IRS Issues Guidance On Deduction Limitation On Payments To Some Health Insurers.

Part III -- Administrative, Procedural, and Miscellaneous

I. PURPOSE

This notice provides guidance on the application of section 162(m)(6) of the Internal Revenue Code (Code). Section 162(m)(6) limits the allowable deduction for remuneration for services provided by individuals to certain health insurance providers. Section 162(m)(6) was added to the Code by section 9014 of the Patient Protection and Affordable Care Act (Public Law 111-148, 124 Stat. 119, 868 (2010)).

Section III of this notice provides guidance on certain issues the Treasury Department and the IRS have determined require immediate guidance. Section V requests comments as to the application of the provisions of this notice as well as all other aspects of the application of section 162(m)(6). The Treasury Department and the IRS anticipate that the guidance provided in this notice will be incorporated into future regulations issued under section 162(m)(6).

II. BACKGROUND

Section 162(m)(6) limits the allowable deduction to $500,000 for "applicable individual remuneration" and "deferred deduction remuneration" attributable to services performed by "applicable individuals" that is otherwise deductible by a "covered health insurance provider" in taxable years beginning after December 31, 2012.

Section 162(m)(6)(C)(i)(I) provides that for taxable years beginning after December 31, 2009, and before January 1, 2013, the term "covered health insurance provider" means any employer that is a health insurance issuer as defined in section 9832(b)(2) and which receives premiums from providing health insurance coverage (as defined in section 9832(b)(1)) ("pre-2013 covered health insurance provider"). For taxable years beginning after December 31, 2012, section 162(m)(6)(C)(i)(II) provides that the term "covered health insurance provider" means any employer that is a health insurance issuer as defined in section 9832(b)(2) and with respect to which not less than 25% of the gross premiums received from providing health insurance coverage (as defined in section 9832(b)(1)) are from minimum essential coverage (as defined in section 5000A(f)) ("post-2012 covered health insurance provider"). Section 162(m)(6)(C)(ii) provides that two or more persons who are treated as a single employer under section 414(b), (c), (m), or (o) are treated as a single employer for purposes of section 162(m)(6), except that in applying section 1563(a) for purposes of any such subsection, paragraphs (2) and (3) thereof are disregarded.

Section 162(m)(6) applies to applicable individual remuneration attributable to services performed in a "disqualified taxable year" beginning after December 31, 2012 that is otherwise deductible in such taxable year. Section 162(m)(6)(B) provides that a disqualified taxable year for any employer is any taxable year for which the employer is a covered health insurance provider. Section 162(m)(6)(D) provides that applicable individual remuneration for any disqualified taxable year is the aggregate amount otherwise allowable as a deduction for such taxable year for remuneration for services performed by such individual (whether or not during the taxable year), but does not include any deferred deduction remuneration with respect to services performed during the disqualified taxable year.

In addition, section 162(m)(6) applies to deferred deduction remuneration attributable to services performed in a disqualified taxable year beginning after December 31, 2009 that is otherwise deductible in a taxable year beginning after December 31, 2012. Section 162(m)(6)(E) provides that deferred deduction remuneration is compensation for services that an applicable individual performs during a disqualified taxable year but that is not deductible until a later taxable year (for example, nonqualified deferred compensation). In the case of deferred deduction remuneration attributable to services performed in a disqualified taxable year, the unused portion of the $500,000 limit (if any) for the taxable year in which the services to which the deferred deduction remuneration is attributable were performed is carried forward to the taxable year or years in which such compensation is otherwise deductible, and applied in calculating the allowable deduction with respect to such amount.

Section 162(m)(6)(F) provides that an applicable individual, with respect to any covered health insurance provider for any disqualified taxable year, is any individual (i) who is an officer, director, or employee in such taxable year, or (ii) who provides services for or on behalf of such covered health insurance provider during such taxable year.

III. GUIDANCE

The following examples illustrate this rule:

The following example illustrates this rule:

IV. EFFECTIVE DATE

The guidance provided in section III of this notice is effective for taxable years beginning on or after January 1, 2010. The Treasury Department and the IRS anticipate incorporating this guidance into regulations. Any future guidance, including regulations, addressing the issues covered by this notice in a manner that would expand the coverage of section 162(m)(6), such as a modification of, or a restriction on, the application of the de minimis rule in section III.C, or broadening of the definition of an applicable individual under section III.D, will apply prospectively.

V. REQUEST FOR COMMENTS

The Treasury Department and the IRS request comments as to the application of this notice, as well as all aspects of the application of section 162(m)(6). Specifically, comments are requested on the application of the deduction limitation to remuneration for services performed for insurers who are captive or who provide reinsurance or stop loss insurance, and specifically with respect to stop loss insurance arrangements that effectively constitute a direct health insurance arrangement because the attachment point is so low. Comments are also requested on the application of the term "covered health insurance provider", including the de minimis rule set forth in this Notice and possible alternative de minimis rules. Comments are also requested on the application of the term "covered health insurance provider" in the case of a corporate event such as a merger, acquisition or reorganization. Comments are also requested as to whether the allocation rules set forth in Notice 2008-94, 2008-2 C.B. 1070, Q&A-9, should be applied for purposes of determining the services and the taxable year to which deferred deduction remuneration is attributable and as to any alternatives to those rules, including the services and the taxable year to which deferred deduction remuneration is attributable in the case of a corporate event such as a merger, acquisition or reorganization. Comments may be submitted through March 23, 2011 to Internal Revenue Service, CC:PA:LPD:RU (Notice 2011-02), Room 5203, PO Box 7604, Ben Franklin Station, Washington DC 20044. Submissions may also be hand-delivered Monday through Friday between the hours of 8 a.m. and 4 p.m. to the Courier's Desk at 1111 Constitution Avenue, NW, Washington DC 20224, Attn: CC:PA:LPD:RU ( Notice 2011-02), Room 5203. Submissions may also be sent electronically via the internet to the following email address: Notice.comments@irscounsel.treas.gov. Include the notice number (Notice 2011-02) in the subject line.

VI. DRAFTING INFORMATION

The principal author of this notice is Ilya Enkishev of the Office of Division Counsel/Associate Chief Counsel (Tax Exempt and Government Entities), although other Treasury and IRS officials participated in its development. For further information on the provisions of this notice, contact Ilya Enkishev at (202) 622-6030 (not a toll-free number).