By Zachary Zagger
Law360, New York (September 19, 2014, 4:22 PM ET) — The Internal Revenue Service on Friday published final regulations on applying the Affordable Care Act’s $500,000 deduction limit for remuneration provided by certain health insurance providers, adopting proposed rules making certain insurance providers take deductions in the year the services are provided rather than when remunerations are paid.
The final regulations adopt most the rules the IRS proposed in April 2013 interpreting section 162(m)(6) of the Internal Revenue Code added by the ACA health reform law, which limits allowable deductions for remuneration to employees of covered health insurance providers in certain taxable years after Dec. 31, 2012.
The regulations provide two definitions of “covered health insurance provider” for two different periods. For tax years starting after Dec. 31, 2009, and before Jan. 1, 2013, a covered health insurance provided is defined as a “health insurance issuer” that receives premiums from providing “health insurance coverage.”
But for tax years starting on or after Jan. 1, 2013, a covered health insurance provider is defined as an employer that is a health insurance issuer with respect to which not less than 25 percent of the premiums received by the employer from providing the coverage are from providing “minimum essential coverage” that individuals have to maintain under the health reform law.
Applicable individuals include any individual who is an officer, director, or employee in a taxable year who provides services for the covered health insurance provider during the taxable year.
“The final regulations, like the proposed regulations, provide that … remuneration is attributable to services performed by an applicable individual in the taxable year of the covered health insurance provider in which the applicable individual obtains a legally binding right to the remuneration,” and “is not attributable to a taxable year during which the applicable individual is not a service provider,” the regulations provide.
The regulations further say that the applicable individual remuneration, or AIR, referring to the aggregate amount allowable as a deduction with respect to an individual for a disqualified taxable year, does not include deferred deduction remuneration, or DDR, such as deferred compensation.
“The $500,000 deduction limitation under section 162(m)(6) applies to the AIR and DDR that is attributable to services performed by an applicable individual for a covered health insurance provider in a disqualified taxable year,” the regulations provide. “Accordingly, at the time that an amount of AIR or DDR for an applicable individual becomes otherwise deductible (and not before that time), the remuneration must be attributed to services performed by the applicable individual during a particular taxable year or years of a covered health insurance provider.”
The final regulations further provided guidance on appropriate methods for attributing increases.
–Editing by Mark Lebetkin.