United States: Health Care Reform: New Deduction Limit on Compensation Paid by Certain Health Insurers

New health care reform laws impose a $500,000 deduction limit on compensation paid by certain health insurers and their related companies to all employees and other individual service providers.

An expansive new provision in the health care reform law will limit the ability of many health insurers and their related companies to fully deduct compensation paid to employees and other individual service providers in 2013 and later tax years. All health insurers will want to take action now to determine the effect of the new rules and to review the compensation structure for their highly paid employees and individual service providers in order to maximize potential deductions.

Background

Generally employers may deduct employee compensation expenses as reasonable and ordinary business expenses. However, Section 162(m)(1) of the Internal Revenue Code places a special deduction limit on individual compensation paid to certain officers of a publicly held corporation when the compensation for the tax year exceeds $1 million. The 2008 economic stimulus bill, which enacted Code Section 162(m)(5), placed similar deduction restrictions on certain employers receiving federal assistance under the Troubled Asset Relief Program (TARP), although the deduction limit for TARP employers was $500,000 per covered employee. The $1 million and TARP deduction limits under Code Section 162(m) both apply to only a limited number of officers. One significant difference between these two deduction limits is that the $1 million deduction limit does not apply to commissions and performance-based pay, which is one of the reasons for the popularity of stock options, stock appreciation rights, and performance-based cash and equity awards to executives. By contrast, the TARP $500,000 deduction limit applies to all taxable compensation, including commissions and performance-based pay.

Covered Health Insurance Providers

The Patient Protection and Affordable Care Act (PPACA) enacted Code Section 162(m)(6), which establishes a new $500,000 deduction limit applicable to any employer (determined on a controlled group basis) that is a health insurance issuer—including insurance companies and HMOs—and which receives premiums for providing "health insurance coverage." For this purpose, health insurance coverage means benefits consisting of medical care offered by a health insurance issuer, excluding the following coverages: accident and/or disability income; insurance-only coverage; liability insurance (e.g., general liability or automobile liability); supplementary liability insurance; workers' compensation or similar insurance; automobile medical payment insurance; credit-only insurance; coverage for on-site medical clinics; and other similar insurance coverage in regulations where medical care is secondary or incidental.

For any tax year from 2010 through 2012, the health insurer's receipt of any premiums for providing health insurance coverage will subject certain deferred compensation paid to a covered individual (i.e., compensation earned during or after 2010 and paid after 2012) by a health insurer or any related company in its controlled group to the new $500,000 deduction limit. In contrast, for any tax year after 2012, the new $500,000 deduction limit will apply to all compensation earned by a covered individual of a health insurer or any related company in its controlled group, only if at least 25 percent of the gross premiums received by the health insurer from providing health insurance coverage are attributable to "minimum essential coverage."

The PPACA defines minimum essential coverage broadly to include government-sponsored programs (Medicare, Medicaid, CHIP, TRICARE, etc.), eligible employer-sponsored plans, plans in the individual market within a state, grandfathered plans and other health benefits coverage, such as a state health benefits risk pool designated by the Secretary of Health and Human Services. However, certain excepted benefits are not considered minimum essential coverage for this purpose, including the following (if provided under a separate insurance policy, certificate or contract): limited-scope dental or vision benefits, long-term care, nursing home care, home health care, community-based care, specified disease or illness coverage, hospital indemnity or other fixed indemnity insurance and Medicare supplemental coverage. Given the broad scope of the minimum essential coverage definition, most health insurers and their related companies will be affected by the new $500,000 deduction limit with respect to compensation earned in 2013 and later tax years, unless the insurer writes a substantial amount of excepted coverage.

Covered Individuals

Unlike the $1 million and TARP deduction limits, the new deduction limit applies to all employees, officers and directors, as well any individual providing services for or on behalf of the health insurer or any related company in its controlled group (e.g., consultants and brokers).

Compensation Subject to Limit

The new $500,000 deduction limit for health insurers (and related companies in their controlled group) applies to all compensation earned for services performed by a covered individual during the applicable tax year. Similar to the deduction limit for employers receiving TARP assistance, all compensation paid to a covered individual is counted and there is no special exclusion for commissions or performance-based pay.

For each tax year in which an employer is subject to the new $500,000 deduction limit, a covered individual's compensation that otherwise would be deductible for such tax year (determined without regard to the new $500,000 deduction limit) will be subject to a $500,000 deduction cap, including any deferred compensation amounts earned in that tax year, even if paid in later years. Thus, if a covered individual's compensation during any such tax year equals or exceeds $500,000, any deferred compensation attributable to services performed during that year will not be deductible in a later year. Conversely, to the extent a covered individual's compensation during any such tax year is less than $500,000 (i.e., the unused portion of the $500,000 deduction limit), any deferred compensation attributable to services performed during that year can be deductible in a later year (generally, the year in which it is paid), up to the unused portion of the $500,000 deduction limit.

Under the new rules, compensation paid in excess of these limits is effectively taxed twice. The covered individual pays individual income tax on the compensation and the employer essentially pays a second tax by not being able to deduct the compensation expense to the extent it exceeds the $500,000 deduction limit.

Effective Date

The new $500,000 deduction limit is effective for compensation earned in 2013 and later tax years, along with compensation earned in 2010 or later tax years and deferred until after 2012.

Next Steps

Health insurers should take action now in the following ways:

  1. Determine whether and, if so, what tax years they will be subject to the new deduction limit, including with respect to deferred compensation earned during or after this year and deferred until after 2012
  2. Analyze the potential tax impact of the new deduction limit
  3. Implement a compliance program to identify employees and other individual service providers whose compensation will be subject to the new deduction limit, with special attention to allocating the limit to deferred compensation

The following table provides a high-level comparison of the various deduction limits under Code Section 162(m).

 

$1 million

TARP

PPACA

Effective date

Effective beginning with the 1994 tax year

Effective for tax years ending on or after October 3, 2008

Effective beginning with the 2013 tax year, including compensation earned in 2010 or later tax years and deferred until after 2012

Deduction limit

$1 million

$500,000

$500,000

Employers subject to limit

Publicly held corporations

Employers (and related companies) that receive federal assistance under the TARP of the Emergency Economic Stabilization Act of 2008, with aggregate acquired assets exceeding $300 million

Certain health insurance issuers (and related companies) that receive premiums for providing health insurance coverage

Covered individuals

Chief executive officer and three other highest paid officers, other than the chief financial officer

Chief executive officer, chief financial officer and three other highest paid officers

All officers, directors, employees and other individuals who provide services for or on behalf of the employer

Compensation

Total compensation paid to the covered individual for services performed, whether or not services were performed in the current tax year (excludes commissions and performance-based pay)

Same as $1 million deduction limit, except no exclusion for commissions and performance-based pay

Same as TARP deduction limit

Deferred compensation

Deferred compensation paid in or after the tax year in which an officer ceases to be a covered individual is excluded from compensation that is subject to the deduction limit

The unused portion of a prior tax year's deduction limit is carried over to determine the deductibility of compensation earned during that year, but paid in a subsequent year

Same as TARP deduction limit

Controlled group

Compensation from non-publicly held members of the controlled group of corporations is not aggregated for purposes of applying the $1 million limit

All compensation paid by members of the controlled group (with certain exceptions) is aggregated for purposes of applying the $500,000 limit

All compensation paid by members of the controlled group is aggregated for purposes of applying the $500,000 limit

 

Health Care Law Reform Information

 

Click here to view the archived sessions from a recent webcast discussing "Critical Next Steps for Your Business" and to access other health care reform articles. Plus, follow the Health Care Law Reform Blog to read the latest blog posts and subscribe to blog alerts.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions