Health Care Law Applies Multiple Definitions Of Insurance Company, Federal Bar Association Speakers Say

The Patient Protection and Affordable Care Act (ACA) uses a variety of definitions for the terms “insurance company” and “health insurance company,” practitioners and government officials stated at a May 31 conference. The discussion took place at the Federal Bar Association’s 25th Annual Insurance Tax Seminar in Washington, D.C.

While the term insurance company is defined in IRC Sec. 816(a), the term health insurance company had not been defined in the tax code until the ACA was enacted, explained Monica Coakley, principal at KPMG LLP Washington National Tax Services. A company that is a health insurer under one ACA provision may not be subject to a different ACA provision that also applies to health insurers, Coakley said.

Stephen Tackney, IRS deputy associate chief counsel (Tax Exempt and Government Entities), agreed that the ACA definitions do not match. “The IRS is not making it up,” Tackney said; the IRS is following the statute.

Coakley described the $500,000 limit under Code Sec. 162(m)(6) on compensation that may be deducted by health insurance providers. The provision has nothing in common with Code Sec. 162(m)(1), which limits compensation deductions to $1 million in certain circumstances and is, in fact, more onerous than Code Sec. 162(m)(1), Coakley noted. Tackney said the tougher restrictions are based on the Troubled Asset Relief Program (TARP) rules, which set the approach.

The IRS issued proposed regulations under Code Sec. 162(m)(6) on April 1, 2013, Coakley said. The regulations build on Notice 2011-2, but provide a lot more detail, she said. Coakley said that she gets asked about “work-arounds” to avoid the provision, but there are few ways to avoid the law.

There are some limits to the provisions, according to Coakley. Under the regulations, a self-insured plan is not health insurance; thus, the company maintaining the plan is not subject to the deduction limits. There are de minimis rules for companies that derive small amounts of health premiums, and the rules exclude reinsurance payments from treatment as premiums.

The rules provide a one-year grace period from application of the rules for companies that relied on the de minimis exception, Coakley said. This should help companies avoid “bouncing” in and out of the law. A similar transition rule provides a one-year grace period if a company becomes a health insurer because of a corporate transaction such as a merger.

Certain independent contractors are excluded from the rules, Coakley said. The rules do not apply to companies receiving direct service payments, such as medical care providers receiving payments from health insurance companies. However, the law is not clear about the receipt of payments from the government, she said.

The rules apply to every member of a consolidated group, Coakley indicated. Thus, if one member company is a health insurer, it can taint the entire group. The regulations also have “painfully detailed” rules for attributing compensation (current and deferred) to a particular tax year. The year when the $500,000 limit is exceeded may not be the same year that the deduction limits are applied, she noted.

Tackney said that the regulations attempt to provide shortcuts to simplify the tracking of compensation. The regulations also provide more detailed methods for companies to determine whether amounts are compensation for a particular year.

Providers’ fee. Craig Springfield, partner at Davis & Harman LLP in Washington, D.C., moderated the program and discussed the annual fee applicable to health insurance providers under Sec. 9010 of ACA. The IRS issued proposed regulations on the fee on March 4, 2013. The IRS also is developing new Form 8963 for companies to use to determine their fee. Jeanne Ross, senior counsel to the IRS Associate Chief Counsel (Passthroughs & Special Industries), said the form is in the works and that a draft will be posted soon. She said the form is similar to the form that is used for the branded prescription drug fee (Form 8947).

Springfield noted that the total fee collected annually “is tremendous,” starting at $8 billion for 2014 and increasing to $14.3 billion for 2018. Each company’s share of the fee is based on their net premiums written. Clayton Herbert, managing director at Blue Cross Blue Shield Association, said that the fee will have an impact on insurers’ costs and charges. He estimated that the cost of health insurance will increase 2.25 percent to 2.5 percent in 2014 and may increase as much as 4 percent by 2018.

The fee applies to “covered entities,” Springfield said. It does not apply to self-insured companies, some government agencies, some nonprofits, and VEBAs. Because the provisions regarding nonprofits are “vague,” he said there is some potential to do tax planning to reduce the fees. Ross noted that the IRS is aware of this and may try to prevent certain approaches.

Springfield asked whether insurance fees are counted if they involve a foreign company selling insurance to a resident of a foreign country who is a U.S. citizen. His view was that this might not be counted. Ross said the IRS is considering this situation; she did not have an answer. Springfield also asked about the treatment of school insurance. Tackney said the IRS does not have an answer yet.

Wellness programs. Tackney discussed the recently-released final regulations on wellness programs. He noted that the regulations do not address the tax consequences of payments or benefits provided under a program. Taxpayers need to look to regular tax principles, such as the fringe benefit rules, to determine the tax consequences. The amounts would not be medical care, so taxpayers would need an exclusion to avoid being taxed on the benefit.

Tackney stressed that the regulations respond to the Health Insurance Portability and Accountability Act (HIPAA) nondiscrimination requirements. Programs that satisfy the IRS regulations will be exempt from the HIPAA discrimination rules. Important features in the regulations address reasonable alternatives to certain types of programs and when it is appropriate to rely on a doctor’s note that an activity is not medically appropriate.

Reporting requirements. A member of the audience asked about the information-gathering and reporting responsibilities under ACA and whether there has been any coordination of these requirements. Tackney said that guidance on this topic is a high priority and that the IRS has received lots of comments on the issue. He said that guidance may be issued “soon,” but he could not say when that would be.

Herbert noted that ACA requires health insurers to provide taxpayer identification numbers (TINs) for individuals, but this will be a massive task, especially since they have been purging this information from their files in recent years. Tackney did not know whether the IRS might provide a matching program for TINs. Tackney said that another issue involves reporting of “offers of coverage” by employers. This is a novel reporting requirement; employers have the relevant information scattered throughout their files, and it will not be gathered easily. Herbert said that insurers are working with the IRS’s Information Reporting Program Advisory Committee on these issues.

Visit our News Library to read more news stories.