Health insurance carriers are keenly aware of many provisions of the Patient Protection and Affordable Care Act (“ACA”). But an often-overlooked ACA provision may actually impact the ability of these insurers and their non-insurance related entities, in their role as sophisticated employers, to take tax deductions for certain compensation paid to their executives.  This change results from the addition of new Section 162(m)(6) of the Internal Revenue Code (“Code”). New Section 162(m)(6), which generally applies for employer tax years beginning in 2013, has a much broader reach than the general deduction limit under Code Section 162(m).

Past Rules. In general, Code Section 162(m) has limited the amount that a publicly held corporation may deduct for compensation paid to the executive officers named in the proxy statement (i.e., the top five executives) to $1 million per year per executive, with certain exceptions (e.g., performance based compensation).

New Rules. In contrast, the new Code Section 162(m)(6) applies only to certain health insurance carriers (including HMOs) and their related companies.  It applies regardless of whether the company is public or private, it significantly lowers the cap on the deductible compensation amount to $500,000 per individual and makes no exception for performance-based compensation. It also is not limited to the top five executives; it is applicable to all current and former employees and may apply to some independent contractors.

Companies Subject to New Rules. Health insurance carriers of all sizes are impacted.  Furthermore, the law extends to any employer within a controlled group (regardless of industry) that includes a health insurance carrier.  As a result, this new Code Section 162(m)(6) could have a far reaching impact on many companies who have any sized health insurance entity within their controlled group, and could be a trap for the unwary.  There is an exception to this expansive scope, however.  The rules provide an exemption for certain employers if the employer and members of its parent-subsidiary controlled group collectively meet a “de minimis” standard. To meet this standard for any given tax year beginning in 2013, all health insurance premiums received for providing minimum essential coverage (i.e., group or individual medical coverage needed to satisfy the individual coverage mandate under ACA) must comprise less than 2% of the employer’s controlled group’s aggregate gross revenue for that year.

Next Steps.  This law is effective for the  current 2013 tax year.  Health insurance carriers and their related companies need to expeditiously consider whether they are covered under Code Section 162(m)(6), as there could be significant tax ramifications.  If you have any questions about these new requirements please feel free to contact any of the attorneys in our Employee Benefits and Executive Compensation practice group.