IRS Issues Final Regulations under IRC Section 162(m)(6) Deduction Limit on Compensation Paid by Health Insurance Providers | Practical Law

IRS Issues Final Regulations under IRC Section 162(m)(6) Deduction Limit on Compensation Paid by Health Insurance Providers | Practical Law

The Internal Revenue Service (IRS) issued final 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.

IRS Issues Final Regulations under IRC Section 162(m)(6) Deduction Limit on Compensation Paid by Health Insurance Providers

by Practical Law Employee Benefits & Executive Compensation
Published on 19 Sep 2014 • USA (National/Federal)
The Internal Revenue Service (IRS) issued final 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 September 18, 2014, the IRS released final 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. Like the proposed regulations issued on April 1, 2013 (see Legal Update, Proposed Regulations Address the Deduction Limit on Compensation Paid by Health Insurance Providers), the final regulations address:
  • Application of the term "covered health insurance provider," including aggregated group rules.
  • Attribution of deferred deduction remuneration and other types of compensation to an employee's taxable year.
  • Treatment of grandfathered amounts.
Although the final regulations generally adopted the regulations as proposed, they also contained some modifications suggested by commenters, including providing:
  • Additional clarification for the aggregated group rules, including:
    • how to determine the successor parent entity of an aggregated group when the predecessor parent entity ceases to be a member of that aggregated group; and
    • how to determine members of an aggregated group when a change in the parent entity results in the taxable year of the parent entity being less than 12 months.
  • Additional clarification for the types of amounts that will be considered premiums for providing health insurance coverage.
  • Revised approaches to the attribution of deferred compensation payments from account balance plans and nonaccount balance plans.
  • An alternative method for attributing remuneration resulting from the exercise of stock options and stock appreciation rights that are subject to a substantial risk of forfeiture.
  • A flexible approach to the application of the attribution consistency rules after a corporate transaction.
IRC Section 162(m)(6) was added by the Affordable Care Act (ACA) and generally applies to the following compensation paid to certain individuals by covered health insurance providers:
  • 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.
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), see Practice Note, Section 162(m)(6) of the Code: Limit on Deduction for Compensation Paid by Health Insurers under the ACA.
The final regulations are effective on September 23, 2014 and apply to taxable years beginning on or after September 23, 2014.