous, employers and employees who choose to participate risk losing valuable tax-preferred health savings options — so should carefully evaluate their options before jumping in.
The Proposal and Concierge Care
Under the regulations, a direct primary care arrangement may be classified as medical care or medical insurance. Classification would depend upon the facts of the specific arrangement. For example, an arrangement that provides only an annual physical exam would be classified as medical care, not insurance. Similarly, an arrangement that only covers specified treatment for a specific condition would not qualify as “insurance.”
Payments must be made to a primary care physician, which is defined as one who specializes in family medicine, pediatrics, geriatrics or internal medicine.
Regardless of how the arrangement is classified, the payments would be eligible for HRA reimbursement. Further, they will be eligible for the Section 213 federal tax deduction for medical expenses — to the extent that the taxpayer’s medical costs exceed 7.5% of adjusted gross income for the tax year.
The regulations also address contributions to health care sharing ministries. These arrangements involve an agreement where members (who often share similar religious beliefs) pool their funds by making monthly payments into a fund that will cover the health costs of other members. The health care sharing ministry itself must have existed as of Dec. 31, 1999, and qualify as a tax-exempt 501(c)(3) organization.
The regulations clarify that these arrangements will be treated as medical insurance for IRC purposes as long as members remain eligible for reimbursement even if they have developed a medical condition.
Look Before You Leap: Effect on HSAs
The IRS proposal would open the window for HRA reimbursement, but individuals covered by these arrangements would lose eligibility to contribute to an HSA under most circumstances. Individuals are only eligible to contribute to a health savings account if they are enrolled in a high-deductible health plan (HDHP) and have no other comprehensive medical insurance.
HDHPs must impose certain strict limits on the annual deductible and annual out-of-pocket expenses. If the participant has another option available, HSA eligibility is lost. For many, HSAs provide a valuable tax-preferred savings option — one in which contributions can even be carried over from year to year and used as a type of retirement health savings vehicle.
If the employer pays the fees for the concierge care program, the arrangement could be classified as a group health plan. If the arrangement is classified as medical insurance, rather than limited medical care, HSA eligibility will also be lost because the arrangement will not qualify as an HDHP.
However, if the concierge arrangement only provides preventive care services or certain types of disregarded coverage, the participant may be eligible to continue HSA contributions.
Adding to Recent Expansions in Health Options
The new IRS proposal adds to a growing body of rules that expand clients’ ability to use HRAs, HSAs and health flexible spending accounts (FSAs) in the wake of the pandemic. The HSA-HDHP rules have already been changed to allow telehealth and remote health services to be provided without jeopardizing HSA eligibility.
Further, if an employee has unused amounts remaining in a health FSA at the end of a grace period (or plan year) ending in 2020, a plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through Dec. 31, 2020. Notice 2020-33 makes a change to the health FSA carryover rules, so that the unused amount that can be carried over to the following year will be indexed to inflation (increasing the carryover amount from $500 to $550 for 2020).
In the wake of the pandemic, health care will likely continue to evolve. Clients interested in concierge care should continue to follow the new proposed rules to see whether they are finalized as currently drafted.
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