The IRS on Sept. 23 issued final regulations (T.D. 9694) to provide guidance on Section 162(m)(6), which was enacted as part of the Affordable Care Act to limit certain health insurance providers' compensation deduction to $500,000 per employee.
This limit is effective for taxable years beginning after Dec. 31, 2012, and 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 is derived from minimum essential coverage. In general, each member of an aggregated group that includes a covered health insurance provider at any time during a taxable year is subject to the $500,000 limitation, even if the member is not a health insurance issuer and does not provide health insurance coverage. For this purpose, an aggregated group includes employers treated as a single employer under Sections 414(b), (c), (m) or (o), disregarding Sections 1563(a)(2) and (3) and Treas. Reg. Secs. 1.414(c)-2(c) and (d).
The final regulations adopt transition relief for determining if an entity is a covered health insurance provider after a corporate transaction. If an entity that is not otherwise a covered health insurance provider becomes a covered health insurance provider solely because of a corporate transaction, that entity is not treated as a covered health insurance provider for the taxable year in which the transaction occurs.
The final regulations generally adopt the rules in the proposed regulations and clarify that employers with self-insured plans are excluded from the definition of covered health insurance provider. The final regulations retain the de minimis exception in the proposed regulations, which provides 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 earned in a taxable year in which the employer was covered by Section 162(m)(6), but 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 attributable to services performed in taxable years beginning after Dec. 31, 2009, and before Jan. 1, 2013, that is deductible in a taxable year beginning after Dec. 31, 2012. The final regulations provide extensive guidance on the attribution of deferred deduction remuneration.
Unlike the $1 million compensation deduction limit under Section 162(m)(1), the $500,000 deduction limit under Section 162(m)(6) applies to both private and public companies and to compensation paid to all officers, directors, employees and certain independent contractors. The $500,000 deduction limit generally applies only to compensation paid to individuals, but the final regulations state that future guidance may identify situations in which services performed by an entity will be treated as services provided by individuals for purposes of Section 162(m)(6). Section 162(m)(6) does not exclude from the limit performance-based compensation and commissions.
The final regulations are effective on Sept. 23, 2014, and apply to taxable years beginning after that date. Taxpayers may rely on the final regulations for years beginning prior to Sept. 23, 2014.
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