Payments Under State’s In-Home Supportive Care Programs Can Be Excluded From Gross Income

By Jihan Murad, CPA, Irvine, Calif.

Editor: Mark G. Cook, CPA, MBA, CGMA

In Letter Ruling 201623003, the IRS ruled that payments made under a state's in-home supportive care programs should be treated as difficulty-of-care payments excludable from the gross income of the care provider under Sec. 131.

The IRS's ruling came in response to a request from a taxpayer (a state department) for a determination whether payments made under a state's in-home supportive programs should be treated the same as payments described in Notice 2014-7 and be excluded from the care provider's gross income.

Description of State Programs

The taxpayer's state's in-home supportive services programs (which the taxpayer directs and oversees) provide care to allow elderly, blind, or disabled individuals to remain safely in their home. There are four programs:

  • A program under Section 1905(a)(24) of the Social Security Act (SSA), known as Program A.
  • A program under Section 1915(j) of the SSA, known as Program B.
  • A program under Section 1915(k) of the SSA, known as Program C.
  • A state-funded residual program, known as Program D.

Programs A, B, and C are funded by the state and federal government; Program D is funded solely by the state. Eligibility for each program varies, but they all share the purpose of preventing institutionalization and enabling an eligible individual to be cared for in the home.

Qualifying under Program C requires a determination that if not for the provision of home and community-based attendant services and supports, the individual would require care in a hospital, a nursing facility, an intermediate care facility, or an institution for mental diseases.

Programs A, B, and D provide care to individuals who are at risk of institutionalization. These programs require that an applicant or recipient obtain a certification from a licensed health care professional that the individual is unable to perform one or more daily activities and that, without assistance, the individual is at risk of placement in out-of-home care.

All programs are administered by county welfare departments under the taxpayer's direction and oversight. All programs require state approval and oversight of the care in the provider's home.

The nature of payments is similar under all of the state's in-home supportive care programs, i.e., to provide assistance with the daily activities and personal care services and ancillary services subordinate to personal care services.

Notice 2014-7

Notice 2014-7 provides guidance on the tax treatment of certain payments made to individual care providers for the care of eligible individuals under a state Medicaid Home and Community-Based Services waiver program described in Section 1915(c) of the SSA. Section 1915(c) enables individuals who otherwise would require care in a hospital or nursing facility to receive care in an individual care provider's home. The notice provides that the IRS will treat these Medicaid waiver payments as difficulty-of-care payments excludable from gross income under Sec. 131.

The notice defines qualified Medicaid waiver payments as payments by a state, a political subdivision of a state, or an entity that is a certified Medicaid provider, under a Medicaid waiver program to an individual care provider for nonmedical support services provided under a plan of care to an eligible individual living in an individual care provider's home.

Sec. 131(c) defines difficulty-of-care payments as compensation to a foster care provider for the additional care required because the qualified individual in foster care has a physical, mental, or emotional handicap. A "qualified foster individual" is defined in Sec. 131(b)(2) as any individual who is living in a foster family home in which the individual was placed by an agency of a state or a political subdivision of a state or by a qualified foster care placement agency. A placement agency is defined in Sec. 131(b)(3) as an agency that is licensed or certified for the foster care program of a state or a political subdivision of a state.

The underlying rationale in Notice 2014-7 treating certain Medicaid waiver payments as difficulty-of-care payments excludable from the gross income of the provider under Sec. 131 is that both programs—Medicaid waiver programs and foster care programs—share similar purposes and design. The purpose of both programs is to prevent the institutionalization of individuals with physical, mental, or emotional handicaps. Both programs require state approval and oversight of the care of the individual in the provider's home.

Analysis

Whether payments made under the state's in-home supportive care programs will be treated as difficulty-of-care payments excludable from the gross income of the provider under Sec. 131 depends on the purpose and design of the programs and the nature of the payments.

The purpose of all of the state's in-home supportive care programs is similar to the purpose of foster care programs in that these programs prevent institutionalization of individuals with physical, mental, or emotional handicaps and enable those individuals to be cared for at home. All of the state's in-home supportive care programs are similar to the design of foster care programs, and all the programs require state approval and oversight of the care in the provider's home.

The nature of payments to individual care providers under all of the state's in-home supportive care programs is similar in nature to difficulty-of-care payments. The compensation received by a care provider is for additional care required by an individual who needs assistance with some of the activities to remain safely at home and to prevent institutionalization.

Conclusion

Based on the above analysis, it was concluded that all four of the state's in-home supportive care programs shared similar purposes, design, and nature of payments as Medicaid waiver programs and will be treated as difficulty-of-care payments excludable from the gross income of the provider under Sec. 131.

From Jihan Murad, CPA, Irvine, Calif.

EditorNotes

Mark Cook is the lead tax partner with SingerLewak LLP in Irvine, Calif.

For additional information about these items, contact Mr. Cook at 949-261-8600 or mcook@singerlewak.com.

Unless otherwise noted, contributors are members of or associated with SingerLewak LLP.

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