Yesterday, the IRS proposed new regulations limiting the deductions that certain health insurance issuers may take for compensation paid to their employees (and other service providers, excluding certain bona fide independent contractors) to $500,000 per service provider per year, starting for most companies in 2013.
The regulations implement Section 9014 of the new healthcare reform law (PPACA) (previously discussed here) and are ostensibly intended to prevent health insurance companies from deriving a tax benefit from using the expected new revenues generated by the sale of minimum required insurance coverage in order to increase executive pay, a tax policy the wisdom of which this Blog declines to an express an opinion.
The proposed regulations depart from the current 162(m) rules in several important respects (and are similar in this way to the TARP-related 162(m) rules for troubled financial institutions from several years ago), including:
- the fact they apply to private companies as well as public ones (the current non-TARP 162(m) rules only apply to public companies);
- the $500,000 deduction limit itself, unindexed to inflation (the current non-TARP 162(m) limit is $1 million, also unindexed);
- in their application to all employees and other service providers (excluding certain independent contractors) who provide services at any time during a given taxable year (the current non-TARP 162(m) rules generally apply only to the CEO and three other most highly-compensated executives, excluding the CFO, who are employed on the last day of the year);
- in their application to post-2009 deferred compensation as well as current compensation (the current non-TARP 162(m) rules effectively only apply to current compensation); and
- in their lack of an exemption for stock options and other “performance-based” compensation (the current non-TARP 162(m) rules exclude options and “performance-based” compensation from the $1 million limit).
Most companies will be unaffected by the new rules, which generally only apply to “health insurance issuers” (generally defined as state-licensed and -regulated insurance companies or HMOs) that receive at least 25% of their premiums from providing health insurance coverage which qualifies as “minium essential coverage” (i.e., coverage which an individual must obtain in order to avoid a penalty under PPACA), or their 80%-or-more controlling parents or 80%-or-more controlled subsidiaries (but specifically excluding any brother-sister entity within the controlled group), subject to certain de minimis exceptions.
Importantly, (i) the new rules do not apply to employers who sponsor self-insured group health plans merely because they sponsor such plans and (ii) premiums under an indemnity reinsurance policy (e.g., a policy reinsuring a self-insured group health plan) are not treated as “health insurance premiums” for this purpose.
However, even companies that are unaffected cannot be happy about the trend marked first by the TARP 162(m) rules and now by the PPACA 162(m) rules. How long before Congress decides that the narrower limitations on the deductibility of executive compensation at troubled banks and covered health insurance issuers would be good for the rest of corporate America as well?