The IRS recently issued proposed regulations (REG-106796-12) to provide guidance on the new rule that limits compensation deductions for health insurance providers to $500,000 per employee. The limit was added by the Patient Protection and Affordable Care Act as Section 162(m)(6) and is effective for taxable years beginning after Dec. 31, 2012. It applies to “covered health insurance providers.”
A company is a covered health insurance provider if at least 25% of the provider’s gross premiums from health insurance coverage are derived from minimum essential coverage (defined in the health care reform legislation). In general, each member of an aggregated group (i.e., employers treated as a single employer under Section 414(b), (c), (m) or (o)) that includes a covered health insurance provider at any time during a taxable year is subject to the $500,000 limitation. The proposed regulations clarify that employers with self-insured plans are excluded from the definition of covered health insurance provider. There is a de minimis exception so that an aggregated group of employers is not subject to the $500,000 limitation if the group receives insurance premiums that are less than 2% of the group’s gross revenues.
Section 162(m)(6) applies special rules to “deferred deduction remuneration,” which includes compensation that is earned in a taxable year the employer was covered by Section 162(m)(6) but that is not deductible until a future taxable year (e.g., nonqualified deferred compensation, equity-based compensation and certain severance payments). Even though Section 162(m)(6) is effective for taxable years beginning after Dec. 31, 2012, the limit applies to deferred deduction remuneration that can be attributed to services performed in taxable years beginning after Dec. 31, 2009, and before Jan. 1, 2013, if the remuneration is deductible in a taxable year beginning after Dec. 31, 2012. The proposed regulations provide extensive guidance on the attribution of deferred deduction remuneration.
Unlike the general $1 million compensation deduction limit under Section 162(m)(1), the $500,000 deduction limit under Section 162(m)(6) for health insurers applies to both private and public companies, and to compensation paid to all officers, directors, employees and certain independent contractors. Also, Section 162(m)(6) does not exclude performance-based compensation and commissions.
The proposed regulations are not effective until they are issued in final form, but taxpayers may rely on them until then.
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