Tax Treatment of Direct Primary Care

This may be one of the most confusing topics encountered by DPC physicians, patients, and employers.  DPC practices face detailed questions about these topics from employers, patients, accountants, attorneys, and policy makers.  Hopefully these explanations will be useful.  Remember that while Dr. Eskew is a licensed physician, attorney (member of the Kentucky Bar), and accounting major, he does not spend most of his time on tax issues and this discussion should not be deemed official tax advice.

The "Gap Plan" Logic

While the Affordable Care Act and many states contain language expressly stating that DPC is NOT insurance, the folks in treasury continue to maintain the argument that when an individual patient purchases a DPC plan he has bought a type of "gap" insurance. Following their faulty logic further, they conclude that the purchase of this second "gap" plan means that the individual is no longer eligible to use or contribute to a health savings account because the addition of the "gap" product means that the individual no longer has a qualifying high deducible health plan (which is what made him HSA eligible in the first place).  This letter sent to the IRS by Senator Murray, Senator Cantwell, and Congressman McDermott referenced the DPC provision of the ACA (section 1301(a)(3)) - stating that DPC was not an insurance plan.  They argued that section 223(c) of the Internal Revenue Code should be updated to reflect that DPC medical homes are not a type of "health plan" and that periodic fee payments to primary care physicians should be recognized as a "qualified medical expense" under section 213(d) of the Internal Revenue Code.  In this response from Commissioner Koskinen, the IRS declined to decide whether periodic fees might be a qualified medical expense under 213(d), but did make it clear that they view DPC as a second health plan under section 223(c)(1)(A)(ii).  For DPC periodic fees to not be viewed as a second plan, it would need to be considered disregarded coverage under section 223(c)(1)(B) or be designed so that it exclusively covered preventive care.  For those planning to get creative with the exclusively preventive care exception, note that the IRS defines preventive care in a narrow manner.  You might also consider the narrowness of this preventive exception as contemplated by Sullivan Benefits as well.

The DPC Coalition has been fighting this issue for years and sought to educate the IRS so that a helpful clarification could be made. Rather than changing their policy to be consistent with other federal and state laws, the IRS has stated that if we want this corrected, we must "pass a bill."  Here is a link to SB 1989, which was drafted in part to resolve this issue. CMS is also interested in DPC and issued this RFI regarding a potential DPC Pilot Project.  Here is the response from the DPC Coalition and the DPC Alliance. Interest from CMS has done little to persuade the IRS.

The "Qualifying Medical Expense" Debate

Assuming the IRS decided that DPC was not an unlawful second "gap" plan, meaning that an individual with a DPC plan was now eligible to contribute to an HSA, the second question is whether DPC periodic fees qualify as medical expense.  (I would point out that there is no debate about itemized fees qualifying as medical expenses - such as cash prices for lab testing, pathology, various itemized procedures, etc.)  To answer this question one must try to interpret IRS Publication 502 Medical and Dental Expenses.  "Medical expenses are the costs of diagnosis, cure, mitigation, treatment, or prevention of disease, and the costs for treatments affecting any part or function of the body. These expenses include payments for legal medical services rendered by physicians, surgeons, dentists, and other medical practitioners. They include the costs of equipment, supplies, and diagnostic devices needed for these purposes. Medical care expenses must be primarily to alleviate or prevent a physical or mental defect or illness. They don't include expenses that are merely beneficial to general health, such as vitamins or a vacation."

Can a Patient Pay for DPC with HSA dollars?

Not if you are billing on an exclusively periodic fee basis!  See the discussion above.  DPC physicians should not state without reservation that an HSA can be used to pay routine periodic fees - this is tantamount to aggressive tax advice from someone unqualified to give it (a physician rather than a personal accountant or attorney). The patient has the legal risk in this scenario - not your medical practice.  Taking on your own legal risk is one thing, but offloading it onto patients is something else entirely.  Many small practices have a "don't ask, don't tell" approach, and this is acceptable.  Taking the effort to structure your DPC arrangement to be HSA deductible requires you to consider three options (none of these legal theories have been litigated either):

1. Structure the DPC plan so that it is considered disregarded coverage under section 223(c)(1)(B) (this is not my favorite option),

2. Design the plan so that it exclusively covered preventive care (per the IRS's narrow definition) (this is also not a good option),

3. Structure the DPC plan so that it mirrors the 90 day global surgery fee program, whereby at the initial visit the patient is charged (technically in a fee for service manner) on the first day, and the following ninety days of ongoing care for issues discussed during this initial visit are then included without additional charge (the best option). This solves both the "gap plan" and "qualifying medical expense" problems simultaneously, or

4. Structure the DPC plan so that it charges a monthly/periodic fee exclusively for remote services and charges a small per visit fee for in person office visits only pursuant to the 2020 CARES Act. This exception was scheduled to sunset as of 12/31/21, but it was extended (see below at subtitle E) through 2025 by the Consolidated Appropriations Act of 2023.
   CARES Act SEC. 3701. EXEMPTION FOR TELEHEALTH SERVICES.

   (a) In General.—Paragraph (2) of section 223(c) of the Internal Revenue Code of 1986 is amended by adding at the end the following new subparagraph:

   “(E) SAFE HARBOR FOR ABSENCE OF DEDUCTIBLE FOR TELEHEALTH.—In the case of plan years beginning on or before December 31, 2021, a plan shall not fail to be treated as a high deductible health plan by reason of failing to have a deductible for telehealth and other remote care services.”

   Subtitle E--Health Care Tax Provisions

   SEC. 4151. EXTENSION OF SAFE HARBOR FOR ABSENCE OF DEDUCTIBLE FOR

   TELEHEALTH.

   (a) In General.--Section 223(c)(2)(E) of the Internal Revenue Code

   of 1986 is amended by striking ``In the case of plan years'' and all that follows through ``a plan'' and inserting ``In the case of--

   ``(i) months beginning after March 31, 2022, and before January 1, 2023, and

   ``(ii) plan years beginning on or before December 31, 2021, or after December 31, 2022, and before January 1, 2025, a plan''.

   (b) Certain Coverage Disregarded.--Section 223(c)(1)(B)(ii) of the Internal Revenue Code of 1986 is amended by striking ``(in the case of plan years beginning on or before December 31, 2021, or in the case of months beginning after March 31, 2022, and before January 1, 2023)'' and inserting ``(in the case of months or plan years to which paragraph (2)(E) applies)''.

   (c) Effective Date.--The amendments made by this section shall apply to plan years beginning after December 31, 2022.

Can a Patient Pay for DPC with traditional HRA or FSA dollars?

This remains a debated issue, but historically the answer was already "yes" and after the June 2020 IRS proposed rule (linked below) takes effect the answer is definitively “yes.”  Hopefully the following resources are helpful.  Flexible Spending Accounts (aka Section 125 Cafeteria Plans) may qualify (one group's opinion of eligible expenses, note "boutique")  Theoretically DPC should qualify if structured properly. In other words, the practice would want to bill in arrears, focus on preventive nature, consider itemized statement of preventive services, etc.  Here is one group's example of a Healthcare Qualifying Expenses Table. This likely turns on an Internal Revenue Code Section 213(d) analysis as well - a yet to be decided issue.  Winning this argument might also get DPC in the preferred "disregarded coverage" category under section 223(c)(1)(B) as discussed above.

If an employer is especially fearful then the easy solution is to simply pay for DPC with post-tax dollars.  DPC is a low budget item (unlike the rest of healthcare) so the lost tax savings are minimal compared with the rest of the health plan design.  

Can a Small Employer Pay for DPC for its Employees?

Yes!  This answer is a resounding yes for large employers that elect to self insure with stop loss (generally those with fifty or more employees).  For other employers the answer is more complicated.

If the employer does not provide a qualified plan for its employees (regardless of whether it has 50+ or less than 50 full time equivalent employees), then according to the IRS providing only DPC would be "an arrangement (that) fails to satisfy the market reforms and may be subject to a $100/day excise tax per applicable employee (which is $36,500 per year, per employee) under section 4980D of the Internal Revenue Code."  However, an employer payment plan "generally does not include an arrangement under which an employee may have an after-tax amount applied toward health coverage or take that amount in cash compensation."  The most likely scenario for DPC practices is that you are approached by a employer of less than 50 employees that wants to sponsor DPC.  This employer was not required to buy insurance for its employees, but now does not want to be subject to a $100 per day fine per employee.  Fortunately this $100 per day fine is now nothing more than a theoretical problem.

On Dec 8, 2016 with the passage of H.R. 34: 21st Century Cures Act the potential for a $100 per day fine for the less than fifty employers desiring to pay for DPC services with pretax dollars has largely been eliminated.  See for yourself by reading the language under Title XVIII Other Provisions Sec 18001 titled "Exception from group health plan requirements for qualified small employer health reimbursement arrangements."  The most important subsection reads as follows:

"An arrangement is described in this subparagraph if—
(i)such arrangement is funded solely by an eligible employer and no salary reduction contributions may be made under such arrangement,
(ii)such arrangement provides, after the employee provides proof of coverage, for the payment of, or reimbursement of, an eligible employee for expenses for medical care (as defined in section 213(d)) incurred by the eligible employee or the eligible employee’s family members (as determined under the terms of the arrangement), and
(iii)the amount of payments and reimbursements described in clause (ii) for any year do not exceed $4,950 ($10,000 in the case of an arrangement that also provides for payments or reimbursements for family members of the employee)."

Almost any method of structuring the payment arrangement will now permit you to avoid the fine.  The old method was to make sure the employer paid the DPC fees with after tax dollars, and of course gave the employees the option to take cash rather than enroll in the DPC practice.  Historically we could also make the odd argument that technically the IRS claims that DPC fees are not currently an eligible 213(d) expense.  With the passage of the CURES Act neither of these designs or arguments are necessary.  As long as the arrangement is funded solely by the employer for 213(d) expenses and it costs less than $4,950 per individual or $10,000 per family per year then we do not have a problem.  As readers can realize - for this particular issue - the only way the small business faces a fine is if the DPC practice is charging a monthly membership fee greater than $412.50 per month.  Whether the IRS deemed it a 213(d) expense or not makes no difference in the final outcome - no $100 per employee per day fine would apply in either circumstance.

The employer will want to ask each employee to attest to having some kind of minimum essential (MEC) coverage, but there need be no formal audit regarding this attestation. Please see IRS Notice 2017-67 page 27 and 28. Proof could consist of "an attestation by the employee stating that the employee and the individual have MEC, the date coverage began, and the name of the provider of the coverage." Further "An eligible employer may rely on the employee’s attestation unless the employer has actual knowledge that the individual whose expense is submitted does not have MEC."

If the employer does provide a qualified plan, either through the purchase of a traditional plan or via a self insured / stop loss policy, then the employer may also purchase DPC for its employees without concern for the $100 daily fine.  For more introductory information see this IRS discussion of Employer Health Care Arrangements.  Additional FAQs from the Department of Labor are answered here.

Those readers that want to dig into the details should also review IRS Notice 2013-54 and IRS Notice 2015-17 (especially Questions 4 and 5).  These complicated discussions are difficult even for attorneys and accountants.  I will attempt to summarize my reading.  If you are dealing with an employer (likely fewer than 50 employees) that does not want to be stuck with the $100 per employee per day fine, you will need to argue that the employer's decision to purchase DPC for its employees does NOT amount to a "Health Reimbursement Arrangement."  The IRS says that a HRA is "an arrangement that is funded solely by an employer and that reimburses an employee for medical care expenses as defined under Code section 213(d)."  At this stage, you could launch two potential defenses: 1) structure the DPC arrangement such that each individual patient must pay part of the monthly fee so that the employer is not "solely" funding the arrangement, or 2) you could (ironically) argue that DPC is not a recognized medical care expense under section 213(d).

Those reading this page closely would note that the IRS has yet to firmly decide whether DPC periodic fees are an expense under 213(d).  In terms of our HSA argument (discussed above) this is harmful since patients could not pay for DPC periodic fees with HSA dollars, but in terms of the HRA argument here it could be helpful because it could help the employer avoid this large fine.  Are you confused yet?  The safest and easiest way to avoid the $100 per day fine is probably to make the purchase of DPC a post-tax option as contemplated in Question #4 of Notice 2015-17 and mentioned above.

Can a large employer pay for DPC for its Employees?

Yes, and the best way to do this has recently changed. EBHRAs (Excepted Benefit Health Reimbursement Accounts) with an on site DPC clinic are the best way for employers to pay for DPC in a tax advantaged way.

While there may be an argument that ICHRAs can fund DPC this is less clear, and the employer would be limited in its ability to endorse a specific DPC practice with an ICHRA (Individual Coverage Health Reimbursement Account), but this is easily achieved with an EBHRA. Readers will want to review the following Federal Register language (82 FR 28,888) Here are some of the more important sections below:

"Some commenters requested that the Departments confirm that certain excepted benefits, including standalone dental coverage, hospital indemnity or other fixed indemnity coverage, and coverage for a specific disease or illness, provide medical care within the meaning of Code section 213(d) and, therefore, that expenses for these types of coverage are reimbursable by an individual coverage HRA. Some commenters requested that expenses paid with regard to direct primary care arrangements be recognized as expenses for medical care under Code section 213(d). In addition, one commenter requested clarification of whether payments for participation in health care sharing ministries qualify as medical care expenses under Code section 213(d)."

"An HRA, including an individual coverage HRA, generally may reimburse expenses for medical care, as defined under Code section 213(d), of an employee and certain members of the employee's family. Under Code section 213(d), medical care expenses generally include amounts paid (1) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure of function of the body; (2) for transportation primarily for and essential to medical care; (3) for certain qualified long-term care services; and (4) for insurance covering medical care. Neither the proposed rules nor the final rules make any changes to the rules under Code section 213. Thus, any issues arising under Code section 213, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. The Treasury Department and the IRS, however, appreciate the comments and plan to address some of these issues in future rulemaking or guidance."

"Finally, some commenters requested that direct primary care arrangements not be treated as a health plan or coverage under Code section 223, so that an individual may have a direct primary care arrangement without becoming ineligible for HSA contributions. Similar to the discussion of Code section 213 in the preceding section of this preamble, neither the proposed rules nor the final rules make any changes to the rules under Code section 223. Thus, any issues arising under Code section 223, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking."

"Several commenters inquired whether an excepted benefit HRA could reimburse expenses related to participation in a health care sharing ministry or a direct primary care arrangement. One commenter asked whether reimbursement could be provided for categories of excepted benefits other than “limited excepted benefits,” such as those in which benefits for medical care are secondary or incidental (for example, travel insurance). This commenter expressed concern that there could be potential conflicts under rules regarding taxable fringe benefits under the Code. Some commenters requested clarification more generally regarding whether an excepted benefit HRA may only reimburse excepted benefits that pay health benefits or all excepted benefits, with some advocating that excepted benefit HRAs be allowed to reimburse all expenses for all excepted benefits and some advocating that the excepted benefit HRA only be allowed to reimburse expenses for excepted benefits that are medical care. The Departments clarify that an HRA, including an excepted benefit HRA, generally may reimburse medical care expenses of an employee and certain of the employee's family members (subject to the prohibition on the reimbursement of certain premiums that apply for excepted benefit HRAs). Neither the proposed nor the final rules make any changes to the rules under Code section 213. Thus, any issues arising under Code section 213, and any guidance requested by commenters to address those issues, are beyond the scope of this rulemaking. The Treasury Department and the IRS, however, appreciate the comments and anticipate addressing some of these issues in future rulemaking or guidance."

"(d) Health reimbursement arrangements (HRAs) and other account-based group health plans—
(1) In general. If an HRA or other account-based group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2711 and paragraph (a)(2) of this section, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2711 and paragraph (a)(2) of this section. Similarly, if an HRA or other account-based group health plan is integrated with another group health plan or individual health insurance coverage and the other group health plan or individual health insurance coverage, as applicable, separately is subject to and satisfies the requirements in PHS Act section 2713 and § 54.9815-2713(a)(1) of this chapter, the fact that the benefits under the HRA or other account-based group health plan are limited does not cause the HRA or other account-based group health plan to fail to satisfy the requirements of PHS Act section 2713 and § 54.9815-2713(a)(1) of this chapter. For the purpose of this paragraph (d), all individual health insurance coverage, except for coverage that consists solely of excepted benefits, is treated as being subject to and complying with PHS Act sections 2711 and 2713.
(2) Requirements for an HRA or other account-based group health plan to be integrated with another group health plan. An HRA or other account-based group health plan is integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section if it satisfies the requirements under one of the integration methods set forth in paragraph (d)(2)(i) or (ii) of this section. For purposes of the integration methods under which an HRA or other account-based group health plan is integrated with another group health plan, integration does not require that the HRA or other account-based group health plan and the other group health plan with which it is integrated share the same plan sponsor, the same plan document or governing instruments, or file a single Form 5500, if applicable. An HRA or other account-based group health plan integrated with another group health plan for purposes of PHS Act section 2711 and paragraph (a)(2) of this section may not be used to purchase individual health insurance coverage unless that coverage consists solely of excepted benefits, as defined in 45 CFR 148.220."

So when readers review the excepted benefits under 45 CFR 148.220 one of them should stand out -

(a) Benefits excepted in all circumstances: #8 - "coverage for on site medical clinics."

Do on-site or near-site DPC clinics qualify as "employee welfare benefit plans" (see the full definition below) pursuant to 29 U.S. Code § 1002 (the referenced term "medical care" is defined here)?   Yes - if DPC is paid for with pretax dollars it will be considered a benefit plan by the IRS the employer will need to include these details in their form 5500.  Even if your DPC clinic is on-site it will not fit within the on-site clinic exception described in the US Code section above for the form 5500.  DPC services are too broad in scope to qualify for this exception that is intended for mere band-aid stations.  This is discussed in great detail on the ERISA page of DPC Frontier. If the patient were to lose his job and wish to remain with the practice then he would be able to do this (at least for a limited time period) pursuant to COBRA requirements.  Two helpful resources: this FAQ from the International Foundation of Employee Benefit Plans & also McDermott, Will, & Emery On-Site Medical Guidelines.  

Employee Welfare Benefit Plan defined = “any plan, fund, or program which was heretofore or is hereafter established or maintained by an employer or by an employee organization, or by both, to the extent that such plan, fund, or program was established or is maintained for the purpose of providing for its participants or their beneficiaries, through the purchase of insurance or otherwise, (A) medical, surgical, or hospital care or benefits, or benefits in the event of sickness, accident, disability, death or unemployment, or vacation benefits, apprenticeship or other training programs, or day care centers, scholarship funds, or prepaid legal services, or (B) any benefit described in section 302(c) of the Labor Management Relations Act, 1947 (other than pensions on retirement or death, and insurance to provide such pensions). (Emphasis supplied.)” Section 3(1) of ERISA, 29 U.S.C. §1002(1).

Does the Fiduciary Duty Rule apply to DPC? Yes, since DPC is a type of benefit plan then employers and their consultants will want to be able to demonstrate they were careful with the plan dollars. Can you think of a better way to ensure that plan assets are protected than by using the price transparency enabled by a DPC practice. Please note that the fiduciary duty rule in no way requires the submission of claims data from the DPC practice. Downstream savings can be used to demonstrate the value of the DPC practice without requiring coding or quality metrics from the DPC practice.

For more information on this topic please see “Understanding Your Fiduciary Responsibilities Under a Group Health Plan” from the US Department of Labor. Note that the language on page 6 under “Monitoring A Service Provider” is vague and could be accomplished in many ways without detailed ghost claiming to mirror the inefficient third party payment system.

“An employer should establish and follow a formal review process at reasonable intervals to decide if it wants to continue using the current service providers or look for replacements. When monitoring service providers, actions to ensure they are performing the agreed-upon services include:

• Reviewing the service providers’ performance;

• Reading any reports they provide;

• Checking actual fees charged;

• Asking about policies and practices (such as a TPA’s claims processing systems);

• Ensuring that plan records are properly maintained; and

• Following up on participant complaints.”

Here is another review from Sullivan Benefits.

The Short Answers:

- If the employer has less than fifty employees, then almost any plan design will do unless you are charging individuals more than $412.50 per month.  If the employer is nervous about all this tax research or attorney fees associated with the investigation, then the simplest answer is to avoid any potential IRS dispute is to pay for the monthly DPC fee with post-tax dollars.
- If the patient has an HSA plan and wants to both maintain this HSA (continue to contribute to it) and use the HSA to pay for medical services, then the safest answer is to charge them on a cash-pay fee for service basis (ideally in a manner and amounts that would lead to approximately the same charges you would expect with your periodic fees). Example: For their HSA patients charge the company on a cash pay per visit basis. If a DPC practice was charging $100 per month then the practice would now charge $300 per visit with the expectation that this charge is levied on an approximately quarterly basis. Mimic the 90 day global payment fee for surgery where at the first visit the full fee is charged and for ninety days thereafter followups and complications for the issue addressed and treated at the initial visit do not result in additional charges. Using this approach allows employees to continue contributing to their HSAs and to use their HSAs for DPC expenses since the IRS has never objected to cash pay fee for service medicine.
- If HRAs or FSAs are being used, then these implicate only 213(d) concerns. As discussed at length above, if an HSA is used then both 223(c) and 213(d) are implicated.

Federal Legislative Efforts:

Regulatory Interpretation - Multiple groups have made efforts to educate the IRS into offering a different position.  The IRS has formally replied on at least two indications indicating that we would need to "pass a bill" if we wanted our patients to safely fund and use HSAs for DPC.  

- June 17, 2014 Letter to IRS from Sen Cantwell, Sen Murray, and Rep McDermott
- June 30, 2014 Response from IRS (John Koskinen)
- April 17, 2018 Second letter to IRS from Sen Cruz and Sen Johnson
- May 15, 2018 Response from IRS (Drew Maloney)
- Jan 4, 2019 Letter to IRS from the Docs 4 Patient Care Foundation
- Jun 24, 2019 White House Executive Order (see below & this blog post)

"Within 180 days of the date of this order, the Secretary of the Treasury, to the extent consistent with law, shall 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."

- Jun 10, 2020 Proposed rule announced: DEPARTMENT OF TREASURY Internal Revenue Service 26 CFR Part 1 [REG-109755-19] RIN 1545-BP31 Certain Medical Care Arrangements.

If you want to see my full analysis please check out my three page summary (color coded with quotes and references) of the 26 page proposed rule or view this blog post for a briefer analysis.

Efforts should continue to be steered toward reintroducing and gaining cosponsors of the House and Senate versions of the Primary Care Enhancement Act (SB 1358 and HR 360).  These were bipartisan bills.  Support from members of the House Ways and Means Committee and Senate Finance Committee are especially helpful at increasing the chance of passage.  We would like for you to ask your Senators and Representatives to cosponsor the bill.  We believe that the score offered in 2018 by JCT as part of HR 6317 was pessimistic to the point of inaccuracy. We continue to argue that the Joint Committee on Tax and the Congressional Budget Office should "score" it at zero - meaning that the expectation is no cost to the federal government as predicted by this memorandum from Don Moran of the Moran Company dated March 13, 2018. If patients were already paying for (expensive) primary care on a fee for service basis using their HSA, the switching to low cost DPC and using their HSA results in less spending.