The principal author of this revenue ruling is Casey R. Conrad of the Office of the Associate Chief Counsel (Procedure and Administration). For further information regarding this revenue ruling, contact Mr. Conrad at (202) 317-6844 (not a toll-free number).

* The asterisk reflects the interest factors for daily compound interest for annual rates of 0.5 percent published in Appendix A of this Revenue Ruling.

On March 13, 2020, the President of the United States issued an emergency declaration under the Robert T. Stafford Disaster Relief and Emergency Assistance Act (Stafford Act) (42 U.S.C. 5121 et seq.) in response to the ongoing COVID-19 pandemic (Emergency Declaration¹). The Emergency Declaration instructed the Secretary of the Treasury “to provide relief from tax deadlines to Americans who have been adversely affected by the COVID-19 emergency, as appropriate, pursuant to 26 U.S.C. 7508A(a).” Subsequent to the Emergency Declaration, the President issued major disaster declarations under the authority of the Stafford Act with respect to all 50 states, the District of Columbia, and 5 territories (Major Disaster Declarations).² The Major Disaster Declarations declared that, beginning on January 20, 2020, major disasters existed in each of these jurisdictions, within which is located every population census tract designated as a qualified opportunity zone under section 1400Z-1 of the Code. See Notice 2018-48, 2018-28 I.R.B. 9 (Nov. 21, 2018), and Notice 2019-42, 2019-29 I.R.B. 352 (October 10, 2019) (which collectively list every designated qualified opportunity zone).

Section 7508A provides the Secretary of the Treasury or his delegate (Secretary) with authority to postpone the time for performing certain acts under the internal revenue laws for a taxpayer determined by the Secretary to be affected by a Federally declared disaster, as defined in section 165(i)(5)(A) of the Code. See section 165(i)(5)(A) (defining “Federally declared disaster” to mean “any disaster subsequently determined by the President of the United States to warrant assistance by the Federal Government under the Robert T. Stafford Disaster Relief and Emergency Assistance Act”). Pursuant to section 7508A(a), a period of up to one year may be disregarded in determining whether the performance of certain acts is timely under the internal revenue laws.

On April 9, 2020, the Department of the Treasury and the Internal Revenue Service issued Notice 2020-23 to provide relief under section 7508A(a) to taxpayers affected by the COVID-19 emergency by postponing due dates with respect to certain taxpayer and government acts. See generally Part III of Notice 2020-23 (providing relief for certain time-sensitive actions due to be performed on or after April 1, 2020, and before July 15, 2020), amplifying Notice 2020-20, 2020-16 I.R.B. 660 (April 13, 2020) and Notice 2020-18, 2020-15 I.R.B. 590 (April 6, 2020), and modifying Rev. Proc. 2014-42, 2014-29 I.R.B. 192 (July 1, 2014).

Section 1400Z-2(a)(1)(A) provides that, if a taxpayer has “gain from the sale to, or exchange with, an unrelated person of any property held by the taxpayer” the taxpayer may elect to exclude from gross income for the taxable year “so much of such gain as does not exceed the aggregate amount invested by the taxpayer in a [QOF] during the 180-day period beginning on the date of such sale or exchange” (180-day investment requirement). Section 1.1400Z2(a)-1 provides definitions and rules to implement the 180-day investment requirement.

One of the time-sensitive acts postponed by Notice 2020-23 was the making of “an investment at the election of a taxpayer due to be made during the 180-day period described in section 1400Z-2(a)(1)(A) of the Code” (180-day investment period). See Notice 2020-23, Part III.A and C. Specifically, Notice 2020-23 postponed to July 15, 2020, any deadline for the 180-day investment requirement that otherwise would have occurred on or after April 1, 2020 and before July 15, 2020. See id., Part III.C.

Section 1400Z-2(d)(1) defines a QOF as any investment vehicle organized as a corporation or a partnership for the purpose of investing in qualified opportunity zone property (other than another QOF). This definition also requires a QOF to hold at least 90 percent of its assets in qualified opportunity zone property, determined by the average of the percentage of qualified opportunity zone property held by that QOF as measured (i) on the last day of the first 6-month period of the taxable year of the QOF, and (ii) on the last day of the taxable year of the QOF. See section 1400Z-2(d)(1). The requirement that the average percentages of the QOF’s qualified opportunity zone property on these two dates (semi-annual testing dates) must equal at least 90 percent of the QOF’s assets is referred to as the 90-percent investment standard. See section 1400Z-2(f). Section 1.1400Z2(d)-1 provides definitions and rules to implement the 90-percent investment standard.

If the average of the percentages of the qualified opportunity zone property held by a QOF on these semi-annual testing dates fails to meet the 90-percent investment standard, section 1400Z-2(f)(1) provides a general rule that the QOF must pay a penalty for each month that the QOF fails to meet that standard. However, section 1400Z-2(f)(3) provides that no such penalty is imposed “with respect to any failure if it is shown that such failure is due to reasonable cause.”

An entity must meet certain requirements to be a qualified opportunity zone business, including the requirement of section 1397C(b)(8) that less than 5 percent of the average of the aggregate unadjusted bases of the entity’s property be attributable to nonqualified financial property, as defined in section 1397C(e). Section 1397C(e) excludes from nonqualified financial property reasonable amounts of working capital that are held in cash, cash equivalents, or debt instruments with a term of 18 months or less. See § 1.1400Z2(d)-1(d)(3)(iv).

The section 1400Z-2 regulations provide qualified opportunity zone businesses with a safe harbor for treating an amount of working capital as reasonable for purposes of section 1397C(e) if certain requirements are satisfied (working capital safe harbor). See § 1.1400Z2(d)-1(d)(3)(v) (providing the scope of the working capital safe harbor and conditions for eligibility). One of those requirements is that there is a written schedule consistent with the ordinary start-up of a trade or business for the expenditure of the working capital assets within 31 months of the receipt by the business of the assets. See § 1.1400Z2(d)-1(d)(3)(v)(B). A qualified opportunity zone business may extend the working capital safe harbor period to a maximum 62-month period under § 1.1400Z2(d)-1(d)(3)(vi) if certain additional requirements are met.

If such qualified opportunity zone business is located in a qualified opportunity zone within a Federally declared disaster (as defined in section 165(i)(5)(A)), the qualified opportunity zone business may receive not more than an additional 24 months to expend its working capital assets, as long as the qualified opportunity zone business otherwise meets the requirements of the working capital safe harbor. See § 1.1400Z2(d)-1(d)(3)(v)(D). Therefore, a qualified opportunity zone business may, if each applicable requirement of § 1.1400Z2(d)-1(d)(3)(v) and (vi) is satisfied, have up to a maximum 86-months to expend working capital assets if the qualified opportunity zone business is located in a qualified opportunity zone within a Federally declared disaster.

Section 1400Z-2(d)(2)(D)(i) provides that tangible property is treated as qualified opportunity zone business property if the tangible property is used in a trade or business of the QOF and satisfies three general requirements. One of these requirements is that the original use of post-2017 acquired tangible property in the qualified opportunity zone must begin with the QOF (referred to as the “original use requirement”), or the QOF must substantially improve that property (substantial improvement requirement). See section 1400Z-2(d)(2)(D)(i)(II). The substantial improvement requirement is met only if, during any 30-month period beginning after the date of acquisition of the post-2017 acquired tangible property, there are “additions to basis with respect to such property” held by the QOF that, in the aggregate, exceed the QOF’s adjusted basis of that property as of the beginning of that 30-month period (30-month substantial improvement period). See section 1400Z-2(d)(2)(D)(ii). Section 1.1400Z2(d)-2(b)(4) provides rules to implement the substantial improvement requirement.

The section 1400Z-2 regulations provide generally that, if (i) a QOF sells or disposes of some or all of its qualified opportunity zone property or if a distribution with respect to the QOF’s qualified opportunity zone stock is treated as a return of capital in the QOF’s hands, and if (ii) the QOF reinvests some or all of the proceeds in qualified opportunity zone property by the last day of the 12-month period beginning on the date of the distribution, sale, or disposition, then the proceeds, to the extent that they are so reinvested, are treated as qualified opportunity zone property for purposes of the 90-percent investment standard. See § 1.1400Z2(f)-1(b)(1). This treatment is available to a QOF only to the extent that, prior to the reinvestment in qualified opportunity zone property, the reinvested proceeds are continuously held in cash, cash equivalents, or debt instruments with a term of 18 months or less. See id.

If the QOF’s plan to reinvest some or all of the above-described proceeds in qualified opportunity zone property is delayed due to a Federally declared disaster (as defined in section 165(i)(5)(A)), the QOF may receive not more than an additional 12 months to reinvest the proceeds, provided that the QOF invests the proceeds in the manner originally intended before the disaster. See § 1.1400Z2(f)-1(b)(2).

If the last day of the 180-day investment period within which a taxpayer must make an investment in a QOF in order to satisfy the 180-day investment requirement falls on or after April 1, 2020, and before December 31, 2020, the last day of that 180-day investment period is postponed to December 31, 2020. This relief is automatic; taxpayers do not have to call the IRS or send letters or other documents to the IRS to receive this relief. However, a taxpayer will still need to make a valid deferral election in accordance with the instructions to Form 8949, complete Form 8997, and file the completed Form 8949 and Form 8997 with a timely filed Federal income tax return (including extensions) or amended Federal income tax return for the taxable year in which the gain would be recognized if section 1400Z-2(a)(1) did not apply to defer recognition of the gain. For additional information, see https://www.irs.gov/form8949https://www.irs.gov/form8997.

In the case of a QOF whose (i) last day of the first 6-month period of the taxable year or (ii) last day of the taxable year falls within the period beginning on April 1, 2020, and ending on December 31, 2020, any failure by that QOF to satisfy the 90-percent investment standard for that taxable year of the QOF is—

(1) due to reasonable cause under section 1400Z-2(f)(3); and

(2) disregarded for purposes of determining whether the QOF or any otherwise qualifying investments in that QOF satisfy the requirements of section 1400Z-2 and the section 1400Z-2 regulations for any taxable year of the QOF.

This relief is automatic; QOFs do not have to call the IRS or send letters or other documents to the IRS to receive this relief. However, a QOF must accurately complete all lines on Form 8996 filed with respect to each affected taxable year EXCEPT that the QOF should place a “0” in Part IV, Line 8 (Penalty). The accurately completed Form 8996 must be filed with the QOF’s timely filed Federal income tax return (including extensions) for the affected taxable year(s). For additional information, see https://www.irs.gov/form8996

For purposes of the substantial improvement requirement with respect to property held by a QOF or qualified opportunity zone business, the period beginning on April 1, 2020, and ending on December 31, 2020, is disregarded in determining any 30-month substantial improvement period (that is, the 30-month substantial improvement period is tolled during the period beginning on April 1, 2020, and ending on December 31, 2020).

As a result of the Emergency Declaration (that is, the declaration of a Federally declared disaster for purposes of section 165(i)(5)(A)), all qualified opportunity zone businesses holding working capital assets intended to be covered by the working capital safe harbor before December 31, 2020, receive not more than an additional 24 months to expend the working capital assets of the qualified opportunity zone business, as long as the qualified opportunity zone business otherwise meets the requirements of § 1.1400Z2(d)-1(d)(3)(v) (that is, the requirements to qualify for the working capital safe harbor). See § 1.1400Z2(d)-1(d)(3)(v)(D) (providing such 24-month extension due to a Federally declared disaster).

If any QOF’s 12-month reinvestment period includes January 20, 2020 (that is, the date of the disaster identified in the Major Disaster Declarations), that QOF receives up to an additional 12 months to reinvest in qualified opportunity zone property some or all of the proceeds received by the QOF from the return of capital or the sale or disposition of some or all of the QOF’s qualified opportunity zone property, provided that the QOF satisfies the requirements of § 1.1400Z2(f)-1(b)(1) and invests the proceeds in the manner originally intended before January 20, 2020. See § 1.1400Z2(f)-1(b)(2) (providing such 12-month extension due to a Federally declared disaster).

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.

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 §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 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 §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.

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).

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 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 §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’ 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 §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

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.

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.

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.

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.

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.

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.

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.

Income taxes, Reporting and recordkeeping requirements.

Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1—INCOME TAXES

Paragraph 1. The authority citation for part 1 continues to read in part as follows:

Authority: 26 U.S.C. 7805 * * *

Par. 2. Section 1.213-1 is amended by:

1. Redesignating paragraphs (e)(1)(v) and (vi) as (e)(1)(vi) and (vii) respectively.

2. Adding a new paragraph (e)(1)(v).

3. Redesingnating newly redesignated paragraphs (e)(1)(vi)(a) through (c) as (e)(1)(vi)(A) through (C).

4. Redesignating paragraphs (e)(4)(i)(a) and (b) as (e)(4)(i)(B) and (C) respectively.

5. Adding a new paragraph (e)(4)(i)(A).

6. Revising newly redesignated paragraph (e)(4)(i)(B).

7. In newly redesignated paragraph (e)(4)(i)(C):

i. Adding a subject heading;

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);

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;

iv. Designating the undesignated paragraph following newly redsignated paragraph (e)(4)(i)(C)(1)(ii) as paragraph (e)(4)(i)(C)(2); and

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:

§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 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.

(Filed by the Office of the Federal Register on July 10, 2020, 4:15 p.m., and published in the issue of the Federal Register for June 13, 2020, 85 F.R. 35398)

¹ Section 103 of the Taxpayer Certainty and Disaster Tax Relief Act of 2019, enacted as part of the Further Consolidated Appropriations Act, 2020, Pub. L. No. 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.

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).

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).