The tax law is difficult to understand due to its numerous special rules. This is apparent on just about every news show about the House Republican/President Trump’s bill to replace/repair the Affordable Care Act (aka Obamacare). Last night, I saw a bit of a CNN town hall with HHS Secretary Tom Price. Questions were raised about the bill providing significant benefits to high income/wealthy individuals. In addition to repeal of the Net Investment Income Tax (Section 1411), a comment was made by the CNN reporter about repealing the ACA rule regarding a compensation limit on high compensation of health insurance companies.
At first, Secretary Price said he wasn’t familiar with the rule. Then he said he did know and queried the audience as to why anyone would want a rule that limits what an individual can be paid. This was after the CNN reporter noted the rule involved $500,000 of compensation. Query: Does he know that this is more than 10 times the median income in the US (see IRS stats that median AGI was $38,171 for 2014)? I only note that as it is interesting (sad) to see government officials be cavalier on such points that seem to just highlight they are out of touch with the lives of 90% of the public.
Back to the rule—the ACA added IRC Section 162(m)(6) to basically provide that a health insurance company cannot deduct compensation of any employee that exceeds $500,000 for the year. Employees can still be paid a greater amount, it is just that the employer can’t deduct the excess. The House Republican/President Trump proposal released March 6 would repeal this provision (section 241 of the bill). And, yes, there are health insurance employees paid more than $500,000.
Given that the ACA aimed to make health insurance more affordable, the rationale for the compensation deduction limitation was to perhaps discourage such amounts by increasing taxes for the employer.
Is that a good rule? Well, the rule increases costs for insurance companies because losing a deduction (for the compensation paid to an employee in excess of $500,000), causes them to pay more taxes. That increases their costs. While SEC rules already require disclosure of executive compensation, perhaps the ACA rule should have been that the health insurance companies had to disclose the positions in the company where the holder of that position was paid more than $500,000. Perhaps that would put some pressure on health insurance companies to restrict compensation or at least highlight that insurance companies have a lot of money if they can pay employees such a large amount of compensation.
What do you think?
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