United States: Treasury And The IRS Propose Regulations On $500,000 Compensation Deduction Limit For Health Insurers

Last Updated: May 17 2013
Article by Linda Z. Swartz, Shane J. Stroud and Brian T. McGovern

Most Read Contributor in United States, September 2018


On April 2, 2013, the Treasury Department and the IRS issued proposed regulations1 under section 162(m)(6) of the Internal Revenue Code,2 which generally imposes an annual $500,000 limitation on the amount that certain health insurers and their affiliates ("Covered Health Insurance Providers" or "CHIPs") may deduct for compensation paid to an employee.3 This limitation is contained within section 162(m) of the Code, which historically has governed the deductibility of compensation paid by public companies to certain of their senior executive officers. However, the $500,000 limitation in subpart (6) of section 162(m) is much broader in scope and applies to all CHIPs, whether public or private, and to all of a CHIP's current or former officers, directors, employees and related service providers.

The Proposed Regulations provide:

  • Additional guidance on qualification as a CHIP, including exceptions for de minimis premiums, self-insured plans, reinsurance plans, and other similar arrangements.
  • Further guidance excepting compensation paid to independent contractors, corporations and partnerships from the $500,000 deduction limitation.
  • Timing rules regarding when compensation is deemed to be paid for purposes of applying the $500,000 compensation limitation within a taxable year. 4

This memorandum summarizes the provisions of the Proposed Regulations and highlights those portions of particular importance to health insurers, members of corporate groups affiliated with a health insurer, and their respective executives.

II. Overview of the Deduction Limitation

Section 162(m)(6) of the Code imposes a $500,000 limit on a CHIP's5 deduction for the combined "applicable individual" and "deferred deduction"6 compensation paid to certain employees7 for taxable years after December 31, 2012. "Deferred deduction" compensation includes compensation that relates to services performed in any taxable year beginning after December 31, 2009 and before January 1, 2013.

III. CHIP Status and Exceptions

The Proposed Regulations indicate that the determination as to whether a person or entity is a CHIP is made with reference to an individual taxable year; a taxpayer may be a CHIP in one taxable year but not the next. The Proposed Regulations also provide that all entities related to a CHIP are aggregated with the CHIP and treated as a single employer for purposes of applying the deduction limitation (an "Aggregated Group").8

The Proposed Regulations establish three exceptions to CHIP status: (1) the de minimis premiums exception; (2) the reinsurance exception; and (3) the self-insured plan exception.

The de minimis exception provides that no member of an Aggregated Group will be a CHIP if the health insurance premiums received by such group are less than 2% of the aggregate gross revenue of all members of the Aggregated Group, so long as a member does not qualify for CHIP status independently.

The Proposed Regulations also except reinsurance contract premiums and direct service payments9 from the deduction limitation.

Finally, the Proposed Regulations provide that an employer (other than a captive insurance company) will not be a CHIP solely because it sponsors a self-insured medical reimbursement plan.10

IV. "Applicable Individual" Status and Exceptions

The $500,000 deduction limitation generally applies to payments by a CHIP to any individual who is an officer, director or employee of the CHIP, or who provides services for or on behalf of a CHIP.

The Proposed Regulations specifically exclude from the $500,000 deduction limitation compensation paid to independent contractor service providers. Generally, an unrelated service provider will be considered an independent contractor if the service provider is actively engaged in a trade or business of providing services to others and providing "significant services" to two or more non-related persons.

In addition, the preamble to the Proposed Regulations indicate that no entity classified as a corporation or partnership for federal income tax purposes providing services to a CHIP will be covered by the $500,000 deduction limitation. However, the preamble invites comments on how to ensure individuals do not abuse this exception by forming small single-member personal service corporations or similar entities to circumvent the deduction limitation.

V. Timing and Application of the Deduction Limitation

The Proposed Regulations provide that the services performed by an employee for a CHIP relate to the taxable year of the CHIP in which the employee obtains a legally binding right to the compensation. For example, if, in Year 1, the CHIP pays an employee $400,000, but the employee also earns $200,000 in deferred (but not vested) compensation in such year that is payable in Year 3, the CHIP can only deduct $100,000 of the $200,000 in deferred compensation when it pays the deferred compensation in Year 3 because the compensation relates to services provided in Year 1 (when $400,000 in compensation was already paid). However, if an employee actually receives compensation exceeding $500,000 in a taxable year, then the deduction limit applies first to any such compensation exceeding $500,000, and then to any amounts of deferred compensation paid out in such taxable year.

Finally, in the case of aggregate compensation paid to an employee by two or more members of an Aggregated Group that exceeds $500,000, the deduction limitation is applied to each member in proportion to amounts of compensation paid by each member of the Aggregated Group.

VI. Conclusion

The Proposed Regulations present many complex issues important both to health insurers and their employees, as well as to any organization that is an affiliate of a health insurer. Concerned parties are encouraged to submit comments on the Proposed Regulations no later than July 1, 2013.


1 78 Fed. Reg. 19950 (Apr. 2, 2013).

2 Internal Revenue Code of 1986, as amended (the "Code").

3 This provision was added to the Code by the Patient Protection and Affordable Care Act of 2010 (the "Affordable Care Act").

4 The Proposed Regulations build on guidance issued by the IRS in 2011. See generally I.R.S. Notice 2011-2, 2011-1 C.B. 260.

5 Generally, a CHIP is any taxpayer that issues health insurance and receives 25% or more of its gross health insurance premiums by providing "minimum essential coverage" (as that term is defined by the Affordable Care Act) or is related to any other such taxpayer.

6 The Proposed Regulations indicate that "deferred deduction" compensation is any compensation for which a payor is entitled to a deduction in a later taxable year; "applicable individual" compensation is any compensation which is not "deferred deduction" compensation.

7 Generally, employees covered by this provision include any individual other than an independent contractor who is an officer, director or employee of a CHIP or performs services for or on behalf of a CHIP.

8 The Proposed Regulations provide that two or more taxpayers will generally be treated as a single employer if they are treated as a single employer under section 414 of the Code.

9 Direct service payments are any earnings that a health insurance issuer receives from directly providing or arranging the provision of services by medical service providers.

10 78 Fed. Reg. 19950, 19952 (Apr. 2, 2013).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions