Last month I blogged on the proposed regulations under new Code Section 162(m)(6) "IRS Issues Proposed Regulations under Code Section 162(m)(6), Applicable to Covered Health Insurance Providers". Although this blog generated more feedback than I expected, proxy season duties (and topics) intervened, so that I am only now getting back to the subject. Most of the reader comments on the blog (other than those making rude suggestions as to Congress and the IRS) could be summarized by the question: "How do I legally get around this ridiculous limit?"
Before I get to that, briefly, for those who have not been following it, new Section 162(m)(6), added by the Affordable Care Act ("ACA"),* limits to $500,000 the allowable deduction for the "aggregate applicable individual remuneration" attributable to services performed by an "applicable individual" for a "covered health insurance provider." Unlike the rest of Code Section 162(m), this $500,000 limitation applies to: (i) both privately held and public traded companies, (ii) any employee of any employer that has a "covered health insurance provider" (including controlled group), (iii) all compensation, including performance-based compensation and compensation deferred in the year, and (iv) compensation deferred by the employee.
Given these critical differences from Sec. 162(m) as it applies to the rest of corporate America, how does a covered health insurance provider legally "get around" this ridiculous limit? The answer is that – generally, it does not get around the limit. It simply loses the deduction. Code Sec. 162(m)(6) has no compensation policy shaping goal or other tax related purpose. Congress intended to make Section 162(m)(6) punitive and, therefore, included no exceptions to the limit.
Thus far, in brainstorming with other leaders in the executive compensation professional community, the only idea we have come up with is for the employer to shift more benefits and compensation to its qualified retirement plans. Because of the limitations on qualified plan, this is only a band aid. However, every little bit helps, and qualified retirement plans offer at least 15 other advantages to employers and employees. In addition to simply improving the plan's benefit formula, employers might consider the strategy I have blogged on before known as the "SERP Swap" or the "QSERP." As long-time readers will recall, this strategy involves shifting non-qualified plan benefits, which are fully counted for purposes of 162(m)(6), to a qualified plan, the benefits of which are not counted. Readers can review this strategy in these past blogs: "Another Blogger Sings the Praises of QSERPs," and "Follow-Up on QSERPs". Note that, although a QSERP are usually utilized in a defined benefit plan context, it can be utilized in a defined contribution plan scenario as well (since many companies no longer have defined benefit plans providing for current accruals).
Another blog on this strategy from a leading actuary appears here.
*I am told that some people consider the reference to "ObamaCare" as pejorative. This Blog is unabashedly pro-business and pro-capitalism, but we try to be non-partisan, so I will no longer use that term.