3524 / Do the health care reform laws place any limitations on the deductibility of executive compensation?

Yes. The Affordable Care Act (ACA) has added rules to limit the deductibility of compensation paid to certain executives of certain “health care insurers” as defined under the law (and applying the controlled group rules). The definition of “health care insurers” includes insurance companies, health maintenance organizations, and any other entity that receives premiums for providing “health insurance coverage.” The ACA places a $500,000 limit on the deduction of compensation that otherwise would be deductible to each employee during an applicable tax year. This limit includes any deferred compensation amounts earned in that tax year, even if it will not be paid until a later year. The deduction then would not be available when the deferred compensation is later paid if it is used up.

In effect, the compensation in excess of the limit is taxed twice. It is taxed once when the employee pays tax on the compensation, and it is taxed again to the extent the employer cannot deduct the compensation in excess of the limit.

This limit is effective for compensation earned in 2013 and later tax years, but includes compensation earned in 2010 or later tax years and deferred until later than 2012.