Last month, the IRS issued final regulations under IRC Section 162(m)(6) for certain health insureance companies. The final regulations largely track the regulations proposed in 2013, previously discussed here.
For taxable years starting after 2012, the statute (added by the Affordable Care Act) reduces the annual deduction limit for “covered health insurance providers” from $1,000,000 to $500,000, expands the class of covered individuals to include all employees, officers and directors, eliminates the performance-based compensation exemption, extends the limitation to deferred compensation earned after 2009 and applies to private health insurers as well as public, among other things. A “covered health insurance provider” for this purpose is any licensed health insurance company or organization that receives 25% or more of its gross premiums from providing health insurance coverage during a taxable year from “minimum essential coverage,” which generally includes coverage provided under a government program, an employer-sponsored group health plan or a health plan offered in the individual market within a state.
Importantly any direct or indirect 80%-controlled parent or subsidiary of a covered health insurance provider (or any member of an affiliated service group) is subject to the reduced deduction limitation as well, regardless of whether the related entity is in the health insurance business, unless a de minimis rule applies. Under the de minimis rule, an entity will not be a covered health insurance provider if less than 2% of the gross revenues for a taxable year for that entity and its direct or indirect parents or subsidiaries (or affiliated service group members) comes from providing health insurance coverage that is minimum essential coverage.
As mentioned above, one of the changes introduced by Section 162(m)(6) was to apply the deduction limitation to deferred as well as current compensation. This requires covered health insurance providers to allocate deferred compensation amounts (including traditional nonqualified retirement plans, cash and equity-based incentive compensation and severance pay) to the taxable years in which such amounts are earned (or on a pro-rata basis to the year or years in which they vest, if subject to vesting). A summary of these rules is beyond the scope of this post, but suffice it to say the rules are complex and will impose substantial additional tracking requirements on covered health insurance providers.
Many of the innovations introduced by Section 162(m)(6) may ultimately find their way into tax reform legislation that would apply to businesses beyond the health insurance industry. For example, the Camp tax reform proposal for 162(m) would eliminate the performance-based compensation exemption and would apply to deferred compensation as well as current, similar to Section 162(m)(6). Alternatively, the recently proposed CEO-Employee Pay Fairness Act indicates that Congress could end up taking a different tack in its efforts to reform Section 162(m)—by tying the deductibility of certain officer and director compensation in excess of $1 million to whether a company pays a minimum average compensation level to its rank and file employees.