Last week, the Internal Revenue Service (IRS) issued a proposed regulation to expand the definition of qualified medical expenses. The expansion would allow employers to reimburse employees for direct primary care arrangement fees and health care sharing ministry shares. It would also allow reimbursement for premiums for other types of insurance contracts that cover medical care and specific government-sponsored health care program costs through a health reimbursement arrangement (HRA). If finalized, the rule would have significant implications for employer coverage paired with health savings accounts (HSAs).
The impetus for this regulation is an Executive Order issued by the Trump Administration almost one year ago. Among other things, the order directs the Treasury Department 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 title 26, United States Code.”
The proposed rule would classify direct primary care arrangement fees as qualified medical expenses, either as medical care or medical insurance, depending on the arrangement’s structure. Healthcare sharing ministry shares are classified as medical insurance by the IRS for qualified medical expense purposes. The classification is interesting since healthcare sharing ministries have resisted labeled as insurance and, therefore, subject to state-based insurance regulation. Other forms of medical care coverage and amounts paid for coverage under Medicare, Medicaid, CHIP, TRICARE, and some veteran’s health coverage would also qualify as amounts paid for medical insurance under Section 213(d) of the Internal Revenue Code.
If finalized, the regulation would have an impact on both HRAs and HSAs. The rule could allow employers to use an HRA to reimburse employees for healthcare sharing ministry costs and direct primary care fees as qualified medical expenses. However, HRAs need to integrate with another type of health coverage, such as major medical coverage or for an Excepted Benefit HRA, an excepted benefit plan. Neither a healthcare sharing ministry nor direct primary care arrangement qualifies as such integrated coverage, so an employer would generally need to ensure employees have other primary medical coverage.
The proposed rule would have a significant limiting impact on HSAs and employer-sponsored qualified high deductible health plan (HDHP) coverage. According to Section 223 of the Internal Revenue Code, a person may only contribute to an HSA account when they are also enrolled in a qualified HDHP. The law and related rules also regulate what other sources of medical care funding and coverage an individual may have in addition to an HDHP, which is very limited. Membership in a healthcare sharing ministry would certainly disqualify someone from enrolling in HDHP coverage and making HSA contributions, according to Section 223. The proposed rule suggests it may be possible in minimal circumstances for someone to have direct primary care coverage and contribute to an HSA, but not if an employer pays for it.
The IRS is accepting public comments on the proposed rule until August 10, 2020. Only after all public comments are reviewed may the Trump Administration finalize the proposal. As currently drafted, this regulation would go into effect on January 1 of the first year after finalization.
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Rob is an employee benefits expert with over 25 years of experience. He is the founder and principal of Precision Benefits Group, a leading provider of corporate benefits plans. He is a member of the Philadelphia Business Journal Leadership Trust and regularly contributes to the publication.