[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or withdrawn.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