Regulation Reissued to Reflect Technical Corrections (T.D. 9772)

The IRS has reissued final regulations to incorporate subsequent technical corrections and thereby avoid possible confusion. Reg. §1.833-1, adopted in T.D. 9651, provides that an organization’s medical loss ratio (MLR) should be calculated over a three-year period, with a transition rule that—for the first tax year beginning after December 31, 2013—an organization’s MLR is only calculated on a one-year basis and, for the first tax year beginning after December 31, 2014, its MLR is only calculated on a two-year basis. For all succeeding tax years, an organization’s MLR is based on amounts reported under Sec. 2718 of the Public Health Service Act (PHSA) for that tax year and the preceding two tax years.

Sec. 2718 of the PHSA requires health insurance issuers to submit reports for each plan year detailing the percentage of total premium revenue (after accounting for collections or receipts for risk adjustments or risk corridors and payments of reinsurance) that the issuer expends for (1) reimbursements for clinical services provided to enrollees, (2) activities that improve health care quality, and (3) all other non-claim costs excluding state and federal taxes and regulatory or licensing fees.

Subsequent to the issuance of T.D. 9651, the Consolidated and Further Continuing Appropriations Act (P.L. 113-235) was enacted containing a technical correction to Code Sec. 833(c)(5). This technical correction is retroactively applicable to tax years beginning after December 31, 2009, and (1) requires the organization to include both the cost of reimbursement for clinical services and amounts expended on health care quality activities in the numerator of the MLR calculation, and (2) clarifies that the consequence for not meeting the MLR threshold is solely that Code Sec. 833(a)(2) -(3) do not apply. This consequence results in the organization with insufficient MLR being treated as a stock insurance company under Code Sec. 833(a)(1).

For purposes of Code Sec. 833(c)(5), the reissued final regulation now describe “activities that improve health care quality” as having the same meaning as in Sec. 2718 of PHSA and include the clarification that the transition rules for calculating MLR include premium revenue expended on activities that improve health care quality in the numerator for transition years and thereafter. In addition, for plan years during which an organization described in Code Sec. 833(c) has an MLR of less than 85 percent, that organization will not be allowed (1) the special deduction under Code Sec. 833(b), and (2) it must account for 80 percent (instead of 100 percent) of its unearned premiums under Code Sec. 832(b)(4). An organization with an MLR under 85 percent will not, however, lose its eligibility to be treated as a stock insurance company under Code Sec. 833(a)(1).

T.D. 9772, 2016FED ¶47,031

Other References:

Code Sec. 833

CCH Reference – 2016FED ¶26,170B

Tax Research Consultant

CCH Reference – TRC EXEMPT: 15,160.10

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CCHTaxGroup

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