Tax Treatment of Direct Primary Care

Archived Tax Discussion (from 2014-2025) - See the History tab

Historically this was one of the most confusing topics encountered by DPC physicians, patients, and employers. Fortunately with the signing of H.R. 1 in the 119th Congress on 07/04/25 things have been simplified and will change in 2026. For the time being please see the prior discussion linked on the history tab above. The answers below are ACCURATE AS OF THE YEAR 2026 moving forward. Here is all of the DPC language from H.R. 1:

(a) In General.--Section 223(c)(1) is amended by adding at the end the following new subparagraph:

(E) Treatment of direct primary care service arrangements.--

(i) In general.--A direct primary care service arrangement shall not be treated as a health plan for purposes of subparagraph (A)(ii).

(ii) Direct primary care service arrangement.--For purposes of this subparagraph--

(I) In general.--The term `direct primary care service arrangement' means, with respect to any individual, an arrangement under which such individual is provided medical care (as defined in section 213(d)) consisting solely of primary care services provided by primary care practitioners (as defined in section 1833(x)(2)(A) of the Social Security Act, determined without regard to clause (ii) thereof), if the sole compensation for such care is a fixed periodic fee. [1833(x)(2)(A) = family medicine, internal medicine, geriatric medicine, or pediatric medicine]

(II) Limitation.--With respect to any individual for any month, such term shall not include any arrangement if the aggregate fees for all direct primary care service arrangements (determined without regard to this subclause) with respect to such individual for such month exceed $150 (twice such dollar amount in the case of an individual with any direct primary care service arrangement (as so determined) that covers more than one individual). [Note the language below - meds and labs should be ordered and passed through to the patient rather than bundled into the monthly fee and do not count toward the $150 cap.]

(iii) Certain services specifically excluded from treatment as primary care services.--For purposes of this subparagraph, the term `primary care services' shall not include--

(I) procedures that require the use of general anesthesia,

(II) prescription drugs (other than vaccines), and

(III) laboratory services not typically administered in an ambulatory primary care setting.

The Secretary, after consultation with the Secretary of Health and Human Services, shall issue regulations or other guidance regarding the application of this clause.''.

(b) Direct Primary Care Service Arrangement Fees Treated as Medical Expenses.--Section 223(d)(2)(C) is amended by striking ``or'' at the end of clause (iii), by striking the period at the end of clause (iv) and inserting ``, or'', and by adding at the end the following new clause:

(v) any direct primary care service arrangement.''.

(1) by striking ``in subsections (b)(2) and (c)(2)(A)'' and inserting ``in subsections (b)(2), (c)(2)(A), and in the case of taxable years beginning after 2026, (c)(1)(E)(ii)(II)'',

(2) in subparagraph (B), by striking ``clause (ii)'' in clause (i) and inserting ``clauses (ii) and (iii)'', by striking ``and'' at the end of clause (i), by striking the period at the end of clause (ii) and inserting ``, and'', and by inserting after clause (ii) the following new clause:

(iii) in the case of the dollar amount in subsection (c)(1)(E)(ii)(II), `calendar year 2025'.'', and

(3) by inserting ``, (c)(1)(E)(ii)(II),'' after ``(b)(2)'' in the last sentence.

(d) Effective Date.--The amendments made by this section shall apply to months beginning after December 31, 2025.

Can a Patient Pay for DPC with HSA dollars?

Yes, as of January 1, 2026.

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

Yes, clearly as of January 1, 2026, and arguably already yes at this time as well.

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 was already true for HRAs and FSAs (as discussed below) and will be true for HSAs moving forward as of Jan 1, 2026.

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, in many ways as described above.

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.