Two Medicaid programs qualified for difficulty-of-care treatment

Plain-English summary

A state agency administered two Medicaid-funded programs that paid individual providers to care for aged, blind, or disabled recipients in the providers' homes. Although the programs operated under Social Security Act sections 1915(k) and 1905 rather than the section 1915(c) waiver addressed in Notice 2014-7, their purpose, state oversight, and payments were similarly designed to prevent institutionalization and compensate for extra care. The IRS ruled that payments under both programs were difficulty-of-care payments excluded from providers' income under section 131. The agency did not have to report them under sections 6041 or 6051 as wages subject to income tax, or under section 6041A. The payments could still be wages subject to FICA and FUTA and reportable under section 6051 unless a family-service, domestic-service threshold, or other exception applied.

Ruling snapshot

• Question: Were payments under the two state Medicaid programs excludable difficulty-of-care payments, and how did that affect reporting?
• Outcome: Approved, the payments were excluded from income with possible FICA and FUTA reporting remaining
• Key authorities: IRC §§ 131, 3121, 3306, 6041, 6041A, and 6051; Notice 2014-7

Full text (IRS public release)

 Internal Revenue Service                                    Department of the Treasury
                                                             Washington, DC 20224

Number: 201624012                                            Third Party Communication: None
Release Date: 6/10/2016                                      Date of Communication: Not Applicable
Index Numbers: 131.02-00,
                                                             Person To Contact:
6041.08-00, 6041A.04-00, 6051.00-00
                                                             -----------------------------------------------------
                                                             Telephone Number:
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                                                             Refer Reply To:
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------------------------                                     CC:ITA:4
----------------------                                       PLR-131836-15
------------------------------------------                   Date:
                                                             March 11, 2016


 Legend

 Taxpayer = -----------------------------------------------------------------------------------------------------
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 State = -----------------
 State Administrative Code = ------------------------------------------------------
 State Administrative Code § a = --------------------------------
 State Administrative Code § b = --------------------------------
 State Administrative Code § c = ----------------------------------------
 State Administrative Code § d = --------------------------------
 State Administrative Code § e = ---------------------------------
 State Administrative Code § f = -- -----------------------------
 State Statute = --------------------------------------------------
 State Statute § g = -----------------------------
 State Statute § h = ----------------------------------
 State Administrative Code § i = --------------------------------
 State Administrative Code § j = --------------------------------
 State Statute § k = ------------------------------
 State Administrative Code § l = --------------------------------
 State Administrative Code § m = --------------------------------
 State Administrative Code § n = ----------------------------------
 Program A = ----------------------------------------------
 Program B = ----------------------------------------------

 Dear --------------:

 The Taxpayer, an agency of State, requested rulings on whether certain payments to
 individual care providers under State’s in-home supportive care programs will be treated
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as difficulty of care payments excludable from the gross income of the individual care
provider under section 131 of the Internal Revenue Code (Code), and, therefore, the
Taxpayer is not required under section 6041, 6041A, or 6051 to report the payments as
wages subject to income tax.

The Taxpayer is responsible for directing and overseeing the following two State in-
home supportive care programs funded in part by the federal government through
Medicaid under Title XIX of the Social Security Act (SSA):

   (1) State’s program pursuant to section 1915(k) of the SSA, known as Program A;
       and
   (2) State’s program pursuant to section 1905 of the SSA, known as Program B.

These programs assist qualifying aged, blind, or disabled persons who are unable to
perform activities of daily living independently and who cannot remain safely at home
without assistance. See State Administrative Code § a. Under both programs, care
providers include, among others, individual providers who provide in-home services to
eligible individuals (also referred to as “care recipients” or “eligible recipients”) and
residential providers, including licensed adult family homes. See State Administrative
Code § b. Under both programs, in the case of an eligible child, the Taxpayer will not
compensate a responsible parent or other responsible adult for the care that would be
provided to a child who does not have a disability or chronic illness. See State
Administrative Code § c.

The Taxpayer requested rulings regarding payments it makes under Programs A and B
to individual care providers when the care recipient lives in the care provider’s home.
The Taxpayer also requested that the payments it makes to individual care providers
under Programs A and B be treated the same as the payments described in Notice
2014-7, 2014-4 I.R.B. 445, available at www.irs.gov/irb/2014-4_IRB/ar06.html, with the
result that it may look to the Q&As on the Notice for information on its reporting and
withholding obligations.

Specifically, the Taxpayer requested the following rulings:

      (1) Medicaid payments made under Program A, pursuant to section 1915(k) of the
      SSA, to an individual care provider for in-home supportive care provided for an
      eligible recipient (whether related or unrelated) who resides in the provider’s home
      will be treated as difficulty of care payments excludable from the gross income of
      the provider under section 131 of Code, and, therefore, the Taxpayer is not
      required under section 6041, 6041A, or 6051 to report these payments as wages
      to the care provider subject to income tax. Further, the Taxpayer may treat these
      payments the same as the excludable payments described in Notice 2014-7, and
      it may look to the Q&As relating to the Notice for information on its reporting and
      withholding obligations.
PLR-131836-15                                3

      (2) Medicaid payments made under Program B, pursuant to section 1905 of the
      SSA, to an individual care provider for in-home supportive care provided for an
      eligible recipient (whether related or unrelated) who resides in the provider’s home
      will be treated as difficulty of care payments excludable from the gross income of
      the provider under section 131 of the Code, and, therefore, the Taxpayer is not
      required under section 6041, 6041A, or 6051 to report these payments as wages
      subject to income tax. Further, the Taxpayer may treat these payments the same
      as the excludable payments described in Notice 2014-7, and it may look to the
      Q&As on the Notice for information on its reporting and withholding obligations.

I. BACKGROUND

State offers in-home supportive care to aged, blind, or disabled individuals under two
Medicaid programs, Program A and Program B, which are funded by State and the
federal government. The Taxpayer, an agency of State, administers both of State’s in-
home supportive care programs. In order to receive services under either Program A or
Program B, an applicant must request an assessment of need from the Taxpayer and
submit a medical evaluation. See State Administrative Code § d. For both Programs,
the Taxpayer assesses, at every twelve months, the individual’s need for personal care
services to live safely in a home setting and to avoid institutionalization. See State
Administrative Code § e. For both programs, the Taxpayer, or a local agency,
processes applications for care services, determines income and resource eligibility,
assesses the type and level of care necessary for an eligible individual to safely remain
at home, and authorizes services under the individual’s plan of care. See State
Administrative Code § f.

For both programs, the Taxpayer represents that it processes and approves payments
to the individual care provider and that it files information returns and withholds and
pays any applicable taxes on such payments in accord with previous rulings from the
Service regarding its employment tax reporting responsibilities for payments under
similar programs. Further, the Taxpayer represents that it reports the care recipient as
the employer of the care provider on the information returns in accord with the previous
rulings. We are not ruling whether the conclusions in the previous rulings govern the
specific payments at issue.

II. PROGRAM DESCRIPTIONS

Title XIX of the Social Security Act (SSA) authorizes federal grants to states for medical
assistance to low-income persons who are age 65 or over, blind, or disabled. These
medical assistance programs are jointly financed by the federal and state governments
and are administered by the states. Within broad federal rules, each state decides
eligible groups, types and range of services, payment levels for services, and
administrative and operating procedures. See 42 CFR § 430.0.
PLR-131836-15                                   4

A. State Program A pursuant to Section 1915(k) of the SSA

Section 1915(k) of the SSA, 42 USC § 1396n(k), includes in the definition of “medical
assistance” certain home and community-based attendant services and supports for
individuals who are eligible for medical assistance under the state plan and whose
income does not exceed 150 percent of the poverty line or, if greater, the income level
applicable for an individual who has been determined to require an institutional level of
care to be eligible for nursing facility services under the state plan, and with respect to
whom that there has been a determination that, but for the provision of such services,
the individual would require the level of care provided in a hospital, a nursing facility, an
intermediate care facility for persons with intellectual disabilities, or an institution for
mental disease, the cost of which could be reimbursed under the state plan.

State Statute § g authorizes State to provide Medicaid personal care services under
Program A. State Statute § h provides that “personal care services” means physical or
verbal assistance with activities of daily living and instrumental activities of daily living
provided because of a person’s disability. As a condition of receiving services under
Program A, the Taxpayer must assess the applicant’s needs at least annually and make
a determination that, in the absence of in-home services, the individual would require
the level of care furnished in a hospital, a nursing facility, an intermediate care facility for
individuals with intellectual disabilities, an institution providing psychiatric services for
individuals under age 21, or an institution for mental diseases for individuals age 65 or
over (or will likely need the level of care within 30 days unless the services under
Program A are provided). See State Administrative Code §§ i and § j.

B. State Program B pursuant to Section 1905 of the SSA

Section 1905(a)(24) of the SSA, 42 USC § 1396d(a)(24), includes in the definition of
“medical assistance” personal care services furnished to an individual who is not an
inpatient or resident of a hospital, nursing facility, intermediate care facility for persons
with intellectual disabilities, or institution for mental disease that are (A) authorized by a
physician in accordance with a plan of treatment or (at the option of the state) otherwise
authorized for the individual in accordance with a service plan approved by the state,
(B) provided by a qualified individual who is not a member of the individual’s family, and
(C) provided in the home or other permissible location.

Program B, pursuant to section 1905(a)(24) of the SSA and State Statute § k, includes
as “medical assistance” certain personal care services. As a condition of receiving
services under Program B, the Taxpayer must assess the applicant’s needs at least
annually and make a determination that the individual is unable to perform a certain
number of activities of daily living. See State Administrative Code §§ l and m.

III. LAW
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Section 61(a) of the Code provides that, except as otherwise provided, gross income
means income from whatever source derived, including compensation for services.

Section 131(a) of the Code excludes qualified foster care payments from the gross
income of a foster care provider.

Section 131(b)(1) of the Code defines a qualified foster care payment, in part, as any
payment under a foster care program of a state or a political subdivision that is either
(1) paid to the foster care provider for caring for a qualified foster individual in the foster
care provider’s home, or (2) a difficulty of care payment.

Section 131(b)(2) of the Code defines a qualified foster individual as any individual who
is living in a foster family home in which the individual was placed by an agency of a
state or political subdivision or by a qualified foster care placement agency.

Section 131(b)(3) of the Code defines a qualified foster care placement agency, in part,
as a placement agency that is licensed or certified for the foster care program of a state
or political subdivision of a state.

Section 131(c) of the Code defines difficulty of care payments as compensation to a
foster care provider for the additional care required because the qualified foster
individual has a physical, mental, or emotional handicap. The provider must provide the
care in the provider’s foster family home, a state must determine the need for this
compensation, and the payor must designate the compensation for this purpose. In the
case of any foster home, difficulty of care payments are not excludable to the extent that
the payments are for more than 10 qualified foster individuals who have not attained
age 19 or 5 qualified foster individuals who have attained age 19. See § 131(c)(2).

Notice 2014-7 provides that the Internal Revenue Service (Service) will treat qualified
Medicaid waiver payments as difficulty of care payments under section 131(c) of the
Code that are excludable from the gross income of the individual care provider. 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 (whether related or unrelated) living in the
individual care provider’s home. The Notice addresses only payments under a state
Medicaid Home and Community-Based Services waiver program under section 1915(c)
of the SSA.

Q&A1at www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-
Excludable-From-Income, provides that whether the Service will treat payments
received by an individual care provider under a state program other than a section
1915(c) program as difficulty of care payments excludable from the gross income of the
PLR-131836-15                                6

provider under section 131 of the Code will depend on the nature of the payments and
the purpose and design of the program.

Section 3402(a) of the Code, relating to income tax withholding, generally requires
every employer making a payment of wages to deduct and withhold upon those wages
a tax determined in accordance with prescribed tables or computational procedures.

Section 6041(a) of the Code provides, in part, that all persons engaged in a trade or
business and making payments in the course of the trade or business to another person
of wages or other fixed or determinable gains, profits, and income of $600 or more in
any taxable year must render a return of information in the form and manner prescribed
by regulations.

Section 1.6041-1(b) of the Income Tax Regulations (regulations) clarifies that the term
"all persons engaged in a trade or business" includes states and their subdivisions.

Section 1.6041-1(c) of the regulations provides that income is fixed when it is to be paid
in amounts definitely predetermined and that it is determinable whenever there is a
basis of calculation by which the amount to be paid may be ascertained.

Section 1.6041-2(a) of the regulations provides that wages, as defined in section 3401,
paid to an employee must be reported on Form W-2, “Wage and Tax Statement.”

Section 6041(A)(a) of the Code provides, in part, that if any service-recipient engaged in
a trade or business pays in the course of the trade or business remuneration
aggregating $600 or more in a calendar year to a person, for services performed by that
person, then the service-recipient shall make a return setting forth the aggregate
amount of the payments. For purposes of section 6041A(a), the term “remuneration”
does not include amounts paid to any person for services performed by that person if
the service-recipient knows that such amounts are excludable from the gross income of
the person performing the services. See Prop. Reg. § 1.6041A-1(a)(1)(ii). Section
6041A(c) provides that section 6041A(a) does not apply if a statement regarding the
services is required to be furnished under section 6051.

Section 6051(a) of the Code provides that employers must furnish the tax return copy
and the employee's copy of Form W-2 to employees for remuneration paid during the
calendar year. The Form W-2 must show, among other information, the total amount of
wages paid subject to withholding of income tax, the total amount of wages paid subject
to social security and Medicare taxes, and the total amounts of income tax and social
security and Medicare taxes deducted and withheld. Section 6051(d) of the Code and
section 31.6051-2(a) of the Employment Tax Regulations provide that employers must
file a copy of the Form W-2 with the Social Security Administration.

IV. ANALYSIS
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A. Payments under State’s In-Home Supportive Care Programs Will Be Treated as
Excludable Difficulty of Care Payments

The underlying rationale in Notice 2014-7 for treating certain Medicaid waiver payments,
pursuant to section 1915(c) of the SSA, as difficulty of care payments excludable from
the gross income of the provider under section 131 of the Code is the similarity in
purpose and design of Medicaid waiver programs and foster care programs. The Notice
provides:

       Section 131 does not explicitly address whether payments under Medicaid
       waiver programs are qualified foster care payments. Medicaid waiver programs
       and state foster care programs, however, share similar oversight and purposes.
       The purpose of Medicaid waiver programs and the legislative history of § 131
       reflect the fact that home care programs prevent the institutionalization of
       individuals with physical, mental, or emotional handicaps. See 128 Cong. Rec.
       26905 (1982) (stating that “[difficulty of care payments] are not income to the
       [foster] parents, regardless of whether they, dollar for dollar only cover expenses.
       [These] parents are saving the taxpayers’ money by preventing
       institutionalization of these children.”); S. Rep. No. 97–139 at 481 (1981)
       (describing the purpose of the amendment to 42 USC §1396n, allowing Medicaid
       waivers for home and community-based services, as “[permitting] the Secretary
       to waive the current definition of covered [M]edicaid services to include certain
       nonmedical support services, other than room and board, which are provided
       pursuant to a plan of care to an individual otherwise at risk of being
       institutionalized and who would, in the absence of such services be
       institutionalized”). Both programs require state approval and oversight of the
       care of the individual in the provider’s home. The programs share the objective
       of enabling individuals who otherwise would be institutionalized to live in a family
       home setting rather than in an institution, and both difficulty of care payments
       and Medicaid waiver payments compensate for the additional care required.

Whether certain payments under State’s in-home supportive care programs will be
treated as difficulty of care payments excludable from the gross income of the individual
care provider under section 131 of the Code depends on an analysis of the purpose and
design of the programs and the nature of the payments.

1. Purpose of State’s In-Home Supportive Care Programs

Eligibility for State’s programs varies slightly, but both programs have the shared
purpose of preventing institutionalization and enabling an eligible individual to be cared
for in a home setting. Program A, pursuant to section 1915(k) of the SSA and State
Administrative Code § i, and a Medicaid waiver program under section 1915(c) of the
SSA, require that the Taxpayer determine that the individual needs an institutional level
of care. Program B provides for care to individuals who are at risk of institutionalization
PLR-131836-15                                   8

and requires the Taxpayer to determine that the individual is unable to perform a certain
number of activities of daily living independently. See State Administrative Code § b.
Thus, the purpose of both of State’s in-home supportive care programs is similar to the
purpose of foster care programs as stated in Notice 2014-7: That is, both of State’s in-
home supportive care programs and foster care programs prevent institutionalization of
individuals with physical, mental, or emotional handicaps and enable such individuals to
be cared for in a home setting.

2. Design of State’s In-Home Supportive Care Programs

Both of State’s in-home supportive care programs are administered by the Taxpayer, an
agency of State. For both programs, the Taxpayer, or a local agency, processes
applications for assistance, determines income and resource eligibility, assesses the
type and level of care necessary for an individual to remain safely at home, and
authorizes services under the individual’s plan of care. Thus, the design of both of
State’s in-home supportive care programs is similar to the design of foster care
programs: That is, both of State’s in-home supportive care programs and foster care
programs require approval and oversight by the state, or an agency of the state, of the
individual’s care in the provider’s home.

3. Nature of Payments under State’s In-Home Supportive Care Programs

The nature of the payments is similar under both of State’s in-home supportive care
programs. Both programs provide personal care services and supports that include
assistance with the activities of daily living, the instrumental activities of daily living, and
health-related tasks. The nature of the payments to individual care providers under
both of State’s in-home supportive care programs is similar to the nature of difficulty of
care payments. Difficulty of care payments compensate a provider for the additional
care required because an individual has a physical, mental, or emotional handicap.
Similarly, an in-home supportive care provider receives compensation for the additional
care required by an individual who needs assistance with activities of daily living to
remain safely at home and to prevent institutionalization. See State Administrative
Code §§ c and n.

Accordingly, the purpose and design of both of State’s in-home supportive care
programs are similar to the purpose and design of foster care programs, and the nature
of the payments to providers is similar to the nature of difficulty of care payments under
section 131 of the Code. Therefore, payments under both of State’s in-home supportive
care programs to an individual care provider for in-home supportive care provided for an
eligible recipient who resides in the provider’s home will be treated as difficulty of care
payments excludable from the gross income of the provider under section 131 of the
Code.

B. Taxpayer’s Reporting and Withholding Obligations in General
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In general, payments made to an individual care provider as an employee of the care
recipient as employer are wages that would be: (1) includable in the provider’s gross
income and subject to income tax under section 61(a)(1) of the Code, (2) reportable on
Form W-2 under sections 6041 and 6051, and (3) subject to income tax withholding
under section 3402. However, payments made to an individual care provider that are
excludable from the gross income of the provider under section 131 are not reportable
under section 6041 or 6051 as wages subject to income tax and income tax withholding.
Nevertheless, payments made to an individual care provider generally are wages
subject to taxes under the Federal Insurance Contributions Act (FICA) (also known as
social security and Medicare taxes) and the Federal Unemployment Tax Act (FUTA)
unless an exception applies.

Specifically, if the care recipient (and not an outside agency) is the employer of the
individual care provider, the FICA tax rules for domestic service (household work done
in or around the care recipient employer’s home) may apply. Under those rules,
payments for services performed for a spouse or a child and services performed for a
parent by a child under the age of 21 generally are not subject to FICA tax under
section 3121(b)(3)(B) of the Code. In addition, if wages for domestic services paid
during a calendar year are below a threshold ($2,000 for 2016), the wages are not
subject to FICA tax under sections 3121(a)(7)(B) and 3121(x). Similarly, payments for
services performed for a spouse or a child and services performed for a parent by a
child under the age of 21 are not subject to FUTA tax under section 3306(c)(5). In
addition, there is a dollar threshold for wages paid to all household employees for
purposes of FUTA tax under section 3306(a)(3).

Accordingly, for those payments that are excludable from an individual care provider's
gross income under section 131 of the Code, the Taxpayer is not required under section
6041 or 6051 to report the payments as wages subject to income tax and income tax
withholding. However, the Taxpayer may be required under section 6051 to report the
payments as wages to the individual care provider subject to FICA and FUTA taxes,
unless one of the exceptions applies. In addition, the Taxpayer may look to the Q&As
on Notice 2014-7 (in particular, Q&As 15 - 20), available on irs.gov at
https://www.irs.gov/Individuals/Certain-Medicaid-Waiver-Payments-May-Be-Excludable-
From-Income, and Publication 926, Household Employer’s Tax Guide, also available on
irs.gov, for further information on its reporting and withholding obligations.

In addition, reporting is not required under section 6041A of the Code. Section
6041A(c) provides that reporting is not required under section 6041A(a) if reporting for
the services is required under section 6051. Therefore, if the payments are wages
subject to FICA and FUTA, and thus reportable under section 6051, no reporting is
required under section 6041A. Further, if there is an exception to FICA and FUTA
reporting such that reporting is not required under section 6051, the payments would
also not be reportable under section 6041A because the Taxpayer knows that the
PLR-131836-15                                10

payments are excludable from the income of the care provider. See Prop. Reg.
§1.6041A-1(a).

V. CONCLUSIONS

For the reasons explained above, the described payments under both of State’s in-
home supportive care programs will be treated as difficulty of care payments excludable
from the gross income of the provider under section 131 of the Code. Specifically, the
following rulings are granted:

    (1) Medicaid payments made under Program A, pursuant to section 1915(k) of the
        SSA, to an individual care provider for in-home supportive care provided for an
        eligible recipient (whether related or unrelated) who resides in the provider’s
        home will be treated as difficulty of care payments excludable from the gross
        income of the provider under section 131 of the Code. Therefore, the Taxpayer
        is not required under section 6041 or 6051 to report these payments as wages
        subject to income tax. Further, the Taxpayer is not required to report these
        payments under section 6041A.

    (2) Medicaid payments made under Program B, pursuant to section 1905) of the
        SSA, to an individual care provider for in-home supportive care provided for an
        eligible recipient (whether related or unrelated) who resides in the provider’s
        home will be treated as difficulty of care payments excludable from the gross
        income of the provider under section 131 of the Code. Therefore, the Taxpayer
        is not required under section 6041 or 6051 to report these payments as wages
        subject to income tax. Further, the Taxpayer is not required to report these
        payments under section 6041A.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Except as expressly provided herein, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of the Code
provides that it may not be used or cited as precedent. All taxpayer identifying
information has been redacted as required under section 6110(c).
PLR-131836-15                                  11

In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.

                                       Sincerely,


                                       Donna Welsh
                                       Senior Technician Reviewer, Branch 4
                                       (Income Tax & Accounting)

cc: