An Affordable Care Act (ACA) provision that is often-overlooked by the media, but has impacted the ability of insurers and their non-insurance related entities, in their role as employers, to take tax deductions for certain compensation paid to their highly paid employees may be ending at the end of the year. If passed, the House Republican’s health care bill repealing aspects of the ACA, titled the American Health Care Act (AHCA), provides for the termination of Section 162(m)(6) of the Internal Revenue Code (Code) on December 31, 2017. Section 162(m)(6), which took effect in 2013, had a much broader reach than the general deduction limit under Code Section 162(m).
Code 162(m) – $1 Million Cap on Compensation Deductions.
In general, Code Section 162(m) limits the amount that a publicly held corporation may deduct for compensation paid to the CEO and the 3 highest paid officers (excluding the CEO and CFO) to $1 million per year per executive, with certain exceptions (e.g., exceptions for performance based compensation and commission based compensation).
Code 162(m)(6) – $500,000 Cap on Compensation Deductions.
Code Section 162(m)(6) applies only to certain health insurance carriers (including HMOs) and their related companies. Unlike Code Section 162(m) generally, the provision under Code Section 162(m)(6) applies to both public and private companies and significantly lowers the cap on the deductible compensation amount to $500,000 per individual and makes no exception for performance-based or commission-based compensation. It also is not limited to the top executives. The limitations under Code Section 162(m)(6) may apply to all current and former employees, as well as certain independent contractors.
Impact of Change.
Although the general limitations under Code Section 162(m) will still be in place (i.e., public companies will still be subject to the $1 million cap for its top paid officers), should this provision of the AHCA be signed into law, the broader limitation for health insurers and their related entities will no longer apply beginning in 2018. This potential change will give these health insurance carriers (and their related entities) wider latitude to structure compensation arrangements for their executives going forward, while seeking to preserve tax deductions.
We will continue to monitor the developments in these areas in the weeks and months to come. If you have any questions about various ACA and ACA replacement issues impacting executive compensation and employer sponsored group health plans, please feel free to contact any of the attorneys in our Employee Benefits and Executive Compensation practice group.