Certain Medical Care Arrangements

Cited as:85 FR 35398
Court:Internal Revenue Service
Publication Date:10 Jun 2020
Record Number:2020-12213
Federal Register, Volume 85 Issue 112 (Wednesday, June 10, 2020)
[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                or withdrawn.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