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Regulation and Compliance > Federal Regulation > IRS

PPACA: IRS Interprets "Excess Comp" Rules

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The Internal Revenue Service (IRS) is starting to weigh in on which health insurance company bosses are subject to the new “excess compensation” tax rules.

The IRS has issued a batch of guidance interpreting Section 162(m)(6) of the Internal Revenue Code, a tax law created by Section 9014 of the Patient Protection and Affordable Care Act (PPACA), in IRS Notice 2011-02.

PPACA limits the ability of “covered health insurance providers” to deduct compensation Section 162(m)(6)paid to “”applicable individuals.”

For tax years beginning between Dec. 31, 2009, and Jan. 1, 2013, a “covered health insurance provider” will include any provider of major medical coverage, according to the authors of an analysis of the section posted by the New York office of Dewey & LeBoeuf L.L.P.

For tax years beginning after Dec. 31, 2012, the term also will include any entity that provides health coverage if the entity gets at least 25% of its premium revenue from selling “minimum essential” coverage, and the tax code language suggests that it could include providers of vision, dental, critical illness or hospital indemnity coverage, the Dewey & LeBoeuf team notes.

“Applicable” individual could include any individual who is an officer, director, or employee of a coverage provider, or someone who provides services for a covered provider.

A covered provider can deduct only $500,000 in compensation and deferred compensation for a

covered individual each year.

PPACA watchers at the American Benefits Council, Washington, and elsewhere have asked if regulators could define the term “health insurance provider” broadly enough to include employers that sponsor their own health plans, and if the term “applicable individual” could include a health insurer’s top consultants, lawyers or accountants.

The IRS says it will exclude an ordinary employer from the definition of “covered provider” unless health insurance premiums account for at least 2% of the employer’s gross premium revenue.

The IRS says it will exclude independent contractors from the “applicable individual” definition unless the contractor would be subject to Internal Revenue Code Section 409A executive compensation rules.


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