Concierge Health Care May See Expansion Under Proposed HRA Rule

Last month, the IRS issued a proposed rule that would expand the ability of health reimbursement accounts (“HRAs”) to reimburse employees tax-free for care or expenses from direct primary care arrangements (“DPCA”) and health care sharing ministries (“HCSM”).  The proposed rule would allow payments for DPCA and for membership in an HCSM to qualify as expenses for medical care so they may be reimbursed by HRA and be deductible under the tax code.

The proposed regulations also clarify that amounts paid for certain arrangements and programs, such as Medicaid, the Children’s Health Insurance Program (“CHIP”), TRICARE, and certain veterans’ health care programs are medical insurance under the tax code. That means, if a government-sponsored health program requires individuals to pay premiums or enrollment fees for coverage, those premiums or fees may be deducted or reimbursed.

For those that are unfamiliar, 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 for a fixed annual or periodic fee without billing a third party.  These are sometimes referred to a “concierge care.”  A “health care sharing ministry” is an arrangement where members, who typically share religious beliefs, make monthly or other payments to a common pool.  The pooled money is then used to pay for the medical expenses of the other members.

HCSMs, unlike direct primary care arrangements, do not actually provide any medical care or services. Instead, they provide a method to share the burden of the expenses for medical care. However, the IRS determined in the proposed rule that amounts paid for membership in an HCSM are considered payments for medical insurance under the tax code. This is the case even though HCSMs expressly describe themselves as not medical insurance and appear to have no desire to be considered insurance due to the applicable state regulation of insurance.

A side effect of the IRS classifying both DPCAs and HCSMs as medical insurance is that employees who participate in either of these arrangements will likely be ineligible to participate in a health savings account (“HSA”).  The prohibition depends on the type of coverage offered but, in most cases, employees with coverage under a DPCA or HCSM would be disqualified from making HSA contributions, as the ability to do so is limited to those enrolled solely in a high-deduction health plan.

While this proposed rule is not yet final, it does give insight into how the IRS intends to proceed.  The rule does expand the ability of employers to potentially help employees with medical costs but that help comes at a price.  Graydon will continue to monitor this developing law and provide updates as they develop.  If you should have any questions about this proposed rule or any employee benefits issues, please contact any of Graydon’s employee benefits team.