The Internal Revenue Service is set to recognize a health care sharing tax deduction for the first time. The Service should be issuing its final regulation on the health care sharing tax deduction in the coming months–likely before the 2020 election.
Under the proposed IRS regulation, payments for membership in a health care sharing ministry that shares expenses for medical care are considered to be payments for medical insurance for the purposes of the tax deduction.
However, even though the health care sharing tax deduction will be treated as the equivalent of an insurance deduction, the Service was clear that it did not intend the deduction to expand the definition of health care sharing for any other purpose of federal or state law. The proposed regulation says this:
“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.”
Many people are not familiar with the concept of health care sharing. Health care sharing is an expanding concept that brings the benefits of a sharing economy to payment of health care costs: think “uber” or “airbnb” for medical expenses. This method of medical expense payments has numerous advantages over ACA health insurance for many people. For a discussion about the health care sharing concept, see: Health Care Sharing Coming of Age.
The basic differences between health care sharing and health insurance centers around the voluntary nature of health care sharing, as well as its feature of paying expenses through member-to-member sharing contributions instead of from pooled funds.
A health insurance company is designed to pool funds paid in by its insured, and to then pay medical expenses from that pool of funds. Conversely, a health care sharing ministry, properly constructed, is designed to facilitate payments of medical expenses through direct payments from one participant to another.
Health care sharing has proven to be a valuable and affordable alternative way for many people of faith to pay their medical expenses. But, as most agree, certain abuses have arisen.
For example, on May 19, 2019 the Texas Department of Insurance filed an administrative action against Georgia-based Aliera Healthcare alleging, in part: “Texas law requires health-sharing ministries to be non-profit organizations. TDI alleges that Aliera is a for-profit corporation and is using only 20 percent or less of the money it collects from consumers to pay health claims” (emphasis added).
It is inconceivable that any reputable health care sharing organization would allocate only 20% of monies collected toward payment of members medical expenses.
While enforcement proceedings to, e.g., revoke a 501(c)(3) charter are always available tools for regulators to address problematic non-profit organizations, we believe that the opportunity for abuse can also be limited by defining clear accounting procedures that minimize the opportunity for abuse.
To more clearly define the accounting procedures that should be required of a health care sharing organization, we have offered this definition for use by IRS in outlining the health care sharing tax deduction regulation:
A health care sharing organization should be defined as an entity:
- Which is described in section 501(c)(3) and is exempt from taxation under section 501(a);
- 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;
- members of which retain membership even after they develop a medical condition;
- 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;
- which does not pool participant funds for payment of medical expenses but rather facilitates direct, participant-to-participant payments for all health care sharing payments; which may include electronic transfers by the participant or by a federal or state charted bank or credit union acting as a transfer agent on behalf of such participant; and
- which provides a monthly accounting to all participants for the previous month of:
–the total dollar amount of qualified needs requested in accordance with criteria established by the organization;
–all sources and uses of funds; and
–the administrative fees and costs assessed to participants.
This proposed definition is modified from Internal Revenue Code §5000A(d)(2)(B)(ii), as modified. As mentioned above, the Service should be issuing its final regulation on the health care sharing tax deduction in the coming months–likely before the 2020 election. We will update this post when that occurs.