As expected, the GOP’s proposed legislation to replace Obamacare (entitled the American Health Care Act) includes the repeal of most tax provisions under the Affordable Care Act (ACA), other than the 40% excise tax on high-cost group health plans. Among them, the proposed legislation would repeal the current $500,000 limitation on the deductibility of compensation for any officer, director, employee and some independent contractors for all covered insurers (whether publicly traded or private) for taxable years beginning after December 31, 2017.
By repealing this $500,000 deduction limit, nonpublic health insurers will be able to fully deduct executive compensation beginning in 2018 and publicly traded health insurers will be treated the same as all other public companies under Section 162(m) of the tax code. That provision generally limits compensation deductions to $1 million for the CEO and the other three highest-paid employees (excluding the CFO) and excludes performance-based pay.
The $500,000 limit on deductibility for health insurers first applied to deductions claimed in 2013 and was intended to discourage the use of additional revenues from ACA for executive bonuses rather than for improvements in patient care. When the ACA limit on deductibility was first introduced, most health insurers viewed it as an increased cost of doing business. The market rate for executive talent at larger health insurers often exceeds $500,000 in total compensation. Since the ACA limit wasn’t restricted to the most senior executives and didn’t exclude performance-based pay or commissions, there really wasn’t anything health insurers could do in terms of pay program design to avoid a lost tax deduction and still attract and retain qualified executive talent.
Based on Willis Towers Watson’s 2016 Health Insurance Executive Compensation Survey, target incentive opportunities for the CEOs of larger health insurers are often double their annual salary. Because there’s already this robust pay-for-performance relationship, we don’t anticipate changes to executive compensation practices at most health insurers if the ACA deduction limit is repealed. As health care continues to evolve, it will be even more critical for companies to ensure they have the right leaders and the right incentive plans to ensure success.
Betsy Field is a senior consultant in the executive compensation consulting practice in Willis Towers Watson’s Cincinnati office and a leader of the practice’s nonprofit health care consulting team nationally. Email firstname.lastname@example.org or email@example.com.