Tax Law

IRC § 162(m)(6): A Game Changer in the Healthcare Insurance Arena

Update on "Obamacare" and the Individual Health Insurance Mandates

Judicial challenges to the Patient Protection and Affordable Health Care Act of 2010, P.L. 111-148 have been plentiful pretty much since its enactment and I discussed this briefly in a commentary earlier this year.  See "Group Health Plan Reporting Requirements: Delays, Rumors, Cadillacs Under Attack," Lexis Tax Staff Commentary (Sept. 9, 2011).   The individual insurance mandates in the Act are the primary target of constitutional scrutiny and on November 14, 2011, the U.S. Supreme Court granted certiorari in the case of Florida v. US Dept. of Health & Human Services, 648 F.3d 1235 (11th Cir. 2011); cert granted 2011 U.S. LEXIS 8094 (Nov. 14, 2011).  Oral arguments are scheduled for March 2012 and a ruling is expected by July 2012. 

The Supreme Court's decision regarding the Act could have a significant effect on the November 2012 election as the Act (dubbed "Obamacare" by pundits) is considered to be perhaps the President's most significant domestic achievement.  Lower courts are split on the constitutionality issue of the mandates and it is uncertain whether the mandate could be severed from the remaining portions of the Act.  See Virginia v. Sebellius, 702 F. Supp. 2d 598 (US Dist Ct. 2010) (severing the individual mandate but leaving the remainder of the Act intact), but see Florida v. US Dept. of Health & Human Services, 780 F. Supp. 2d 1256 (U.S. Dist. Ct. 2011) (holding that severance is not possible).  The Supreme Court will address these issues, and several others, when they review the case next year.

IRC Section 162(m)(6) is an Industry Gamechanger and Among the Provisions Under Scrutiny

Among the provisions that may be subject to the Supreme Court's decision is the deduction limitation contained in Section 9014 of the Act and codified at IRC Section 162(m)(6).  This subsection is in addition to the limitation imposed in IRC Section 162(m)  which restricts the deduction a publicly-traded company may take for compensation paid to a narrow group of executives to $1,000,000 per year.  Within IRC Section 162(m)(1)  is a "performance-based compensation" exception as well as several other possible exceptions that can help lessen the blow of the limitation in IRC Section 162(m), including an exception for compensation paid to former executives.

More controversial and limited is new IRC Section 162(m)(6).  An industry gamechanger because of its broad and expansive application, the new provision applies to "covered health insurance providers" and limits the tax deduction these health care insurers may take with respect to compensation for services paid to all current and former employees, and most independent contractors, to $500,000 per year.  The limitation applies whether the insurer's stock is publicly traded and the exceptions in IRC Section 162(m)(1)  mentioned above do not apply in connection with IRC Section 162(m)(6)

The limitation is applicable for tax years beginning after 2012, but compensation earned starting in 2010 that is deductible after 2012 is also subject to the limitation (and referred to as "deferred deduction remuneration").  Under the Act, "covered health insurance provider" is defined differently depending on which tax year is at issue, but both definitions are broad in scope (see Notice 2011-02).  There is a separate definition for the term for tax years beginning after December 31, 2012 and a different definition for tax years beginning after December 31, 2009 but ending before January 1, 2013.  A broad definition applies for the first set of tax years and an even more expansive definition applies for the second set of tax years.  In addition, IRC Section 162(m)(6) is applicable to all members of a controlled group that contain a "covered health insurance provider."  See IRC Section 414

There are still a number of questions surrounding IRC Section 162(m)(6), including whether certain types of insurance could be construed as "health insurance coverage" and result in the issuer and members of its controlled group being subject to the new rules.  Possible additional IRS guidance on IRC Section 162(m)(6) seems unlikely prior to the Supreme Court's decision on the validity of the entire Act itself next year, but stay tuned for developments in this important area.


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