Code Section 162
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 162 | *See Note Below | Patient Protection and Affordable Care Act | Limitation on Deduction for Remuneration Paid by Health Insurance Providers | 600 |
| 105, 162, 401, and 501 | 3/30/2010 | Health Care and Education Reconciliation Act of 2010 | Adult Dependents | **See Note Below |
| 162(l) | 12/31/2009 | The Small Business Jobs Act of 2010 | Temporary deduction for health insurance costs in computing self-employment income | -1,919 |
*Note on Effective Date
The provision is effective for remuneration paid in taxable years beginning after 2012 with respect to services performed after 2009.
**Note on Revenue Estimate
See table 3 of CBO estimate letter addressed to Speaker Pelosi on March 20, 2010, http://www.cbo.gov/sites/default/files/cbofiles/ftpdocs/113xx/doc11379/amendreconprop.pdf
Limitation on Deduction for Remuneration Paid by Health Insurance Providers
Explanation of Provision
Under the provision, no deduction is allowed for remuneration which is attributable to services performed by an applicable individual for a covered health insurance provider during an applicable taxable year to the extent that such remuneration exceeds $500,000. As under section 162(m)(5) for remuneration from TARP participants, the exceptions for performance based remuneration, commissions, or remuneration under existing binding contracts do not apply. This $500,000 deduction limitation applies without regard to whether such remuneration is paid during the taxable year or a subsequent taxable year. In applying this rule, rules similar to those in section 162(m)(5)(A)(ii) apply. Thus in the case of remuneration that relates to services that an applicable individual performs during a taxable year but that is not deductible until a later year, such as nonqualified deferred compensation, the unused portion (if any) of the $500,000 limit for the year is carried forward until the year in which the compensation is otherwise deductible, and the remaining unused limit is then applied to the compensation.
In determining whether the remuneration of an applicable individual for a year exceeds $500,000, all remuneration from all members of any controlled group of corporations (within the meaning of section 414(b)), other businesses under common control (within the meaning of section 414(c)), or affiliated service group (within the meaning of sections 414(m) and (o)) are aggregated.
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1. Covered health insurance provider and applicable taxable year
An insurance provider is a covered health insurance provider if at least 25 percent of the insurance provider’s gross premium income from health business is derived from health insurance plans that meet the minimum creditable coverage requirements in the bill (‘‘covered health insurance provider’’). A taxable year is an applicable taxable year for an insurance provider if an insurance provider is a covered insurance provider for any portion of the taxable year. Employers with self-insured plans are excluded from the definition of covered health insurance provider.
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2. Applicable individual
Applicable individuals include all officers, employees, directors, and other workers or service providers (such as consultants) performing services for or on behalf of a covered health insurance provider. Thus, in contrast to the general rules under section 162(m) and the special rules executive compensation of employers participating in the TARP program, the limitation on the deductibility of remuneration from a covered health insurance provided is not limited to a small group of officers and covered executives but generally applies to remuneration of all employees and service providers. If an individual is an applicable individual with respect to a covered health insurance provider for any taxable year, the individual is treated as an applicable individual for all subsequent taxable years (and is treated as an applicable individual for purposes of any subsequent taxable year for purposes of the special rule for deferred remuneration).
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Adult Dependents
Explanation of Provision
The provision amends section 105(b) to extend the general exclusion for reimbursements for medical care expenses under an employer- provided accident or health plan to any child of an employee who has not attained age 27 as of the end of the taxable year. This change is also intended to apply to the exclusion for employerproved coverage under an accident or health plan for injuries or sickness for such a child. A parallel change is made for VEBAs and 401(h) accounts.
The provision similarly amends section 162(l) to permit self-employed individuals to take a deduction for the cost of health insurance for any child of the taxpayer who has not attained age 27 as of the end of the taxable year.
For purposes of the provision, ‘‘child’’ means an individual who is a son, daughter, stepson, stepdaughter or eligible foster child of the taxpayer.973 An eligible foster child means an individual who is placed with the taxpayer by an authorized placement agency or by judgment, decree, or other order of any court of competent jurisdiction.
Temporary deduction for health insurance costs in computing self-employment income
Explanation of Provision
Under the provision, the deduction for income tax purposes allowed to self-employed individuals for the cost of health insurance for themselves, their spouses, dependents, and children who have not attained age 27 as of the end of the taxable year is taken into account, and thus also allowed, in calculating net earnings from self-employment for purposes of SECA taxes.
It is intended that earned income within the meaning of section 401(c)(2) be computed without regard to this deduction for the cost of health insurance.1391 Thus, earned income for purposes of the limitation applicable to the health insurance deduction is computed without regard to this deduction.
The provision only applies for the taxpayer’s first taxable year beginning after December 31, 2009.
973- Sec. 152(f)(1). Under section 152(f)(1), a legally adopted child of the taxpayer or an individual who is lawfully placed with the taxpayer for legal adoption by the taxpayer is treated as a child of the taxpayer by blood.
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1391- A technical correction may be necessary so that the statute reflects this intent.
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