Coordinate Medicaid insurer definitions before applying compensation deduction limit

Plain-English summary

Chief Counsel reviewed earlier advice on whether risk-bearing entities serving Medicaid recipients could be subject to the compensation deduction limit in IRC § 162(m)(6). Applying that limit depended in part on treating the entities as health insurance issuers that provide health insurance coverage under § 9832. Those definitions mirror provisions administered by the Departments of Labor and Health and Human Services, and HIPAA calls for coordinated interpretations among the three departments. Because the earlier application had not been coordinated, Chief Counsel identified significant litigation risk. It advised against treating the organizations and arrangements as health insurance issuers and coverage for § 162(m)(6) until interagency coordination was completed, with any later treatment depending on the result.

Ruling snapshot

• Question: Should certain risk-bearing entities serving Medicaid recipients be treated as health insurance issuers providing health insurance coverage for IRC § 162(m)(6)?
• Outcome: Advice given to defer that treatment pending interagency coordination
• Key authorities: IRC §§ 162(m)(6) and 9832(b); 26 C.F.R. § 54.9801-2; HIPAA § 104

Full text (IRS public release)

           Office of Chief Counsel
           Internal Revenue Service
           Memorandum
           Number: 201618010
           Release Date: 4/29/2016
           CC:TEGE:EB
           POSTN-140042-15

 UILC:     9832.00-00

  date:    March 21, 2016

     to:   Mark Hulse
           Area Counsel, Northeast
           Division Counsel
           (TEGE Division Counsel)

  from:    Stephen B. Tackney
           Deputy Division Counsel/Deputy Associate Chief Counsel, (Employee Benefits)
           (TEGE Associate Chief Counsel)

subject:   Review of Chief Counsel Advice on Application of Section 162(m)(6) to Risk-Bearing
           Entities Providing Services to Medicaid Recipients

                   This is in response to the request for review of the Chief Counsel Advice
           #POSTN-140042-15. That advice determined that certain risk-bearing entities providing
           services to Medicaid recipients may be subject to the deduction limitations under
           section 162(m)(6), if certain conditions are met. Two of those conditions are that the
           entity constitute a health insurance issuer under section 9832(b)(2) and that the entity
           provide health insurance coverage under section 9832(b)(1)(A). The advice determined
           that in certain circumstances, those conditions could be met. A further condition
           included that the payments that the health insurance issuer was receiving qualify as
           premiums in accordance with the section 162(m)(6) regulations.

                   The definitions of health insurance coverage and health insurance issuer were
           added to the Code as part of the Health Insurance Portability and Accountability Act
           (HIPAA), Pub. L. No. 104-191, 110 Stat. 1936 (1996), which simultaneously added
           mirror provisions to section 733(b) of ERISA (which falls within the jurisdiction of the
           Department of Labor) and Title XXVII of the Public Health Service Act (which falls within
           the jurisdiction of the Department of Health and Human Services). With respect to the
           mirror definitions and overlapping jurisdiction, HIPAA provides that:

POSTN-140042-15                             2

      The Secretary of the Treasury, the Secretary of Health and Human Services, and
      the Secretary of Labor shall ensure, through the execution of a memorandum of
      understanding, that—

      (1)    Regulations, rulings and interpretations issued by such Secretaries
      relating to the same matter over which two or more such Secretaries have
      responsibility under this subtitle (and the amendments made by this subtitle and
      section 401) are administered to have the same effect at all times; and

      (2)    Coordination of policies relating to enforcing the same requirements
      through such Secretaries in order to have a coordinated enforcement strategy
      that avoids duplication of enforcement efforts and assigns priorities in
      enforcement.

Pub. L. No. 104-191, 110 Stat. 1936, section 104 (1996).

       The three departments generally have met these requirements through the
publication of regulations under each provision which mirror each other. In this case,
the definitions provided for health insurance issuer and health insurance coverage
mirror each other in the three departments’ regulations. See 26 CFR 54.9801-2; 29
CFR 2590.701-2; and 45 CFR 144.103.

       Arrangements between a State and a risk-bearing entity providing services to a
Medicaid recipient present unique issues unlike those raised in the private market
context of insured employee benefit plans and individual insurance policies. As
indicated by your initial inquiry, whether a risk-bearing entity providing services to
Medicaid recipients may fall within the statutory and regulatory definitions of health
insurance issuer and health insurance coverage, and if so under what particular types of
arrangements with a State, is not explicitly addressed in the statute or regulations and
has not been directly addressed by other generally applicable guidance of the three
departments.

        In this case, the determination of whether section 162(m)(6) applies to a risk-
bearing entity providing services to Medicaid recipients requires application of the
definitions of health insurance issuer and health insurance coverage to those
arrangements. The application set forth in the prior advice was not coordinated with the
other agencies. Although section 162(m)(6) is a provision that is not part of HIPAA but
rather is a provision of the Internal Revenue Code over which the Treasury Department
and the IRS have sole jurisdiction, the failure to coordinate the definition raises
significant litigation hazards with respect to enforcement of the application of the
deduction limitation to these entities.

      It may be argued that the application of an Internal Revenue Code-only provision
does not require the coordination contemplated in HIPAA’s coordination provisions,
because the application of section 162(m)(6) does not risk failing to have a different

POSTN-140042-15                             3

effect as applied by another agency, and does not implicate a need for a coordinated
enforcement strategy across agencies, because the IRS will be the only agency
applying and enforcing the provision. However, the application of the statutory and
regulatory definitions of health insurance issuer and health insurance coverage inherent
in the application of section 162(m)(6) to these entities may be considered to have
precedential consequences, given that its application could become the subject of
litigation and courts necessarily would consider the meaning of those definitions in order
to apply section 162(m)(6). Accordingly, we advise that for purposes of section
162(m)(6) the type of organizations identified in the recently issued CCAs not be
identified as health insurance issuers and that the arrangements not be treated as
providing health insurance coverage until such time as that coordination has been
completed, and that any such treatment depend on the result of such coordination.