Resources

Thomson Reuters Tax & Accounting News

Featuring content from Checkpoint

Back to Thomson Reuters Tax & Accounting News

Subscribe below to the Checkpoint Daily Newsstand Email Newsletter

When do entities providing Medicare services face health insurer deduction limit on pay?

Chief Counsel Advice 201616008

In Chief Counsel Advice (CCA), IRS explains which entities providing Medicare services may face the Code Sec. 162(m)(6) health insurer compensation deduction limit. The answer depends on whether the entity is risk-bearing, whether it is licensed as a health insurer, and whether a legal relationship exists between covered individuals and the entity receiving the payment.

Background on deduction limit on pay provided by health insurance providers. Code Sec. 162(m)(6) bars a deduction for “applicable individual remuneration” in excess of $500,000 paid to an “applicable individual” (including an officer, director, or employee) by covered health insurance providers for any “disqualified tax year” beginning after Dec. 31, 2012. (Code Sec. 162(m)(6)(A)) 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. 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. (Code Sec. 162(m)(6)(B))

For years beginning after Dec. 31, 2009, and before Jan. 1, 2013, a “covered health insurance provider” meant a health insurance issuer as defined in Code Sec. 9832(b) which received premiums from providing “health insurance coverage” as defined in Code Sec. 9832(b)(1). For tax years beginning after Dec. 31, 2012, the term generally means a health insurance issuer as defined in Code Sec. 9832(b) with 25% or more of its premiums attributable to providing minimum essential coverage. (Code Sec. 162(m)(6)(C))

Under Code Sec. 9832(b)(2) and Reg. § 54.9801-2, “health insurance issuer” means an insurance company, insurance service, or insurance organization (including a health maintenance organization) which is licensed to engage in the business of insurance in a state and which is subject to state law which regulates insurance. Code Sec. 9832(b)(1)(A) and Reg. § 54.9801-2 provide that “health insurance coverage” means benefits consisting of medical care (provided directly, through insurance or reimbursement, or otherwise) under any hospital or medical service policy or certificate, hospital or medical service plan contract, or health maintenance organization contract offered by a health insurance issuer.

Direct service payments are excluded from the definition of premiums for Code Sec. 162(m)(6) purposes. A direct service payment is a payment made by a health insurance issuer or other entity that received premiums from providing health insurance coverage to another organization as compensation for providing, managing, or arranging for the provision of healthcare services by physicians, hospitals, or other healthcare providers. (Reg. § 1.162-31(b)(iv))

Neither the Code nor the regs define the term “insurance” or “insurance contract.” The Supreme Court, however, has explained that in order for an arrangement to constitute insurance for federal income tax purposes, both risk-shifting and risk distribution must be present.

The preamble to final regs issued in 2014 (see Weekly Alert ¶  32  09/25/2014) specifically notes that IRS didn’t adopt the suggestion to provide in final regs that clinical risk-bearing entities, Medicare and Medicaid providers, and other recipients of payments from government entities in connection with providing benefits under government sponsored health care programs are categorically excluded from being covered health insurance providers, or that the amounts received by these organizations are categorically excluded from classification as premiums from providing health insurance coverage. The preamble further acknowledges that to be a covered health insurance provider under Code Sec. 162(m)(6), a person must be a health insurance issuer (as defined in Code Sec. 9832(b)(2)) that receives premiums from providing health insurance coverage (as defined in Code Sec. 9832(b)(1)) and that meets certain other requirements. As a result, a person that isn’t a health insurance issuer or doesn’t receive premiums from providing health insurance coverage is not a covered health insurance provider for purposes of Code Sec. 162(m)(6).

Background on Medicaid. The Medicaid program provides medical benefits to low-income people who have no medical insurance or have inadequate medical insurance. It is jointly funded by the federal government and states.

States generally pay for Medicaid services through one of two arrangements:

1. Risk-bearing arrangements. States pay providers directly for services. The arrangement can include an entity paid an administrative fee for case management services, although actual medical care is reimbursed on a fee-for-service basis; that is, the states reimburse providers directly for each individual to whom services are furnished.
2. Non-risk-bearing arrangements. In exchange for capitation payments or other set payments, an entity provides medical services or arranges for providers to provide medical services to Medicaid enrollees on a similar basis as services are provided to other Medicaid beneficiaries. The entity assumes risk for the cost of furnishing the services under the arrangement and incurs loss if the cost of furnishing the services exceeds the set payments under the arrangement (or gain if the cost of services is less than the set payments).

In many cases, licensure as an insurance company under state law is a requirement that must be satisfied before an entity may participate in a state Medicaid contract bidding process. The entity participating in the bidding process may be either a risk-bearing or non-risk-bearing entity.

The CCA answers four questions. The CCA deals with the following four questions relating to the Code Sec. 162(m)(6) deduction limit:

(1) Is a non-risk-bearing entity a “health insurance issuer” under Code Sec. 9832(b)? The CCA concludes that the answer is “no.” It reasons that such an entity providing services under a state Medicaid program doesn’t have the risk-shifting or risk-distribution elements of insurance, and, consequently, a non-risk-bearing entity is not a health insurance issuer under Code Sec. 9832(b). Because the state reimburses the entity for medical care provided on a fee-for-service basis based on the actual services provided to the covered individuals, the entity generally is not at risk for the cost of the services exceeding the amount of reimbursements paid by the state.

RIA observation: As a result, a non-risk bearing entity wouldn’t be subject to the Code Sec. 162(m)(6) deduction limit.

(2) Is a risk-bearing entity a “health insurance issuer” under Code Sec. 9832(b)? The CCA concludes that the answer is “yes,” because such an entity is licensed to engage in the business of insurance in a state, is subject to state law which regulates insurance, and has the risk-shifting or risk-distribution elements of insurance. The risk-bearing entity is at risk of loss for the cost of the services exceeding the amount of payments received from the state because a risk-bearing entity is at risk of loss for the cost of the services exceeding the amount of payments received from the state or has the possibility of gain if the amount of payments paid by the state exceeds the cost of services provided.

(3) If a risk-bearing entity becomes licensed as an insurance company under state law in order to submit a bid for a Medicaid contract, is it a “health insurance issuer” under Code Sec. 9832(b)(2)? The CCA concludes that the answer is “yes.” It reasons that an entity that becomes licensed as an insurance company under state law, whether to satisfy a contractual requirement or otherwise, is licensed to engage in the business of insurance in the state and satisfies the requirement under Code Sec. 9832(b)(2) that a “health insurance issuer” be an insurance company licensed to engage in the business of insurance in a state. Moreover, as an insurance company licensed to engage in the business of insurance in a state, that entity is also subject to the state laws which regulate insurance, which is the other Code Sec. 9832(b)(2) requirement for an entity to be a “health insurance issuer.” This is to be contrasted to situations where the entity’s contract with the state imposes conditions similar or identical to the state law requirements but the entity is not, in fact, directly subject to the state insurance laws.

(4) Do payments from a state under a Medicaid contract to a risk-bearing entity that is a health insurance issuer qualify as “premiums” so that the entity is a “covered health insurance provider” under Code Sec. 162(m)(6)? The CCA concludes that the answer is “it depends.” To constitute the payment of a premium for health insurance coverage, the payment must result in a legal relationship between the covered individual and the entity receiving the payment. Whether this relationship exists depends on whether the Medicaid beneficiaries could assert rights against the entity analogous to those between covered individuals and health insurance issuers in the private market and as required under state law. If this type of relationship exists between the entity and the Medicaid beneficiaries (whether directly or indirectly), then payments received by the entity are premiums from provided health insurance coverage paid by the state on behalf of the Medicaid beneficiaries. However, the CCA says that if this type of relationship does not exist because, for example, the individual’s rights under the arrangement are only enforceable against the state, then the relationship between the state and the entity is more akin to a direct service provider.

References: For the health insurer compensation deduction limit, see FTC 2d/FIN ¶  H-3824.3  et seq.; United States Tax Reporter ¶  1624.009  ; TaxDesk ¶  276,501  et seq.; TG ¶  7531  .