HCPF says IRS private letter ruling allows difficulty-of-care tax exemption under Community First Choice

The Colorado Department of Health Care Policy & Financing (HCPF) said an IRS private letter ruling confirms that live‑in caregivers serving members under Community First Choice (CFC) can apply the same federal difficulty‑of‑care (DOC) income‑tax exemption that previously applied to waiver programs.

HCPF staff told the Community First Choice Council that the agency asked the IRS in February 2025 whether the exemption would carry over when the state moved direct‑care services into CFC on July 1, 2025. “The decision they gave us was good. It's favorable. They basically said, yes,” the presenter said.

HCPF said many provider agencies and financial management services (FMS) vendors withheld income tax from caregiver wages during the period of uncertainty; now that the IRS ruling is final, the department has encouraged vendors to reconsider withholding but said it cannot provide legal or tax advice. HCPF posted a link to the IRS private letter ruling and said a memo with additional guidance and links to low‑cost Department of Revenue resources would be posted "shortly."

The department also reminded members that its internal eligibility systems still need updates to reflect CFC‑only members and the DOC exemption. While systems are updated, HCPF said it has recommended that members remain on existing waiver programs for eligibility purposes to avoid interruptions in Medicaid eligibility for caregivers who rely on the DOC exemption.

HCPF invited members and providers to contact their FMS customer service for case‑specific questions and said it would provide further clarifying memos and resources as they become available. The department cautioned that it does not provide tax or legal advice and urged stakeholders to consult qualified tax professionals for individual guidance.

The department posted contact information and said the memo referenced in the meeting was available the same day.