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State Support Not Income

State’s Payments to In-Home Care Providers Are Excludable from Gross Income as “Difficulty of Care Payments”

The IRS ruled privately that Medicaid and state-funded payments made to individual care providers under a state’s in-home supportive care programs would be treated as “difficulty of care” payments excludable from gross income under Code Sec. 131. The IRS noted that although Code Sec. 131 generally applies only to foster care payments, Notice 2014-7 treats certain other payments, like the ones made to the care providers, as difficulty of care payments. PLR201623003.

Background

Under the facts of PLR 201623003, a state offers in-home supportive care to qualifying individuals through four programs. The taxpayer, a department of the state, is responsible for directing and overseeing the programs.

For three of the programs, Medicaid payments are made to individual care providers pursuant to sections 1905, 1915(j), and 1915(k) of the Social Security Act. The state provides funding for payments to the care providers for the fourth program. Each program shares the common purpose of assisting qualifying aged, blind, or disabled
persons who are unable to perform one or more activities of daily living independently and who cannot remain safely at home without assistance.

All four of the state’s in-home supportive care programs are administered by the county welfare departments (CWDs) under the direction and oversight of the taxpayer. The taxpayer facilitates the federal and state funding to the CWDs, and the taxpayer operates the information and payroll system for all four programs. Under the programs, care recipients (as employers) and individual care providers (as employees) verify, sign, and submit bi-monthly timesheets. The taxpayer is required to perform all the federal taxrelated duties and obligations that the care recipient would have been required to perform as the employer of the care provider. The taxpayer requested rulings from the IRS on whether the Medicaid and state-funded payments to individual care providers 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 Code Sec. 131.

Analysis

Code Sec. 131(a) excludes qualified foster care payments, including “difficulty of care” payments, from the gross income of a foster care provider. Code Sec. 131(c) 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.

Notice 2014-7 provides that the IRS will treat qualified Medicaid waiver payments as difficulty of care payments under Code Sec. 131(c) 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 IRS noted that the underlying rationale in Notice 2014-7 for treating Medicaid waiver payments as excludable difficulty of care payments under Code Sec. 131(c) is the similarity in the purpose and design of Medicaid waiver programs and foster care programs. The purpose of Medicaid waiver programs and the legislative history of Code Sec. 131, the IRS observed, reflect the fact that home care programs prevent the institutionalization of individuals with physical, mental, or emotional handicaps. Thus, the IRS stated, whether the payments under the state’s programs will be excluded from the gross income of the provider depended on the purpose and design of the programs, and the nature of the payments.

The IRS noted that all four of the state’s in-home supportive care programs had the shared purpose of preventing institutionalization and enabling an eligible individual to be cared for in a home setting. The IRS thus determined that the purpose of all four programs was similar to the purpose of foster care programs as stated in Notice 2014-7.

Like foster care programs, all four programs require state approval and oversight of the care in the provider’s home, the IRS found. The programs, the IRS observed, were administered by CWDs under the direction and oversight of the taxpayer, a department of the state. As such, the IRS determined that the design of all four programs was similar to the design of foster care programs.

The IRS also determined that the nature of the Medicaid and state funded payments to individual care providers under all four of the state’s programs was similar to the nature of difficulty of care payments. Difficulty of care payments, the IRS said, compensate a provider for the additional care required because an individual has a physical, mental, or emotional handicap. Similarly, the IRS noted, the in-home supportive care providers receive compensation for the additional care required by an individual who needs assistance with one or more activities of daily living to remain safely at home and to prevent institutionalization.

Finding that the purpose and design of all four of the state’s programs were similar to the purpose and design of foster care programs, and that the nature of the payments to the in-home care providers was similar to the nature of difficulty of care payments under Code Sec. 131, the IRS ruled that the Medicaid and state-funded payments were excludable from the gross income of the providers.

The IRS noted that although the state’s payments to the individual care providers were excludable from their gross income, such payments generally are wages subject to FICA and FUTA unless an
exception applies (e.g. the exception for payments for services performed for a spouse or a child).

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