IRS drafts health insurer exec comp regs

The Internal Revenue Service (IRS) is trying to keep health insurers from wiggling out of Patient Protection and Affordable Care Act (PPACA) pay restrictions.

The IRS has published draft regulations that explain how insurers and their advisors should apply Section 162(m)(6) of the Internal Revenue Code (IRC), a tax law created by PPACA.

Section 162(m)(6) prohibits "covered health insurance providers" from deducting more than $500,000 in compensation paid to "applicable individuals" each year. The IRS gave general advice about how to apply the law in IRS Notice 2011-02.

Applicable individuals include a health insurer's employees, officers and directors.

When the IRS issued the notice, it asked for comments about how it could keep the compensation deductibility rule from applying to a company that happens to write a very small amount of health insurance. The IRS also is asking how it should apply the rule in other complicated or unusual situations.

Officials have suggested in the proposed regulations that the deduction limit should apply only if an employer gets 2 percent or more of its revenue in the form of health insurance premiums. The IRS would not count reinsurance premiums as health insurance premiums.

Officials and commenters have been debating whether and how to make a distinction between "natural persons" and services provided through arrangements with corporations or partnerships, including "personal services corporations."

"Commenters were concerned that remuneration paid to doctors working for practice groups that provide services to a covered health insurance provider would be subject to the deduction limitation under Section 162(m)(6)," officials said. "In general, a corporation or a partnership (for federal tax purposes) would not be treated as an applicable individual."

But the IRS and its parent, the U.S. Treasury Department, worry about the possibility that health insurers could try to avoid having to comply with the deduction limit by "encouraging employees and independent contractors who are natural persons to form small or single-member personal service corporations or other similar entities to provide services that are historically provided by natural persons," officials said.

The IRS is asking for comments about how it can keep health insurers' highly paid executives from all becoming parts of small or single-member personal services corporations or similar entities and selling executive services back to the health insurers through those entities.

Comments on the proposed regulations are due July 1.

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