The Internal Revenue Service (IRS) recently proposed rules that would expand the definition of medical expenses allowed under Section 213(d) of the Internal Revenue Code (“Code”). This part of the Code is what helps guide the types expenses that can be reimbursed through a Health Reimbursement Arrangement (HRA), Flexible Spending Account (FSA) or Health Savings Account (HSA). If finalized, the proposed rules would add these expenses under Section 213(d):

• Expenses to participate in Direct Primary Care Arrangements which is defined as 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.

• Expenses to participate in a Health Care Sharing Ministry where members 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.

Under the proposed rules, HRAs could, at the option of the employer, reimburse expenses of employees who participate in a Direct Primary Care Arrangement or Health Care Sharing Ministry; however, the proposed rule does not eliminate the requirement that employees have to be enrolled in other major medical coverage to participate in most types of HRAs.

As written, the proposed rule may have a limited impact to FSAs. The reason being that FSAs cannot reimburse premiums, and the costs for participating in a Direct Primary Care Arrangement or Health Care Sharing Ministry will generally be considered a premium expense. An exception would apply for a Direct Primary Care Arrangement that solely provides for an anticipated course of specified treatments of an identified condition. In this case, the expense would be considered for the cost of medical treatment, which is eligible for reimbursement through an FSA.

Furthermore, HSA account holders should be aware that the proposed regulations make it clear that participation in Health Care Sharing Ministry will eliminate the ability to make contributions to an HSA. Participation in a Direct Primary Care Arrangement will also eliminate the ability make contributions to an HSA except in limited situations, such as when Direct Primary Care Arrangement only provides preventive care.

The proposed rule is available for public comment at www.regulations.gov (indicate IRS and REG-109755-19).

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