SCOTTSDALE, Ariz. (Nov. 12, 2010) — Uncertainty over the scope of a tax code provision in the health care reform law could deter employers from considering reinsuring employee health plans through captive insurance plans until regulations are drafted, a captive tax expert said Nov. 10.
Speaking at the 20th Annual World Captive Forum in Scottsdale, Ariz., P. Bruce Wright, a partner at Dewey & LeBoeuf L.L.P. in New York, noted that Internal Revenue Code Section 162(m)(6)—introduced as part of the Patient Protection and Affordable Care Act—bars covered health insurance providers from taking federal tax deductions for compensation in excess of $500,000 paid to any employee or consultant.
At present it's unclear whether that restriction would apply by extension to the parent company of captives reinsuring employee health plans, Mr. Wright said.
“Does that mean that the chairman or the CEO of the company is going to find out that the company can't take a deduction for more than $500,000 of his compensation that year?” the attorney asked.
With that uncertainty, many plans for such captive benefit programs “are now pretty much on hold,” Mr. Wright said, until the scope of the new tax code provision is clarified.
Similar questions exist around captives writing medical stop-loss coverage, Mr. Wright said, though he added that “I think the stop-loss probably has a clearer case of not being included.”
“We're not going to really know until the regulations come out,” he said.
This report appeared in Business Insurance magazine, a Chicago-based sister publication of Tire Business.