In a Notice, IRS has provided guidance on the application of Code Sec. 162(m)(6) (added by Sec. 9014 of the Patient Protection and Affordable Care Act, P.L. 111-148), which limits to $500,000 the deduction allowed for remuneration paid to an individual by certain health insurers for tax years beginning after 2012. The provision is generally effective for tax years beginning after 2012. However, it also applies to deferred deduction remuneration for services performed in a tax year beginning after Dec. 31, 2009, and before Jan. 1, 2013, if certain conditions are met.
Background. Code Sec. 162(m)(6) disallows any deduction for “applicable individual remuneration” in excess of $500,000 paid to a “qualified individual” by certain health insurers for any “disqualified tax year” beginning after Dec. 31, 2012. This limit will apply whether the remuneration is paid during the tax year in which the services are performed or a later tax year.
“Applicable individual remuneration” means the aggregate amount allowable as an income tax deduction for a disqualified tax year for remuneration for services performed by an applicable individual, whether or not during the tax year. A “qualified individual” is one who: (i) is an officer, director, or employee of a covered health insurance provider in a disqualified tax year; or (ii) provides services for or on behalf of a covered health insurance provider during such tax year. The term “disqualified tax year” means, for any employer, any tax year for which that employer is a “covered health insurance provider” for any portion of the tax year.
For years beginning after Dec. 31, 2009, and before Jan. 1, 2013, “covered health insurance provider” means a health insurance issuer that receives premiums from providing health insurance coverage (“pre-2013 covered health insurance provider”); and for tax years beginning after Dec. 31, 2012, the term means a health insurance issuer with 25% or more of its premiums attributable to providing minimum essential coverage (“post-2012 covered health insurance provider”). For purposes of determining whether a health insurance issuer is a covered health insurance provider, premiums received under an indemnity reinsurance contract are not treated as premiums from providing health insurance coverage.
Code Sec. 162(m)(6) also applies to deferred deduction remuneration that is attributable to services performed in a disqualified tax year beginning after Dec. 31, 2009, and that is otherwise deductible in a tax year beginning after Dec. 31, 2012. When deferred deduction remuneration is attributable to services performed in a disqualified tax year, any unused portion of the $500,000 limit for the year in which the services were performed can be carried forward to the year(s) in which that compensation is otherwise deductible.
Guidance. Notice 2011-2 provides that Code Sec. 162(m)(6)’s deduction limitation applies to deferred deduction remuneration attributable to services performed in a tax year beginning after Dec. 31, 2009, and before Jan. 1, 2013, if: (i) the employer was a pre-2013 covered health insurance provider for the tax year in which the services were performed to which the deferred deduction remuneration is attributable; and (ii) the employer is a post-2012 covered health insurance provider for the tax year in which such deferred deduction remuneration is otherwise deductible.
Notice 2011-2 carries several illustrations of these rules, including the following:
... Corporation A is a pre-2013 covered health insurance provider for 2010–2012 and a post-2012 covered health insurance provider for all tax years thereafter. Any deferred deduction remuneration attributable to services performed in 2010–2012 is subject to Code Sec. 162(m)(6)’s deduction limitation in years after 2012 when such amounts are otherwise deductible.
... Corporation B is a pre-2013 covered health insurance provider for 2010–2012. It does not qualify as a post-2012 covered health insurance provider for 2013–2015, but it does qualify for 2016 and thereafter because less than 25% of its gross premiums from health insurance coverage during those years are from minimum essential coverage. Any deferred deduction remuneration attributable to services performed in 2010–2012 that is otherwise deductible in 2016 and subsequent years is subject to Code Sec. 162(m)(6)’s deduction limitation in the tax year in which such amounts are otherwise deductible. However, any deferred deduction remuneration attributable to services performed in 2010–2012 that is otherwise deductible in 2013–2015, or any deferred compensation attributable to services performed in 2013–2015, is not subject to Code Sec. 162(m)(6)’s limitation.
De minimis rule. An employer will not be treated as a covered health insurance provider for a tax year beginning after Dec. 31, 2009, and before Jan. 1, 2013, if the premiums received for providing health insurance coverage are less than 2% of its gross revenues for that tax year. For post-2012 years, an employer will not be treated as a covered health insurance provider if the premiums received for providing health insurance coverage that are from providing minimum essential coverage are less than 2% of the employer's gross revenues for that tax year.
IRS requests public comments on various aspects of this guidance. (Notice 2011-2, Sec. 5)
Effective date. This guidance is effective for tax years beginning on or after Jan. 1, 2010.
References: For the health insurer compensation deduction limit, see FTC 2d/FIN ¶H-3824.3 et seq.; United States Tax Reporter ¶1624.009; TaxDesk ¶276.001.11A et seq.; TG ¶7531.
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