IRS proposes regulations on compensation deduction limitation for health insurance providers

The IRS has issued proposed regulations on the $500,000 compensation deduction limit for remuneration paid to employees, officers and directors of certain health insurance providers. Highlights of the proposed regulations include:

  • Compensation attributable to tax years beginning before January 1, 2010 is not subject to the deduction limit, even if it vests and is paid after 2009.
  • Unless a specific exclusion applies, if a health insurance provider is part of a larger controlled group, the compensation limit applies to all employees, officers, board members and certain independent contractors of the controlled group.
  • The limit applies to both current and deferred compensation. Deferred deduction remuneration attributable to 2010 through 2012 that is deducted after 2012 is only subject to the limit if the employer is also subject to the limit in the year of the deduction.
  • A de minimis exception applies where premiums from providing health insurance coverage are less than 2% of the gross revenue of the controlled group.
  • An employer will not be a covered health insurance provider merely because it maintains a self-insured medical reimbursement plan.
  • Transition relief is provided for corporate transactions such as the acquisition of a health insurance provider by a group that had not previously been subject to the limitation.