Nonprofit Seeks Broader Definitions for Medical Care Expenses

August 7, 2020

Hon. Steven T. Mnuchin, Secretary of the Treasury
c/o Sunita Lough, Deputy Commissioner for Services and Enforcement
Internal Revenue Service, Room 5203
CC:PA:LPD:PR (REG-109756-19)
P.O. Box 7604
Ben Franklin Station
Washington, DC 20044

Dear Mr. Secretary:

RE: Internal Revenue Service Notice of Proposed Rulemaking titled "Certain Medical Care Arrangements," REG-109755-19, 85 Fed. Reg. 35398 (June 10, 2020)

This letter presents comments of the National Federation of Independent Business (NFIB) in response to the notice of proposed rulemaking (NPRM) of the Internal Revenue Service (IRS) of the Department of the Treasury titled "Certain Medical Care Arrangements" and published in the Federal Register of June 10, 2020. The NPRM proposed rules to implement section 213 of the Internal Revenue Code (IRC) (26 U.S.C. 213), consistent with Presidential direction in section 6(b) of Executive Order 13877 of June 24, 2019, 84 Fed. Reg. 30849 (June 24, 2019). NFIB petitions for and requests two changes to the proposed rules, to allow tax deductibility for amounts paid for direct primary care arrangements with medical professionals other than physicians and for membership in health care sharing ministries that have existed for less than two decades. The changes appear below in bold typeface for your convenience.

NFIB is an incorporated nonprofit association representing small and independent business members across America. NFIB protects and advances the ability of Americans to own, operate, and grow their businesses and ensures that the governments of the United States and the fifty states hear the voice of small business as they formulate public policies. Small businesses, including many sole proprietorships, have a substantial interest access to affordable, flexible, and predictable health care, including through direct primary care arrangements and health care sharing ministries.

Background on Statute, Executive Order, and Proposed Rules

Section 213(a) of the Internal Revenue Code provides that "[t]here shall be allowed as a deduction the expenses paid during the taxable year, not compensated for by insurance or otherwise, for medical care of the taxpayer, his spouse, or a dependent . . ., to the extent that such expenses exceed 10 percent of adjusted gross income" and section 213(f) provides that "[i]n the case of taxable years beginning before January 1, 2021, subsection (a) shall be applied with respect to a taxpayer by substituting '7.5 percent' for '10 percent'."

Section 213(d) defines "medical care":

(d) DEFINITIONS. — For purposes of this section —

(1) The term "medical care" means amounts paid —

(A) for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body,

(B) for transportation primarily for and essential to medical care referred to in subparagraph (A),

(C) for qualified long-term care services (as defined in section 7702B(c)), or

(D) for insurance (including amounts paid as premiums under part B of title XVIII of the Social Security Act, relating to supplementary medical insurance for the aged) covering medical care referred to in subparagraphs (A) and (B) or for any qualified long-term care insurance contract (as defined in section 7702B(b)).

In the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in paragraph (10)) shall be taken into account under subparagraph (D).

Section 6(b) of Executive Order 13877 of June 24, 2019, directed:

(b) 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.

Proposed Treasury Regulation 1.213-1(e)(1)(v)(A) states:

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)) fora 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.

Proposed Treasury Regulation 1.213-1(e)(4)(i)(A)(2) states:

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.

NFIB Comments and Recommendations

NFIB petitions for and requests two changes to the proposed rules, to allow tax deductibility for amounts paid for (1) direct primary care arrangements with medical professionals other than physicians, and (2) membership in health care sharing ministries that have existed for less than two decades.

First, the IRS-proposed rules define "direct primary care arrangement" too narrowly by requiring that the contract for medical care for a fixed annual or periodic fee without billing a third party be between an individual and "one or more primary care physicians." IRC sections 213(a) and 213(d)(1)(A) allow deduction of amounts paid "for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body," whether or not a physician provided that care. Nurse practitioners, clinical nurse specialists, and physician assistants deliver medical care to individuals as well, and often they do so where no physicians are available to provide health care, such as in small rural communities. Also, some nurse practitioners, clinical nurse specialists, or physician assistants may provide service under a direct primary care arrangement at a lower cost to the served individual than some physicians. Expansion beyond physicians to include nurse practitioners, clinical nurse specialists, and physician assistants serves the federal policy in section 2 of Executive Order 13877 "to enhance patients' control over their own healthcare resources." NFIB petitions and requests that the IRS revise its proposed definition of "direct primary care arrangement" to Include a contract for health services between an individual and "one or more primary care physicians, nurse practitioners, clinical nurse specialists, or physician assistants."

Secondly, the IRS-proposed rules define "health care sharing ministry" too narrowly by requiring that the ministry (or its predecessor) "have 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." The other four requirements for a health care sharing ministry (IRC section 501(c)(3) tax-exempt status, a common set of ethical or religious beliefs according to which the members share medical expenses, membership retention after a medical condition develops, and an annual audit made public) do not invidiously discriminate against or among health care sharing ministries, but disqualification from the IRC section 213 medical care deduction of amounts paid by individuals who belong to a health care sharing ministry established after December 31, 1999, does so discriminate. The 1999-or-older requirement does not take proper account of the religion clauses of the First Amendment, the equal protection component of the Fifth Amendment, and the Religious Freedom Restoration Act (42 U.S.C. 2000bb et seq.).

The IRS borrowed the "health care sharing ministry" definition, including the 1999-or-older requirement, from the Affordable Care Act (also known as "Obamacare") (26 U.S.C. 5000A(d)(2)(B)(ii)), perhaps noting that the U.S. Court of Appeals for the Fourth Circuit upheld the 1999-or-older requirement in that very different, Obamacare context in Liberty University, Inc. v. Lew, 733 F. 3d 72 (4th Cir. 2013), cert. denied, 571 U.S. 1071 (2013). But the Fourth Circuit applied in Liberty University the purpose-effect-entanglement test of Lemon v. Kurtzman, 403 U.S. 602 (1971), since all but discarded by the U.S. Supreme Court. See American Legion v. American Humanist Association, 139 S. Ct. 2067 (2019) (Alito plurality opinion: "If the Lemon Court thought that its test would provide a framework for all future Establishment Clause decisions, its expectation has not been met. In many cases, this Court has either expressly declined to apply the test or has simply ignored it" id. at 2080) (Kavanaugh opinion concurring: "As this case again demonstrates, this Court no longer applies the old test articulated in Lemon v. Kurtzman." [citation omitted]. Id. at 2092) (Thomas opinion concurring in judgment; "I would take the logical next step and overrule the Lemon test in all contexts," id. at 2097) (Gorsuch opinion, joined by Thomas, concurring in the judgment: "Scores of judges have pleaded with us to retire Lemon, scholars of all stripes have criticized the doctrine, and a majority of this Court has long done the same. Ante, at 2081 (plurality opinion). Today, not a single Member of the Court even tries to defend Lemon against these criticisms — and they don't because they can't." id. at 2101). Thus, the IRS has little basis to rely on the Liberty University decision to justify the lawfulness of the 1999-or-older requirement against a religious discrimination challenge.

The Fourth Circuit in Liberty University also noted that the 1999-or-older requirement for "health care sharing ministry" eligibility must have a rational basis, which that court said it found in the Obamacare context. 733 F. 3d at 102. But the IRS NPRM provides no basis at all, let alone a rational one, for using the 1999-or-older requirement for a health care sharing ministry in construing IRC section 213. The IRS said simply: "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." 85 Fed. Reg. at 35400, col. 1. That sentence explains where the 1999-or-older requirement came from, but does not provide any reasoning at alt about why the IRS adopted the definition in construing IRC section 213. What was (according to the Fourth Circuit) or was not a rational basis in the context of the Obamacare individual mandate is not automatically without explanation a rational basis in the context of the tax deductibility of medical expenses under a different statute. The IRS has failed to explain a rational connection between facts found and choices made in using the 1999-or-older requirement in the proposed rule. See Motor Vehicle Manufacturers Assn. v. State Farm Mutual Auto Insurance Co., 463 U.S. 29, 43 (1983); Tourus Records, Inc. v. Drug Enforcement Administration, 259 F. 3d 731, 737 (D.C. Cir 2001) ("A 'fundamental' requirement of administrative law is that an agency 'set forth its reasons' for decision; an agency's failure to do so constitutes arbitrary and capricious agency action.")

Even if the 1999-or-older requirement for a health care sharing ministry were legally sound (and it is not), the requirement flouts the President's policy. The IRS understands full well that the President intended with section 6 of Executive Order 13877 to encourage the Secretary of the Treasury to maximize within the bounds of the law, rather than minimize, the tax deductibility under IRC section 213 of amounts individuals pay for membership in a health care sharing ministry. NFIB petitions and requests that the IRS revise its proposed definition of "health care sharing ministry" to allow deduction of amounts paid for membership in a health care sharing ministry that shares expenses for medical care, as payments for medical insurance under IRC section 213(d)(1)(D), without regard to whether the ministry has existed since December 31, 1999.

NFIB noted that the IRS concluded in the NPRM, with respect to Health Savings Accounts (HSA), that under IRC section 223 "an individual generally is not eligible to contribute to an HSA if that individual is covered by a direct primary care arrangement," 85 Fed. Reg. at 35402, col. 1, and that "membership in a health care sharing ministry would preclude an individual from contributing to an HSA." 85 Fed. Reg. at 35402, col. 2. Given the President's policy stated in section 2 of Executive Order 13877 "to enhance patients' control over their own healthcare resources, including through tax-preferred medical accounts," the Department of the Treasury should promptly advise the President to recommend to Congress a measure he judges necessary and expedient to reverse those conclusions and allow individuals who pay from their HSAs the fees for direct primary care arrangements, or for membership in health care sharing ministries, to continue to make tax-deductible contributions to HSAs.

Finally, NFIB appreciates the IRS treatment, in connection with direct primary care arrangements, of Health Reimbursement Arrangements (HRA), including Qualified Small Employer Health Reimbursement Arrangements. The NPRM states specifically that "an HRA may provide reimbursements for direct primary care arrangement fees." 85 Fed. Reg. at 35401, col. 1. Such HRA reimbursements for direct primary care arrangement fees may benefit many small businesses, their employees, and their employees' families.

* * * * *

Obtaining affordable, flexible, and predictable health care for their families, their employees and their employees' families, and themselves remains a top priority for small business owners. NFIB appreciates the Administration's leadership in helping to make health care available and affordable, by increasing, to the extent permitted by law, the tax deductibility of amounts paid for direct primary care arrangements and health care sharing ministries.

David S. Addington
Executive Vice President and General Counsel
National Federation of Independent Business
Washington, DC