• New Compensation Deduction Limits for Certain Health Insurance Providers
  • July 22, 2010 | Authors: Melissa K. Ostrower; Bruce H. Schwartz; Monique Warren
  • Law Firms: Jackson Lewis LLP - New York Office ; Jackson Lewis LLP - White Plains Office
  • The Patient Protection Act and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, has added a new limitation to the Internal Revenue Code with respect to deductions for compensation expenses.  New Section 162(m)(6) provides for a $500,000 annual limit on deductions for compensation paid by “covered health insurance providers” for tax years beginning on or after January 1, 2013.  This new provision also applies to compensation paid by these providers that is earned on or after December 31, 2009, but is not paid until January 1, 2013, or later.

    As a result of new Section 162(m)(6), for the first time, compensation paid to non-executive (and non-top paid) service providers of some non-public companies may be subject to compensation deduction limits, but these new deduction limitations do not apply to companies outside of the healthcare industry.

    Who is a “covered health insurance provider” under Section 162(m)(6)?

    • With respect to taxable years beginning after December 31, 2009, and before January 1, 2013, a “covered health insurance provider” is any employer that is a health insurance issuer under Internal Revenue Code Section 9832(b)(2) and receives premiums from providing health insurance coverage.  Such an employer includes an insurance company, insurance service or insurance organization (including an HMO) licensed to engage in the business of insurance and subject to state insurance law, but not including a group health plan.
    • With respect to taxable years beginning after December 31, 2012, a “covered health insurance provider” is any employer that is a health insurance issuer under Section 9832(b)(2) of the Internal Revenue Code and with respect to which not less than 25% of the gross premiums received from providing health insurance coverage is from minimum essential coverage.
    • Employers with self-insured plans are excluded from the definition of covered health insurance provider.

    Open Issue:  What happens if an employer is considered a covered health insurance provider when the compensation is earned, but not when it is paid?

    Are stock options and performance-based compensation subject to the new deduction limitations?

    • Yes.  Unlike the general rules under Section 162(m), even stock options and performance-based compensation granted/paid by covered health insurance providers are subject to the new deduction limitations.

    Do the new deduction limitations apply to commissions paid by covered health insurance providers?

    • Yes.

    Does the new deduction limitation apply to all service providers, including service providers that are non-executive, non-top paid employees?

    • Yes.  Unlike the general deduction limitation under Section 162(m) and the deduction limitation under Section 162(m)(5) (the TARP provision), the deduction limitation under Section 162(m)(6) applies to compensation paid to any individual who is an officer, director or employee or who provides services for or on behalf of the covered health insurance provider during such year.

    Open Issue:  How will this provision apply to payments made by the covered health insurance providers to doctors and other medical professionals?

    Do the new deduction limitations apply on a controlled group basis?

    • Yes.  All employers in a single controlled group will be treated as a single employer.  Thus, compensation paid by two or more members of the same controlled group will be aggregated to determine if the $500,000 limit has been exceeded.

    Can a covered health insurance provider avoid the deduction limitations by requiring employees to defer certain payments until after termination of employment?

    • No.  Unlike the general rules under Section 162(m), the deduction limitation under Section 162(m)(6) applies with respect to compensation paid after the service provider has terminated employment.

    What should an employer do now?

    • An employer should determine whether it will be a covered health insurance provider subject to the deduction limitations imposed by Section 162(m)(6).
    • If the employer is or will be a covered health insurance provider, keep this status in mind when structuring deferred compensation arrangements (e.g., employers may want to require that deferrals be paid by December 31, 2012).