IRS Proposes Regulations on $500,000 Deduction Limit for Compensation Provided by Health Insurance Providers

On April 1, 2013, the Internal Revenue Service (“IRS”) published proposed regulations clarifying the $500,000 deduction limit for compensation provided by certain health insurance providers, which is contained in section 162(m)(6) of the Internal Revenue Code (the “Code”), as added by the Patient Protection and Affordable Care Act of 2010.

As way of background, for tax years beginning after December 31, 2012, section 162(m)(6) of the Code limits certain health insurance providers to a $500,000 per year deduction on compensation paid to its officers, directors, employees and certain other service providers. This deduction limitation applies to compensation when it is deemed earned and not when it is actually paid.

As such, for purposes of the deduction limitation, compensation in any given year may include deferred compensation not actually paid or otherwise deductible until a later year.

To provide guidance on the application of the $500,000 deduction limitation under section 162(m)(6) of the Code, the IRS issued Notice 2011-02 in late December 2010. The proposed regulations published by the IRS provide additional guidance and address the issues raised under Notice 2011-02. Specifically, the proposed regulations:

  • Confirm that employers with self-insured plans are excluded from the definition of a health insurance provider
  • Address whether a health insurance issuer (i.e., an insurance company, insurance service, or insurance organization that is licensed to engage in the business of insurance in a state and is subject to state law regulating insurance) is a covered health insurance provider
  • Address the timing of application of the deduction limit as well as application of the limit to payments of deferred compensation
  • Address the effect of certain corporate transactions (mergers, acquisitions of stock or assets, reorganizations, etc.) on the application of the deduction limit

If you have questions about the deduction limitation and its applicability to your company, please contact one of the authors or the Reed Smith attorney who sent you this alert.