The Department of Housing & Urban Development (HUD) has released a Final Rule implementing the Housing Opportunity Through Modernization Act of 2016 (HOTMA). This final rule was published in the Federal Register on February 14, 2023. With the exception of changes relating to Non-Public Housing Over Income families (which take effect on March 16, 2023), this final rule takes effect on January 1, 2024.
The Housing Opportunity Through Modernization Act (HOTMA) was signed into law on July 29, 2016, amending many aspects of Multifamily Housing programs (as well as programs administered through the Offices of Public and Indian Housing and Community Planning and Development). HOTMA was intended to streamline processes and reduce burdens on housing providers. On September 17, 2019, HUD issued a proposed rule to update its regulations according to HOTMA’s statutory mandate. The final rule, published on January 9, 2023, considers public comment received on the proposed rule and provides additional guidance for implementing Sections 102, 103, and 104 of HOTMA.
Which Programs will be Affected by the Final Rule?
The Section 8 PBRA (including RAD), Section 202/811 PRAC, 202/8, 202/162 PAC, Senior Preservation Rental Assistance Contract (SPRAC), and Section 811 Project Rental Assistance (811 PRA) programs will see changes due to HOTMA.
This is the third in a series of articles I will write on the sweeping changes that will be made to HUD affordable housing programs. This article will focus on the revised hardship exemptions made by the final rule.
HUD received many comments on the proposed rule relating to hardship exemptions for unreimbursed health and medical care, attendant care, auxiliary apparatus expenses, and childcare expenses. The final rule has been revised to provide clarity to these exemptions and ease burdens on families experiencing financial hardship.
Current regulations permit the deduction of medical expenses from annual income for elderly households if the expenses (1) will not be reimbursed by insurance or another source, and (2) when combined with any disability assistance expenses are in excess of three percent of annual income. The new regulation does not permit the deduction until the medical expenses exceed 10 percent of gross income. This will clearly have a negative impact on many elderly/disabled households. To help ease this burden, the final rule provides two types of hardship exemptions to the ten percent threshold for health and medical care expenses (for elderly and disabled families) and reasonable attendant care and auxiliary apparatus expenses (for families that include a person with disabilities).
The first category is for families eligible for and taking the unreimbursed health and medical care expenses and reasonable attendant care and auxiliary apparatus expenses deduction in effect prior to this rule (i.e., the 3% rule). The second category is for families that can demonstrate that the family’s health and medical care expenses or reasonable attendant care and auxiliary apparatus expenses increased, or the family’s financial hardship is a result of a change in circumstances that would not otherwise trigger an interim reexamination.
HUD is adding this second category in the final rule in recognition that the change from the three percent threshold to the new ten percent threshold for unreimbursed health and medical care expenses or reasonable attendant care and auxiliary apparatus expenses may result in financial hardship for families, including those families who were not receiving the deduction or may not even have been receiving housing assistance at the time the final rule goes into effect. These families may receive temporary hardship relief if their health and medical care expenses or reasonable attendant care and auxiliary apparatus expenses exceed five percent of the family’s income.
Under the first category (families taking the deduction based on the three percent rule), owners must deduct eligible expenses exceeding five percent of the family’s income for the first year, 7.5% for the second year, and 10% for the third year.
Under the second category, a family may qualify for hardship exemptions for health and medical care expenses or reasonable attendant care and auxiliary apparatus expenses if the family can demonstrate that the expenses increased, or the family’s financial hardship is a result of a change in circumstances (as determined by the project owner). For these families, the deduction will be for expenses in excess of five percent of family income for up to 90 days. This may be extended for additional 90-day periods at the discretion of the owner, based on family circumstances. Owners may also terminate the hardship exemption if it is determined that the family no longer needs the exemption.
In some circumstances, families receiving the deduction under the first category may request relief under the second category of hardship relief. During the second year of transition, the owner deducts expenses exceeding 7.5 percent of family income if relief is being obtained under the first category. If the family can demonstrate that the health and medical care expenses or reasonable attendant care and auxiliary apparatus expenses increased or the family’s financial hardship is a result of a change in circumstances, and not just due to the transition to the 7.5% threshold, the family may be granted relief under the second category. In this case, expenses exceeding five percent of the family income will be deducted (instead of 7.5%). However, this relief will last only for 90 days (unless extended by the owner), and the family is no longer eligible for relief under the first category. In other words, at the end of the relief period for the second category, the family will be subject to the regular health and medical care expenses or reasonable attendant care and auxiliary apparatus expenses deduction threshold of ten percent, regardless of whether they fully transitioned to the ten percent threshold under the first category.
Childcare Deduction Hardship Relief
Under the final rule, property owners may extend a deduction for unreimbursed childcare expenses for 90-days, with extensions for additional 90-day periods if the family can demonstrate that they are unable to pay their rent due to loss of the childcare expense deduction, and the childcare expense is still necessary even though the family member is no longer employed or furthering his or her education. The following example illustrates how this relief could work:
- A family that was claiming the childcare deduction no longer qualifies because the care is no longer necessary to enable a family member to work or go to school.
- The family member who was employed had to leave their job in order to provide uncompensated care to an elderly friend who is very ill and lives across town.
- The family may continue to claim the childcare deduction for 90 days, with 90-day extensions as approved by the owner.
The hardship exemptions outlined here apply only to HUD projects that allow for deductions from gross income and will not go into effect until January 1, 2024. Owners of such projects should familiarize themselves with the details of these exemptions so that they will be ready to implement them in 2024.