Proposed Regulations Address the Deduction Limit on Compensation Paid by Health Insurance Providers | Practical Law

Proposed Regulations Address the Deduction Limit on Compensation Paid by Health Insurance Providers | Practical Law

The Internal Revenue Service (IRS) proposed regulations under Section 162(m)(6) of the Internal Revenue Code (IRC), which address the $500,000 deduction limit on compensation provided by certain health insurance issuers.

Proposed Regulations Address the Deduction Limit on Compensation Paid by Health Insurance Providers

by PLC Employee Benefits & Executive Compensation
Law stated as of 02 Apr 2013 • USA (National/Federal)
The Internal Revenue Service (IRS) proposed regulations under Section 162(m)(6) of the Internal Revenue Code (IRC), which address the $500,000 deduction limit on compensation provided by certain health insurance issuers.
On April 1, 2013, the IRS issued proposed regulations under Section 162(m)(6) of the Internal Revenue Code (IRC), which imposes an annual limit of $500,000 on the amount of deductible compensation that covered health insurance providers can pay certain individuals. Issues addressed by the regulations include:
  • Application of the term "covered health insurance provider".
  • Attribution of deferred deduction remuneration and other types of compensation to an employer's taxable year.
  • Treatment of grandfathered amounts.
IRC Section 162(m)(6), which was added by the Affordable Care Act (ACA), is generally effective for:
  • Compensation attributable to services performed in a taxable year beginning after December 31, 2012.
  • Deferred deduction remuneration (for example nonqualified deferred compensation) attributable to services performed in a taxable year beginning after December 31, 2009 and before January 1, 2013, that is deductible in a taxable year beginning after December 31, 2012.
    The proposed regulations clarify that IRC Section 162(m)(6) applies to this deferred deduction remuneration only if the employer is both:
    • a covered health insurance provider (under the definition applicable to taxable years beginning before 2013) for the taxable year to which the deferred deduction remuneration is attributable; and
    • a covered health insurance provider (under the definition applicable to taxable years beginning in 2013) for the taxable year in which that deferred deduction remuneration is otherwise deductible.
Unlike the deduction limit included in IRC Section 162(m)(1), the deduction limit in IRC Section 162(m)(6):
  • Applies to:
    • both public and private companies if they qualify as covered health insurance providers; and
    • officers, directors, employees and certain independent contractors.
  • Does not exclude performance-based compensation.
For more information on IRC Section 162(m)(6) and IRS Notice 2011-02 (providing initial guidance on the application of IRC Section 162(m)(6)), see Practice Note, Section 162(m)(6) of the Code: Limit on Deduction for Compensation Paid by Health Insurers under the ACA).

Covered Health Insurance Providers

The proposed regulations address application of the term "covered health insurance provider", including:
  • How to determine whether a health insurance issuer is a covered health insurance provider for any taxable year.
  • How status as a covered health insurance provider applies:
    • to members of a controlled group; and
    • in the context of corporate transactions.
IRS Notice 2011-02 included de minimis rules exempting certain employers from the definition of covered health insurance provider. The proposed regulations also include an exemption from treatment as a covered health insurance provider for the first taxable year in which a person fails to qualify for the de minimis exception, after having qualified for one or more previous years.
The proposed regulations also clarify that an employer is not a covered health insurance provider solely because it maintains a self-insured medical plan.

Attributing Compensation to a Taxable Year

The proposed regulations address how to attribute the following types of compensation to a taxable year for purposes of applying the $500,000 annual limit:
  • Deferred deduction remuneration, including:
    • account balance plans; and
    • nonaccount balance plans.
  • Equity awards, including:
    • stock options;
    • stock appreciation rights;
    • restricted stock; and
    • restricted stock units.
  • Involuntary separation pay and post-termination reimbursements and in-kind benefits.
Because IRC Section 162(m)(6) only applies to compensation attributable to services performed in taxable years beginning before January 1, 2010, the proposed regulations also include somewhat different rules for determining whether compensation is attributable to taxable years beginning before January 1, 2010.
The proposed regulations are effective on the publication in the Federal Register of a Treasury decision adopting these rules as final regulations. However, taxpayers may rely on these proposed regulations until the issuance of final regulations.