§ 95.11     Other [Necessary] Expenses—Health Care
Cite as:    Keith M. Lundin, Lundin On Chapter 13, § 95.11, at ¶ ____, LundinOnChapter13.com (last visited __________).
[1]

In cases filed prior to May 9, 2008,1 the seventh of 162 categories of Other [Necessary]3 Expenses specified by the IRS4 was “Health Care.”5 A Chapter 13 debtor with current monthly income (CMI)6 greater than applicable median family income7 was allowed a deduction for actual monthly expenses in the category Health Care specified by the IRS as part of the calculation of disposable income under § 1325(b)(2) and (3).8

[2]

In Chapter 13 cases filed after May 9, 2008, there is no Health Care category of Other [Necessary] Expenses specified by the IRS. Literally, in the middle of the night and without notice or opportunity for comment, the Treasury Department modified the categories of Other [Necessary] Expenses specified by the IRS by issuing a new version of its Internal Revenue Manual that contains no Health Care category. The new version was dated May 9, 2008, but contains no instructions with respect to the effective date in bankruptcy cases of the elimination of the Health Care category of Other [Necessary] Expenses. In contrast, when the IRS substantially rewrote its National Standards9 and Local Standards10 on October 1, 2007, a “Disclaimer” was prominently posted to the IRS Web Page stating that the changes were “effective” in bankruptcy cases on January 1, 2008. No similar effective date or time-shifting provision appears with respect to the May 9, 2008, elimination of the Health Care category of Other [Necessary] Expenses.

[3]

It may be speculated that the Health Care category of Other [Necessary] Expenses was eliminated by the IRS in the May 9, 2008, version of the Internal Revenue Manual to reflect changes to the National Standards in October of 2007. Detailed elsewhere,11 on October 1, 2007, the IRS issued new National Standards that included for the first time an expense allowance for “Out-of-Pocket Health Care Expenses.”12 As explained by the Treasury Department, this new National Standards expense allowance included medical services, prescription drugs and medical supplies.13 It seems likely that the Health Care category of Other [Necessary] Expenses was eliminated in the May 9, 2008, version of the Internal Revenue Manual because of perceived overlap with the new National Standards allowance for Out-of-Pocket Health Care Expenses.

[4]

This middle-of-the-night elimination of the Health Care category of Other [Necessary] Expenses by the IRS is another illustration why incorporation of IRS collection standards into the calculation of projected disposable income in Chapter 13 cases by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA)14 is a failed idea. Discussed further below, the category of Other [Necessary] Expenses for Health Care specified by the IRS prior to May 9, 2008, was a broader expense allowance in bankruptcy cases than the Out-of-Pocket Health Care expense allowance added to the National Standards on October 1, 2007. The Out-of-Pocket Health Care expense allowance is a fixed amount. The expenses allowed by the Bankruptcy Code in the Health Care category of Other [Necessary] Expenses was “actual” health care expenses for the debtor and the dependents of the debtor—not capped and not specified as to amount. In Chapter 13 cases filed prior to May 9, 2008, debtors were entitled to (unlimited) actual expenses in the Health Care category specified by the IRS, but debtors filing after May 9, 2008, are allowed only the fixed Out-of-Pocket Health Care expense amount included in the National Standards. This resulted from unvetted internal action by the Treasury Department when it issued a new version of the Internal Revenue Manual on May 9, 2008. An aggressive debtor might argue that the Health Care category of Other [Necessary] Expenses remains available in Chapter 13 cases notwithstanding the May 9, 2008, revision of the Internal Revenue Manual because the IRS failed to submit those changes to public review and comment consistent with the Administrative Procedures Act.15

[5]

Health Care is a very broad category of potential expenses for a Chapter 13 debtor with CMI greater than applicable median family income. The only limitation suggested by § 707(b)(2)(A)(ii)(I) is that actual expenses for Health Care are allowed for “the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case if the spouse is not otherwise a dependent.”16 Health Care would easily include all costs related to the physical and mental care of the debtor and the dependents of the debtor, including doctors, dentists, psychologists, chiropractors, osteopathic and homeopathic care, hospitals, outpatient clinics and the like. Health care would include the cost of health insurance, all deductible and uncovered health care expenses, all medicines—prescribed or not—eyeglasses and health-related equipment of all kinds, from wheelchairs to diabetic monitoring supplies.

[6]

Courts that choose to consult the Internal Revenue Manual for interpretation of the Health Care category of Other [Necessary] Expenses17 will find that there is no commentary on the Health Care category of Other [Necessary] Expenses in the current version of the Internal Revenue Manual because the category was eliminated altogether in the May 9, 2008, version of the Manual. But there was discussion of the Health Care category of Other [Necessary] Expenses in the May 1, 2004, version of the Internal Revenue Manual. The prior version of the Manual provided that the IRS allowed a delinquent taxpayer health care expenses under the following circumstances:

Required for the health and welfare of the family. Elective surgery would not be allowed such as plastic surgery or elective dental work. The taxpayer must provide proof of excessive out-of-pocket medical expenses.18
[7]

Of course, the “health and welfare of the family” limitation imposed by the Internal Revenue Manual appears nowhere in the Bankruptcy Code. “Family” is more than theoretically broader than “debtor [and] dependents of the debtor” in § 707(b)(2)(A)(ii)(I). The elimination of “elective surgery” and “elective dental work” raises as many questions as it pretends to answer. Why a taxpayer must “provide proof of excessive out-of-pocket medical expenses” is curious when only “required” medical expenses were considered allowable by the Treasury Department. The point is obvious: the policy imperatives at work in the Internal Revenue Manual have few or no analogues in bankruptcy practice and provide no useful interpretation of the expenses allowable to Chapter 13 debtors in the Health Care category.

[8]

More problematic, the category of expense for Health Care specified by the IRS overlaps with at least four other expense deductions allowed Chapter 13 debtors with CMI greater than applicable median family income. Detailed above,19 there is a separate category of expense specified by the IRS for “Dependent Care” that will inevitably overlap the Health Care category with respect to the care of elderly, invalid or handicapped debtors and their dependents. In Chapter 13 cases filed after January 1, 2008, there are the new National Standards Out-of-Pocket Health Care Expenses mentioned above.20 Section 707(b)(2)(A)(ii)(I) separately includes in monthly expenses “reasonably necessary health insurance, disability insurance, and health savings account expenses for the debtor, the spouse of the debtor or the dependents of the debtor.”21 “In addition,” § 707(b)(2)(A)(ii)(II) separately allows “the continuation of actual expenses paid by the debtor that are reasonable and necessary for the care and support of an elderly, chronically ill, or disabled household member or a member of the debtor’s immediate family . . . who is unable to pay for such reasonable and necessary expenses.”22

[9]

To one extent or another, all four of these other expense deductions overlap and/or conflict with the category for Health Care specified by the IRS. The problems of statutory construction here are intricate. Through one lens, the category of Other [Necessary] Expenses for Health Care specified by the IRS is broader than and inclusive of the specific separate allowances for out-of-pocket health care expenses, health insurance, health savings account and continuing expenses for “care and support” of a chronically ill family member. Robust canons of statutory construction can be offered to read these specific separate expense allowances as limitations on the more general category of Health Care specified by the IRS. Equally robust canons will counsel that Congress knowingly enacted several different health care–related expense allowances to emphasize the importance of health care expenses within the projected disposable income calculation. The Bankruptcy Code provides no comprehensive guidance to sort out the overlaps and conflicts with respect to health care expenses.

[10]

Acknowledging the multiple overlapping and conflicting allowances for health care expenses, Form B22C incompletely attempts nonstatutory resolution of the problems. Line 36 of Official Form B22C gives this instruction with respect to the Health Care category of Other [Necessary] Expenses specified by the IRS:

Other Necessary Expenses: Health Care. Enter the total average monthly amount that you actually expend on health care that is required for the health and welfare of yourself or your dependents, that is not reimbursed by insurance or paid by a health savings account and that is in excess of the amount entered in line 24b. Do not include payments for health insurance or health savings accounts listed in line 39.
[11]

The “actually expend” part of this instruction is consistent with § 707(b)(2)(A)(ii)(I). The “required for the health and welfare” provision seems to come straight out of the Internal Revenue Manual and has no analogue in the bankruptcy statute. The limitation to “yourself or your dependents” omits the spouse of the debtor and is not consistent with § 707(b)(2)(A)(ii)(I). The exclusion of expenses “reimbursed by insurance or paid by a health savings account” acknowledges that § 707(b)(2)(A)(ii)(I) contains a separate expense deduction for health insurance and for a health savings account, but this netting of the two expense allowances is not specified in the statute. The cross-reference and exclusion of amounts entered at Line 24b is difficult because it requires netting the new National Standards for Out-of-Pocket Health Care created by the IRS in October 2007.23 The content of the National Standards for Out-of-Pocket Health Care is different from the content of the Other [Necessary] Expense category for Health Care specified by the IRS, though the two allowances overlap. The health savings account listed at Line 39—excluded by the instruction at Line 36—will inevitably overlap the Out-of-Pocket Health Care allowance now included in the National Standards. There is no mention at all at Line 36 of the potential duplication of health care expenses in the category of Other [Necessary] Expenses for Dependent Care24 or with respect to the separate statutory allowance in § 707(b)(2)(A)(ii)(II) for the care of an elderly, chronically ill or disabled household member or member of the debtor’s immediate family addressed at Line 40.25

[12]

It is likely that the elimination of the Health Care category of Other [Necessary] Expenses in the May 9, 2008, verison of the Internal Revenue Manual will require revisions to at least Line 36 of Official Form B22C. How these revisions will reflect the remaining overlaps and conflicts with respect to health care expenses is anyone’s guess because there is no formula in the statute for accurately accounting for the multiple overlapping and inconsistent health care expenses allowed by the Bankruptcy Code.

[13]

It is possible that some Health Care expenses will be “debts” excluded from monthly expenses by the “notwithstanding” sentence in § 707(b)(2)(A)(ii)(I).26 For example, a debtor obligated to pay prepetition hospital or doctor bills, an orthodontary contract or the like arguably has a “debt” that falls within the category of Other [Necessary] Expenses for Health Care specified by the IRS, but payments on that debt would be excluded from monthly expenses. If this prepetition debt is the continuation of actual expenses paid by the debtor that are reasonable and necessary for care and support of an elderly, chronically ill or disabled household member or member of the debtor’s immediate family, the expense may come back into the disposable income calculation through § 707(b)(2)(A)(ii)(II) notwithstanding that it is disallowed as a debt for purposes of § 707(b)(2)(A)(ii)(I).27 In the rare circumstance when a health care debt is also secured and scheduled as contractually due at the petition, the secured debt may be allowed as a deduction in the disposable income calculation by § 707(b)(2)(A)(iii) even though it is a debt excluded from deduction in the Other [Necessary] Expense category for Health Care specified by the IRS.28

[14]

It can only be hoped that the multiple and redundant statutory allowances for health care expenses for Chapter 13 debtors with CMI greater than applicable median family income will be interpreted by the courts as an indication that Congress intended to fully and comprehensively allow Chapter 13 debtors to deduct the costs of health care.


 

1  As discussed below in this section and in § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories, the version of the Internal Revenue Manual dated May 9, 2008, eliminated the “Health Care” category of Other [Necessary] Expenses. The Internal Revenue Manual does not specify an effective date in bankruptcy for elimination of the Health Care category, and it can only be speculated that Chapter 13 debtors filing after May 9, 2008, cannot deduct expenses in the Health Care category of Other [Necessary] Expenses previously specified by the IRS.

 

2  Prior to May 9, 2008, the IRS specified 16 categories of Other [Necessary] Expenses in the Internal Revenue Manual. See I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965. The May 9, 2008, version of the Internal Revenue Manual eliminated the “Health Care” category of Other [Necessary] Expenses, leaving only 15 categories. See I.R.M. 5.15.1.10 (May 9, 2008), discussed below in this section and in § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

3  The word “Necessary” is in brackets because there is no such thing as a category of Other Necessary Expenses specified by the IRS as contemplated by 11 U.S.C. § 707(b)(2)(A)(ii)(I). There are categories of Other Expenses specified by the IRS, but the “Necessary” part of that phrase appears only in the Bankruptcy Code and is not specified by the IRS. See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

4  See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

5  I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

6  See 11 U.S.C. § 101(10A), discussed in § 468.1 [ Current Monthly Income: The Baseline ] § 92.3  Current Monthly Income: The Baseline.

 

7  See § 469.1 [ Comparison of CMI to Applicable Median Family Income: § 1325(b)(3) ] § 92.4  Household Size and Comparison of CMI to Median Family Income: § 1325(b)(3).

 

8  See § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

9  See § 475.1 [ National Standards ] § 95.2  National Standards.

 

10  See § 476.1 [ Local Standards: Housing and Transportation ] § 95.3  Local Standards: Housing and Transportation.

 

11  See § 475.1 [ National Standards ] § 95.2  National Standards.

 

12  See http://www.irs.gov/businesses/small/article/0,,id=104627,00.html (Oct. 2, 2007).

 

13  See § 475.1 [ National Standards ] § 95.2  National Standards.

 

14  Pub. L. No. 109-8, 119 Stat. 23 (2005).

 

15  See Matthew Stephenson & Kristin Hickman, The Administrative Law of Borrowed Regulations: Legal Questions Regarding the Bankruptcy Law’s Incorporation of IRS Standards, 1 Norton Bankr. L. Adviser 1 (2008). See §§ 475.1 [ National Standards ] § 95.2  National Standards and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories for further discussion.

 

16  11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

17  There are many good reasons why consulting the Internal Revenue Manual to interpret expense deductions in Chapter 13 cases is a bad idea—particularly with respect to the Health Care category of Other [Necessary] Expenses that was eliminated altogether by the IRS. See §§ 471.1 [ Big Picture: Too Many Issues ] § 94.1  Big Picture: Too Many Issues, 475.1 [ National Standards ] § 95.2  National Standards, 476.1 [ Local Standards: Housing and Transportation ] § 95.3  Local Standards: Housing and Transportation and 477.1 [ Other [Necessary] Expenses—In General; All Categories ] § 95.4  Other [Necessary] Expenses—In General; All Categories.

 

18  I.R.M. 5.15.1.10 (May 1, 2004), available at 2007 WL 2646965.

 

19  See § 477.6 [ Other [Necessary] Expenses—Dependent Care ] § 95.9  Other [Necessary] Expenses—Dependent Care.

 

20  See 11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 475.1 [ National Standards ] § 95.2  National Standards. There is controversy whether this new National Standards Out-of-Pocket Health Care Expenses was effective in Chapter 13 cases filed on October 1, 2007, or not until January 1, 2008. By any interpretation, in Chapter 13 cases filed before May 9, 2008, there was significant overlap between the Health Care category of Other [Necessary] Expenses and the new National Standards Out-of-Pocket Health Care Expenses. That overlap continues if elimination of the Health Care category of Other [Necessary] Expenses was not effective in bankruptcy cases on May 9, 2008.

 

21  11 U.S.C. § 707(b)(2)(A)(ii)(I), discussed in § 478.1 [ Health and Disability Insurance ] § 95.21  Health and Disability Insurance.

 

22  11 U.S.C. § 707(b)(2)(A)(ii)(II), discussed in § 481.1 [ Elderly, Ill or Disabled ] § 95.24  Elderly, Ill or Disabled.

 

23  See § 475.1 [ National Standards ] § 95.2  National Standards.

 

24  See § 477.6 [ Other [Necessary] Expenses—Dependent Care ] § 95.9  Other [Necessary] Expenses—Dependent Care.

 

25  See § 481.1 [ Elderly, Ill or Disabled ] § 95.24  Elderly, Ill or Disabled.

 

26  See § 472.1 [ Netting Issues, Including Exclusion of Payments for Debts ] § 94.2  Netting Issues, Including Exclusion of Payments for Debts.

 

27  See 11 U.S.C. § 707(b)(2)(A)(ii)(II), discussed in § 481.1 [ Elderly, Ill or Disabled ] § 95.24  Elderly, Ill or Disabled.

 

28  See 11 U.S.C. § 707(b)(2)(A)(iii), discussed in § 485.1 [ Average Monthly Payments on Account of Secured Debts ] § 96.1  Average Monthly Payments on Account of Secured Debts.