[Federal Register Volume 78, Number 63 (Tuesday, April 2, 2013)]
[Proposed Rules]
[Pages 19949-19977]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2013-07533]



[[Page 19949]]

Vol. 78

Tuesday,

No. 63

April 2, 2013

Part V





Department of the Treasury





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Internal Revenue Service





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26 CFR Part 1





The $500,000 Deduction Limitation for Remuneration Provided by Certain 
Health Insurance Providers; Proposed Rule

Federal Register / Vol. 78 , No. 63 / Tuesday, April 2, 2013 / 
Proposed Rules

[[Page 19950]]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[REG-106796-12]
RIN 1545-BK88


The $500,000 Deduction Limitation for Remuneration Provided by 
Certain Health Insurance Providers

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Notice of proposed rulemaking.

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SUMMARY: This document contains proposed regulations on the application 
of the $500,000 deduction limitation for remuneration provided by 
certain health insurance providers under section 162(m)(6) of the 
Internal Revenue Code (Code). These regulations affect health insurance 
providers that pay such remuneration.

DATES: Written or electronic comments and requests for a hearing must 
be received by July 1, 2013.

ADDRESSES: Send submissions to CC:PA:LPD:PR (REG-106796-12), Internal 
Revenue Service, PO Box 7604, Ben Franklin Station, Washington DC 
20044. Submissions may be hand-delivered Monday through Friday between 
the hours of 8 a.m. and 4 p.m. to CC:PA:LPD:PR (REG-106796-12), 
Courier's Desk Internal Revenue Service, 1111 Constitution Avenue NW., 
Washington, DC, or sent electronically via the IRS Internet site via 
the Federal eRulemaking Portal at www.regulations.gov (IRS REG-106796-
12).

FOR FURTHER INFORMATION CONTACT: Concerning these proposed regulations, 
Ilya Enkishev at (202) 622-6030; concerning the submission of comments 
or to request a public hearing, Oluwafunmilayo (Funmi) Taylor at (202) 
622-7180 (not toll-free numbers).

SUPPLEMENTARY INFORMATION:

Background

    This document contains a proposed amendment to 26 CFR part 1 under 
section 162(m)(6) of the Code. Section 162(m)(6) limits the allowable 
deduction for remuneration attributable to services provided by 
applicable individuals to certain health insurance providers that 
receive premiums from providing health insurance coverage. Section 
162(m)(6) was added to the Code by section 9014 of the Patient 
Protection and Affordable Care Act (ACA) (Pub. L. 111-148, 124 Stat. 
119, 868 (2010)).
    On December 23, 2010, the Treasury Department and the IRS released 
Notice 2011-2 (2011-1 CB 260), which provides guidance on certain 
issues under section 162(m)(6). Specifically, the notice provides 
guidance on the application of the $500,000 deduction limitation to 
deferred deduction remuneration that is earned during taxable years 
beginning after December 31, 2009 and before January 1, 2013 and 
deductible in a taxable year beginning after December 31, 2012. The 
notice also provides a de minimis exception under which a covered 
health insurance provider is exempt from the deduction limitation if 
the health insurance premiums received by it and all other entities 
with which it must be aggregated under section 162(m)(6) are less than 
two percent of their combined gross revenues. In addition, the notice 
provides that remuneration subject to section 162(m)(6) does not 
include remuneration earned by independent contractors who are not 
subject to section 409A (meaning generally that the independent 
contractor provides substantial services to multiple unrelated 
customers). Finally, the notice provides that premiums under a 
reinsurance contract are not treated as premiums for providing health 
insurance coverage for purposes of section 162(m)(6).
    Notice 2011-2 requested comments on the following issues:
     Application of the term covered health insurance provider, 
including the de minimis exception set forth in the notice and possible 
alternative de minimis exceptions;
     How deferred deduction remuneration should be attributed 
to a taxable year of an employer;
     Application of the term covered health insurance provider 
in the case of a corporate event such as a merger, acquisition, or 
reorganization; and
     Application of the deduction limitation to remuneration 
for services performed for insurers who are captive insurance companies 
or that provide reinsurance or stop loss insurance.
    In drafting these proposed regulations, the Treasury Department and 
the IRS have considered all comments received, many of which are 
discussed in this preamble. See Sec.  601.601(d)(2)(ii)(b).

Explanation of Provisions

    For taxable years beginning after December 31, 2012, section 
162(m)(6) limits to $500,000 the allowable deduction for the aggregate 
applicable individual remuneration and deferred deduction remuneration 
attributable to services performed by an applicable individual for a 
covered health insurance provider in a disqualified taxable year 
beginning after December 31, 2012 that (but for section 162(m)(6)) is 
otherwise deductible under chapter 1 of the Code (referred to in this 
preamble as remuneration that is otherwise deductible). Deferred 
deduction remuneration attributable to services performed in a 
disqualified taxable year beginning after December 31, 2009 and before 
January 1, 2013 that becomes otherwise deductible in taxable years 
beginning after December 31, 2012 is also subject to the $500,000 
deduction limitation, determined as if the deduction limitation applied 
to disqualified taxable years beginning after December 31, 2009.
    Accordingly, if applicable individual remuneration, deferred 
deduction remuneration, or a combination of applicable individual 
remuneration and deferred deduction remuneration that is attributable 
to services performed by an applicable individual for a covered health 
insurance provider in a disqualified taxable year exceeds $500,000, the 
amount of the remuneration that exceeds $500,000 is not allowable as a 
deduction in any taxable year. To the extent that the aggregate 
applicable individual remuneration and deferred deduction remuneration 
attributable to services performed by an applicable individual for a 
covered health insurance provider in a disqualified taxable year is 
less than $500,000, the remuneration generally may be deducted by the 
covered health insurance provider in the taxable year or years in which 
the amount is otherwise deductible.
    The following example illustrates the application of the section 
162(m)(6) deduction limitation. In Year 1, a covered health insurance 
provider pays $400,000 in salary (applicable individual remuneration) 
to an applicable individual and also credits $300,000 to an account for 
the applicable individual under a nonqualified deferred compensation 
plan, which is payable in Year 5 (deferred deduction remuneration). The 
$300,000 credit is fully vested in Year 1 and is attributable to 
services provided by the applicable individual in that year. In Year 1, 
the covered health insurance provider may deduct the $400,000 of 
applicable individual remuneration paid to the applicable individual 
for services provided during that year because the amount of this 
payment is less than the $500,000 deduction limit. In Year 5, the 
covered health insurance provider pays the $300,000 that was credited 
under the nonqualified deferred compensation

[[Page 19951]]

plan for services provided by the applicable individual in Year 1. 
Because the aggregated applicable individual remuneration and deferred 
deduction remuneration attributable to services performed by the 
applicable individual in Year 1 exceeds the $500,000 deduction limit by 
$200,000 ($400,000 + $300,000 = $700,000), the covered health insurance 
provider can deduct only $100,000 of the $300,000 payment in year 5, 
and the remaining $200,000 is not deductible by the covered health 
insurance provider in any year.

I. Covered Health Insurance Provider

A. In General

    Section 162(m)(6)(C) provides that a covered health insurance 
provider is any health insurance issuer described in section 
162(m)(6)(C)(i) and certain persons that are treated as a single 
employer with that health insurance issuer, as described in section 
162(m)(6)(C)(ii). These proposed regulations include rules for 
determining whether a health insurance issuer is a covered health 
insurance provider for any taxable year and whether a person is treated 
as a single employer with a health insurance issuer that is a covered 
health insurance provider for any taxable year. A person may be treated 
as a covered health insurance provider for one taxable year, but not be 
treated as a covered health insurance provider for another taxable 
year, depending on whether that person meets the requirements to be a 
covered health insurance provider under section 162(m)(6)(C) for a 
particular taxable year.

B. Health Insurance Issuers

    For taxable years beginning after December 31, 2009 and before 
January 1, 2013, section 162(m)(6)(C)(i)(I) provides that a health 
insurance issuer (as defined in section 9832(b)(2)) is a covered health 
insurance provider for a taxable year if that health insurance issuer 
receives premiums from providing health insurance coverage (as defined 
in section 9832(b)(1)) during the taxable year. For taxable years 
beginning after December 31, 2012, section 162(m)(6)(C)(i)(II) provides 
that a health insurance issuer (as defined in section 9832(b)(2)) is a 
covered health insurance provider for a taxable year if not less than 
25 percent of the gross premiums that the provider receives from 
providing health insurance coverage (as defined in section 9832(b)(1)) 
during the taxable year are from minimum essential coverage (as defined 
in section 5000A(f)).

C. Persons Treated as a Single Employer with a Health Insurance Issuer

    Section 162(m)(6)(C)(ii) provides that two or more persons that are 
treated as a single employer under sections 414(b), (c), (m), or (o) 
are treated as a single employer for purposes of determining whether a 
person is a covered health insurance provider, except that in applying 
section 1563(a) for purposes of these subsections of section 414, 
sections 1563(a)(2) and (3) (which provide for brother-sister groups 
and combined groups) are disregarded. Accordingly, these proposed 
regulations provide that each member of an aggregated group (as 
described in the final sentence of this paragraph) that includes a 
health insurance issuer described in section 162(m)(6)(C)(i) at any 
time during a taxable year is also a covered health insurance provider 
for purposes of section 162(m)(6), even if the member is not a health 
insurance issuer and does not provide health insurance coverage. (An 
exception for certain corporate transactions is provided in the 
transition rules described in section IX of this preamble.) For this 
purpose, these proposed regulations define the term aggregated group as 
a health insurance issuer (as defined in section 9832(b)(2)) and all 
persons that are treated as a single employer with the health insurance 
issuer under sections 414(b), (c), (m) or (o), disregarding sections 
1563(a)(2) and (3) (with respect to controlled groups of corporations) 
and Sec.  1.414(c)-(2)(c) (with respect to trades or businesses under 
common control).
    For members of an aggregated group that have different taxable 
years, these proposed regulations provide rules to determine whether a 
member of an aggregated group that is not a health insurance issuer is 
a covered health insurance provider for a particular taxable year. 
Under these rules, the parent entity (as defined in the following 
paragraph of this preamble) of an aggregated group is a covered health 
insurance provider for its taxable year with which, or in which, ends 
the taxable year of the health insurance issuer that is a covered 
health insurance provider in the aggregated group of which the parent 
entity is a member. Each other member of an aggregated group is a 
covered health insurance provider for its taxable year that ends with, 
or within, the taxable year of the parent entity during which the 
parent entity is a covered health insurance provider. For purposes of 
these proposed regulations, the term parent entity refers to the common 
parent of an aggregated group that is a parent-subsidiary controlled 
group of corporations (within the meaning of section 414(b)) or a 
parent-subsidiary group of trades or businesses under common control 
(within the meaning of section 414(c)). With respect to an aggregated 
group that is an affiliated service group within the meaning of section 
414(m) or other group within the meaning of section 414(o), the parent 
entity is the health insurance issuer in the aggregated group if the 
aggregated group includes only one health insurance issuer If an 
aggregated group that is an affiliated service group within the meaning 
of section 414(m) or other group within the meaning of section 414(o) 
includes more than one health insurance issuer, the parent entity is 
any health insurance issuer in the aggregated group that is designated 
in writing by the other members of the group as the parent entity for 
purposes of section 162(m)(6), provided that the members of the group 
treat the health insurance issuer as the parent entity consistently for 
all taxable years. If the members of an aggregated group that is an 
affiliated service group or other group fail to designate a parent 
entity in writing (or fail to apply the designation consistently for 
all taxable years), the members of the group are deemed to have a 
parent entity with a taxable year that is the calendar year. A health 
insurance issuer that has been designated as the parent entity of an 
aggregated group may leave that group as a result of a merger, 
disposition, or other corporate transaction; the Treasury Department 
and the IRS request comments on the circumstances under which a 
successor parent entity may be designated and any transition rules that 
may be necessary in this situation.

D. Self-insurers

    In response to a request for comments in Notice 2011-2, commenters 
suggested that an employer that sponsors a self-insured medical 
reimbursement plan should not be treated as a covered health insurance 
provider because benefits under this type of plan should not be treated 
as health insurance coverage for purposes of section 162(m)(6) if the 
employer assumes the financial risk of providing health benefits to its 
employees and limits the availability of benefits only to employees 
(which may include former employees). The Treasury Department and the 
IRS agree that an employer should not be treated as a covered health 
insurance provider under these circumstances. Accordingly, these 
proposed regulations provide that an employer is not a covered health

[[Page 19952]]

insurance provider solely because it maintains a self-insured medical 
reimbursement plan. For this purpose, the term self-insured medical 
reimbursement plan means a separate written plan for the benefit of 
employees (which may include former employees) that provides for 
reimbursement of employee medical expenses referred to in section 
105(b) and that does not provide for reimbursement under an individual 
or group policy of accident or health insurance issued by a licensed 
insurance company or under an arrangement in the nature of a prepaid 
health care plan that is regulated under federal or state law in a 
manner similar to the regulation of insurance companies. An arrangement 
described in the prior sentence may include a plan maintained by an 
employee organization described in section 501(c)(9). A captive 
insurance company, however, is treated as a covered health insurance 
provider under these proposed regulations if it is a health insurance 
issuer that is otherwise described in section 162(m)(6)(C).

E. De Minimis Exception

1. In General
    After section 162(m)(6) was enacted, some commenters observed that 
the aggregation rule in section 162(m)(6)(C)(ii) could result in 
unintended consequences in situations in which a health insurance 
issuer's activities and revenue constitute an insignificant portion of 
the activities and revenue of persons that are treated as a single 
employer with the health insurance issuer under the aggregation rules. 
Commenters also suggested that employers that maintain only legacy 
policies (policies that are no longer sold but for which current 
policyholders have automatic renewal rights) should not be considered 
covered health insurance providers because those employers are no 
longer accepting new policyholders and may find it difficult to 
transfer the legacy policies for regulatory and other reasons.
    In response to these concerns, Notice 2011-2 provides a de minimis 
exception under which a person that would otherwise be a covered health 
insurance provider under section 162(m)(6)(C)(i)(I) for a taxable year 
beginning after December 31, 2009 and before January 1, 2013 is not 
treated as a covered health insurance provider for that taxable year if 
the premiums received by that person and all other members of its 
aggregated group from providing health insurance coverage are less than 
two percent of the gross revenue of that person and all other members 
of its aggregated group for that taxable year. For taxable years 
beginning after December 31, 2012, the notice provides that a person 
that would otherwise be a covered health insurance provider under 
section 162(m)(6)(C)(i)(II) for a taxable year is not treated as a 
covered health insurance provider for that taxable year if the premiums 
received by that person and all other members of its aggregated group 
from providing health insurance coverage that constitutes minimum 
essential coverage are less than two percent of the gross revenue of 
that person and all other members of its aggregated group for that 
taxable year.
    Commenters generally reacted favorably to the de minimis exception 
set forth in Notice 2011-2. One commenter, however, suggested that the 
de minimis exception should be based on compensation instead of 
revenues. The commenter suggested that a health insurance issuer and 
the persons that are treated as a single employer with the health 
insurance issuer under the aggregation rule should not be treated as 
covered health insurance providers if the compensation paid by the 
health insurance issuer is less than two percent of the total 
compensation paid by all members of the aggregated group. The commenter 
reasoned that comparing compensation rather than gross revenue and 
premiums would be a better method to measure the importance of the 
health insurance business to an aggregated group because basing a de 
minimis exception on gross revenue could overemphasize the importance 
of health insurance activities, which may generate relatively higher 
revenues but operate on slimmer profit margins. These proposed 
regulations do not adopt this suggestion. The Treasury Department and 
the IRS do not agree that comparing compensation paid by the health 
insurance issuer with the overall compensation paid by the aggregated 
group would be a better method of measuring the importance of the 
health insurance business to an aggregated group than comparing 
premiums with gross revenues. The Treasury Department and the IRS are 
also concerned that a de minimis exception based on compensation would 
be inadministrable because it would require taxpayers and the IRS to 
allocate compensation between members of an aggregated group if an 
individual performs services for more than one member of the aggregated 
group.
    The commenter also suggested that if an individual provides 
services for a member of an aggregated group, but does not provide any 
services to the health insurance issuer within the group, then the 
remuneration for those services should not be subject to the section 
162(m)(6) deduction limitation. These proposed regulations do not adopt 
this suggestion because that rule would be inconsistent with section 
162(m)(6)(C)(ii), which treats all members of an aggregated group that 
includes a health insurance issuer described in section 162(m)(6)(C)(i) 
as covered health insurance providers subject to the section 162(m)(6) 
deduction limitation.
    One commenter requested that the two-percent threshold for the de 
minimis exception be increased slightly to an unspecified percentage to 
avoid treating certain aggregated groups of employers that utilize 
captive insurance companies as covered health insurance providers. 
Several other commenters, however, requested that the two-percent 
threshold not be increased because a higher threshold could allow 
health insurance issuers that sell significant amounts of health 
insurance coverage to be exempt from the deduction limitation, and 
thereby provide them with a competitive advantage. After carefully 
considering these comments, the Treasury Department and the IRS have 
concluded that the two-percent threshold remains appropriate. 
Accordingly, these proposed regulations adopt a de minimis exception 
that is substantially similar to the de minimis exception set forth in 
Notice 2011-2.
    To accommodate unexpected changes in the revenue sources of an 
aggregated group and other events that could affect application of the 
de minimis exception, and also to provide a reasonable period for 
employers that have not previously been treated as covered health 
insurance providers to adjust their compensation programs, these 
proposed regulations provide that if a person is not treated as a 
covered health insurance provider for one or more taxable years solely 
by reason of the de minimis exception, and then fails to meet the 
requirements for the de minimis exception for one or more taxable 
years, the person will not be treated as a covered health insurance 
provider for the first taxable year in which it fails to meet the 
requirements for the de minimis exception after previously not being 
treated as a covered health insurance provider solely by reason of the 
de minimis exception.
2. Application of the De Minimis Exception to Aggregated Groups the 
Members of Which Have Different Taxable Years
    Commenters asked how the de minimis exception would apply in

[[Page 19953]]

situations in which the members of the aggregated group have different 
taxable years. These proposed regulations provide that the de minimis 
exception applies based on the premiums and gross revenues received for 
the taxable year of the health insurance issuer and the taxable years 
of the other members of the aggregated group for which they would 
otherwise be treated as covered health insurance providers in the 
absence of the de minimis exception. In other words, the de minimis 
exception applies based on the premiums and gross revenues of (i) the 
health insurance issuer for its taxable year, (ii) the parent entity 
for its taxable year with which, or in which, ends the taxable year of 
the health insurance issuer, and (iii) each other member of the 
aggregated group for its taxable year that ends with, or within, the 
taxable year of the parent entity.

II. Premiums

A. In General

    Section 162(m)(6)(C)(i) provides that a health insurance issuer is 
a covered health insurance provider for a taxable year only if it 
receives premiums from providing health insurance coverage (as defined 
in section 9832(b)(1)). These proposed regulations include rules 
specifying that amounts received under an indemnity reinsurance 
contract and amounts that are direct service payments are not treated 
as premiums from providing health insurance coverage for purposes of 
section 162(m)(6)(C)(i).

B. Amounts Received Under an Indemnity Reinsurance Contract

    Health insurance issuers may reinsure a portion of their risks by 
entering into an indemnity reinsurance contract with a reinsurer. After 
Congress enacted section 162(m)(6), commenters suggested that premiums 
received under an indemnity reinsurance contract should not be treated 
as premiums from providing health insurance coverage. An indemnity 
reinsurance contract is a contract between a health insurance issuer 
and a reinsurer under which a reinsurance claim is payable only after 
the health insurance issuer has paid an amount for health benefits 
under its own insurance agreement with the policy holder. Thus, 
commenters reasoned, premiums for reinsurance coverage should not be 
treated as premiums from providing health insurance coverage for 
purposes of section 162(m)(6). In response to these comments, Notice 
2011-2 provides that, solely for purposes of determining whether a 
taxpayer is a covered health insurance provider, premiums received 
under an indemnity reinsurance contract are not treated as premiums 
from providing health insurance coverage.
    Consistent with Notice 2011-2, these proposed regulations provide 
that, solely for purposes of determining whether a person is a covered 
health insurance provider, premiums received under an indemnity 
reinsurance contract are not treated as premiums from providing health 
insurance coverage, provided that under the reinsurance contract (1) 
the reinsuring company agrees to indemnify the health insurance issuer 
for all or part of the risk of loss under policies specified in the 
agreement, and (2) the health insurance issuer retains its liability 
to, and its contractual relationship with, the individual insured.

C. Direct Service Payments

    A health insurance issuer or other person that receives premiums 
from providing health insurance coverage may enter into an arrangement 
with a third party to provide, manage, or arrange for the provision of 
services by physicians, hospitals, or other healthcare providers. In 
connection with this arrangement, the health insurance issuer or other 
person that receives premiums from providing health insurance coverage 
may pay compensation to the third party in the form of capitated, 
prepaid, periodic, or other payments, and the third party may bear some 
or all of the risk that the compensation is insufficient to pay the 
full cost of providing, managing, or arranging for the provision of 
services by physicians, hospitals, or other healthcare providers as 
required under the arrangement. In addition, the third party may be 
subject to healthcare provider, health insurance, licensing, financial 
solvency, or other regulation under state insurance law. Commenters 
suggested that compensation payments to these third parties under these 
types of arrangements should not be treated as premiums from providing 
health insurance coverage for purposes of section 162(m)(6) because, 
while the third party bears some risk in connection with providing, 
managing, or arranging for the provision of healthcare services, a 
health insurance issuer or other entity that receives premiums from 
providing health insurance coverage is ultimately responsible for 
providing health insurance coverage to the insureds. The commenters 
explained that these risk shifting arrangements are simply methods by 
which health insurance issuers and other entities that provide health 
insurance coverage diversify and manage their risk, in a manner similar 
to reinsurance. The Treasury Department and the IRS agree with this 
comment. Accordingly, these proposed regulations provide that 
capitated, prepaid, periodic, or other payments (referred to as direct 
service payments) made by a health insurance issuer or other person 
that receives premiums from providing health insurance coverage to a 
third party as compensation for providing, managing, or arranging for 
the provision of healthcare services by physicians, hospitals, or other 
healthcare providers are not treated as premiums for purposes of 
section 162(m)(6), regardless of whether the third party is subject to 
healthcare provider, health insurance, licensing, financial solvency, 
or other similar regulatory requirements under state law.
    The Treasury Department and the IRS also understand that certain 
government entities may make similar capitated, prepaid, or periodic 
payments to third parties to provide, manage, or arrange for the 
provision of services by physicians, hospitals, or other healthcare 
providers and that these third parties may also bear some or all of the 
risk that the payments are insufficient to pay the full cost of 
providing, managing, or arranging for the provision of services subject 
to the arrangement. Under certain circumstances, it may be 
inappropriate to treat these payments made by government entities as 
premiums for purposes of section 162(m)(6). However, because these 
payments are not made by an entity that has received premiums from 
providing health insurance, it may be difficult to distinguish between 
payments made to third parties that should be treated as premiums from 
providing health insurance and payments that should not be treated as 
premiums from providing health insurance. The Treasury Department and 
the IRS request comments on when such payments should be treated as 
premiums from providing health insurance coverage for purposes of 
section 162(m)(6) and when they should not be treated as premiums for 
these purposes.

III. Disqualified Taxable Year

    Section 162(m)(6)(B) provides that a disqualified taxable year is, 
with respect to any employer, any taxable year for which the employer 
is a covered health insurance provider. Consistent with the statutory 
language, these proposed regulations provide that a disqualified 
taxable year is, with respect to any person, any taxable year for which 
that

[[Page 19954]]

person is a covered health insurance provider.

IV. Applicable Individual

    Section 162(m)(6)(F) provides that with respect to a covered health 
insurance provider for a disqualified taxable year, an applicable 
individual is any individual (i) who is an officer, director, or 
employee in such taxable year, or (ii) who provides services for, or on 
behalf of, the covered health insurance provider during the taxable 
year. As noted in the Background section of this preamble, Notice 2011-
2 provides that the term applicable individual for a taxable year does 
not include an independent contractor with respect to whom a 
compensation arrangement would not be subject to section 409A pursuant 
to Sec.  1.409A-1(f)(2). Section 1.409A-1(f)(2) generally provides an 
exception from section 409A for arrangements that are made with 
independent contractors that provide substantial services to multiple 
unrelated service recipients. Commenters suggested that future guidance 
adopt this rule for purposes of section 162(m)(6).
    These proposed regulations adopt this rule. The proposed 
regulations provide that remuneration for services provided by an 
independent contractor to a covered health insurance provider will not 
be subject to the deduction limitation under section 162(m)(6) if each 
of the following conditions are met. First, the independent contractor 
is actively engaged in the trade or business of providing services to 
recipients, other than as an employee or as a member of the board of 
directors of a corporation (or in a similar position with respect to an 
entity that is not a corporation). Second, the independent contractor 
provides significant services (as defined in Sec.  1.409A-1(f)(2)(iii)) 
to two or more persons to which the independent contractor is not 
related and that are not related to one another (as defined in Sec.  
1.409A-1(f)(2)(ii)). Third, the independent contractor is not related 
to the covered health insurance provider or any member of its 
aggregated group, applying the definition of related person contained 
in Sec.  1.409A-1(f)(2)(ii), except that for purposes of applying the 
references to sections 267(b) and 707(b)(1), the language ``20 
percent'' is not substituted for ``50 percent'' in each place ``50 
percent'' appears in sections 267(b) and 707(b)(1).
    Commenters also suggested that future guidance clarify that the 
section 162(m)(6) deduction limitation applies to services provided by 
individuals that are natural persons and not services provided pursuant 
to a contract or arrangement with a corporation or partnership. For 
example, commenters were concerned that remuneration paid to doctors 
working for practice groups that provide services to a covered health 
insurance provider would be subject to the deduction limitation under 
section 162(m)(6). In general, a corporation or a partnership (for 
federal tax purposes) would not be treated as an applicable individual. 
However, the Treasury Department and the IRS remain concerned that 
covered health insurance providers may attempt to avoid the application 
of the deduction limitation under section 162(m)(6) by encouraging 
employees and independent contractors who are natural persons to form 
small or single-member personal service corporations or other similar 
entities to provide services that are historically provided by natural 
persons. The Treasury Department and the IRS invite comments regarding 
how the final regulations might address this potential abuse.

V. Applicable Individual Remuneration

    Section 162(m)(6)(D) and these proposed regulations provide that 
applicable individual remuneration is the aggregate amount that is 
allowable as a deduction with respect to an applicable individual for a 
disqualified taxable year (determined without regard to section 162(m)) 
for remuneration for services performed by that individual (whether or 
not during the taxable year), except that applicable individual 
remuneration does not include any amount that is deferred deduction 
remuneration. Unlike the definition of remuneration in section 
162(m)(1), the definition of applicable individual remuneration in 
section 162(m)(6)(D) includes remuneration that is performance-based 
compensation, remuneration payable on a commission basis, and 
remuneration payable under existing binding contracts. Whether 
remuneration is applicable individual remuneration is determined 
without regard to when the services for the remuneration are performed. 
For example, a discretionary bonus first granted and paid to an 
applicable individual in a disqualified taxable year solely in 
recognition of services provided in prior years is applicable 
individual remuneration for the disqualified taxable year even though 
the bonus does not relate to services provided in the disqualified 
taxable year. In addition, a grant of restricted stock in a 
disqualified taxable year for which an applicable individual makes an 
election under section 83(b) is applicable individual remuneration for 
the disqualified taxable year of the covered health insurance provider 
in which the grant of the restricted stock is made.

VI. Deferred Deduction Remuneration

    Section 162(m)(6)(E) and these regulations provide that deferred 
deduction remuneration is remuneration that would be applicable 
individual remuneration for services that an applicable individual 
performs during a disqualified taxable year, but for the fact that it 
is not deductible until a later taxable year (such as generally occurs, 
for example, with nonqualified deferred compensation). Whether 
remuneration is deferred deduction remuneration is determined based on 
when the remuneration is deductible, regardless of when the 
remuneration is paid. For example, a bonus that is paid within 2\1/2\ 
months after the end of a covered health insurance provider's taxable 
year in which an applicable individual first obtains a right to the 
remuneration is deductible in the covered health insurance provider's 
taxable year in which the applicable individual obtains the right and, 
therefore, is applicable individual remuneration, rather than deferred 
deduction remuneration. See section 404(a)(5); Sec.  1.404(b)-1T Q&A-2.

VII. Attribution of Applicable Individual Remuneration and Deferred 
Deduction Remuneration to Services Performed in Taxable Years

    The $500,000 deduction limitation under section 162(m)(6) applies 
to the applicable individual remuneration and deferred deduction 
remuneration that is attributable to services performed by an 
applicable individual for a covered health insurance provider in a 
disqualified taxable year. Accordingly, at the time that an amount of 
applicable individual remuneration or deferred deduction remuneration 
for an applicable individual becomes otherwise deductible (and not 
before that time), the remuneration must be attributed to services 
provided by the applicable individual during a particular taxable year 
or years of a covered health insurance provider.
    In response to a request for comments in Notice 2011-2, some 
commenters asked that taxpayers be permitted to use any reasonable 
method to attribute remuneration to taxable years of a covered health 
insurance provider, as long as the method is applied consistently. 
Commenters observed that the allocation methods for purposes of section 
162(m)(5) set forth in Notice 2008-94 (relating to recipients of 
payments under the Troubled Asset Relief Program) may not be 
appropriate

[[Page 19955]]

for purposes of section 162(m)(6) because the methods in Notice 2008-94 
were developed for employers expected to be subject to the deduction 
limitation under section 162(m)(5) only temporarily, and thus 
necessarily provided less flexibility than may be appropriate for 
purposes of section 162(m)(6). Permitting taxpayers to use any 
reasonable method to attribute remuneration to a taxable year of a 
covered health insurance provider, however, may lead to results that 
are inconsistent with section 162(m)(6) and the legislative intent 
underlying the statute. Accordingly, these proposed regulations provide 
rules for attributing applicable individual remuneration and deferred 
deduction remuneration to services performed by an applicable 
individual during a taxable year or years of a covered health insurance 
provider. Nonetheless, the Treasury Department and the IRS remain 
concerned about imposing undue burdens on taxpayers and request 
comments regarding the ease or difficulty of applying the attribution 
rules described in these proposed regulations and regarding specific 
alternatives for attributing applicable individual remuneration and 
deferred deduction remuneration to services performed during taxable 
years of a covered health insurance provider that would be less 
burdensome or otherwise more appropriate.

A. In General

    These proposed regulations provide that remuneration is 
attributable to services performed by an applicable individual in the 
taxable year of the covered health insurance provider in which the 
applicable individual obtains a legally binding right to the 
remuneration, unless the remuneration is attributable to a different 
taxable year under another provision of these regulations.
    In addition, these proposed regulations provide that deferred 
deduction remuneration is not attributable to a taxable year ending 
before the later of the date that (i) an applicable individual begins 
providing services to a covered health insurance provider, or (ii) an 
applicable individual obtains a legally binding right to the 
remuneration. If any amount of remuneration that becomes otherwise 
deductible would be attributable under the rules provided in these 
proposed regulations to a taxable year ending before the applicable 
individual begins providing services to a covered health insurance 
provider or obtains a legally binding right to the remuneration, these 
proposed regulations provide that this remuneration is attributed to 
services performed by the applicable individual in the taxable year in 
which the latter of these two dates occurs.
    These proposed regulations further provide that remuneration is not 
attributable to periods when an applicable individual is not a service 
provider. Solely for purposes of these proposed regulations, an 
individual is treated as a service provider for any period during which 
the individual is an officer, director, or employee of, or providing 
services for, or on behalf of, a covered health insurance provider or 
any member of its aggregated group. An amount of remuneration that 
otherwise would be attributable under the rules set forth in these 
proposed regulations to a period when an applicable individual is not a 
service provider must be reattributed to a period during which the 
applicable individual is a service provider in accordance with the 
rules set forth in these proposed regulations.\1\ Accordingly, for 
example, compensation such as earnings on an account balance after 
termination of employment but before payment, or appreciation of a 
share's fair market value after termination of employment but before 
the exercise of a stock option or stock appreciation right, must be 
attributed to the period during which the applicable individual is a 
service provider.
---------------------------------------------------------------------------

    \1\ These proposed regulations apply solely for purposes of 
section 162(m)(6), and therefore have no effect on the determination 
whether an amount is remuneration attributable to a particular 
taxable year for employment tax purposes, and thus wages subject to 
federal employment taxation (including the Federal Insurance 
Contributions Act, the Federal Unemployment Tax Act, the Railroad 
Retirement Tax Act, and the Collection of Income Tax at Source on 
Wages (chapters 21, 22, 23, and 24 of the Code)), or the timing or 
amount of any applicable federal employment taxation.
---------------------------------------------------------------------------

    If an amount of remuneration that becomes otherwise deductible may 
be attributed to services performed by an applicable individual in two 
or more taxable years of a covered health insurance provider in 
accordance with the rules for attributing remuneration set forth in the 
immediately following sections of this preamble for attributing 
remuneration under an account balance plan or a nonaccount balance 
plan, the amount must be attributed first to services performed by the 
applicable individual in the earliest taxable year to which the amount 
could be attributed under the applicable attribution rules, and then to 
the next subsequent taxable year to which the amount could be 
attributed under those attribution rules, until the entire amount has 
been attributed to one or more taxable years of the covered health 
insurance provider.

B. Account Balance Plans

    To minimize the administrative burden on taxpayers in applying the 
remuneration attribution rules for account balance plans (as described 
in Sec.  1.409A-1(c)(2)(i)(A) and (B)), these proposed regulations 
provide that remuneration for an account balance plan may be attributed 
to a taxable year based on the increase in the account balance during 
the taxable year, taking into account adjustments for the amount of any 
payments from that account during the taxable year. This method of 
attributing remuneration is referred to in the proposed regulations as 
the standard attribution method. Under the standard attribution method, 
the amount of remuneration attributable to services performed in a 
taxable year of a covered health insurance provider is equal to the 
excess of the account balance as of the last day of the taxable year, 
plus any payments made from that account during the taxable year, over 
the account balance as of the last day of the immediately preceding 
taxable year. Any net decrease in an account balance during a taxable 
year (again after adding back payments made under the plan during the 
taxable year) is treated as a reduction to deferred deduction 
remuneration for that taxable year and may offset other deferred 
deduction remuneration (but not applicable individual remuneration) 
attributable to services performed by the applicable individual in that 
year. If there is not sufficient other deferred deduction remuneration 
for that taxable year to offset the entire reduction, the excess may 
offset deferred deduction remuneration in the first subsequent taxable 
year or years in which the applicable individual has deferred deduction 
remuneration to be offset by the loss.
    Under the standard attribution method, any increases or decreases 
in an account balance that occur in taxable years in which an 
applicable individual is not a service provider must be attributed to 
taxable years of the covered health insurance provider (i) during which 
the applicable individual is a service provider, and (ii) on one or 
more days of which the applicable individual retains an account balance 
under the plan. The Treasury Department and the IRS request comments on 
the appropriate method for attributing this remuneration to these 
taxable years. For taxable years beginning in 2013, and thereafter 
until the Treasury Department and the IRS issue further guidance 
prescribing the method for attributing this remuneration to these 
taxable years, this remuneration may be attributed

[[Page 19956]]

using any reasonable method to taxable years of the covered health 
insurance provider (i) during which the applicable individual is a 
service provider, and (ii) on one or more days of which the applicable 
individual retains an account balance under the plan. For this purpose, 
a method is reasonable only if it is consistent with a reasonable, good 
faith interpretation of section 162(m)(6) and is applied consistently 
for all remuneration provided by the covered health insurance provider 
under substantially similar plans or arrangements.
    These proposed regulations provide an alternative method for 
attributing increases and decreases in account balance plans to 
services performed during a taxable year of a covered health insurance 
provider. Under the alternative attribution method, earnings and losses 
on a principal addition (including earnings and losses that occur in 
taxable years during which an applicable individual is not a service 
provider) are attributed to the taxable year in which an applicable 
individual is credited with the principal addition under the plan. For 
example, if a principal addition is credited to the account balance of 
an applicable individual for the 2014 taxable year, earnings (or 
losses) on that principal addition in 2028 are treated as additional 
deferred deduction remuneration (or reductions to deferred deduction 
remuneration) for the 2014 taxable year, and not the 2028 taxable year.
    After an amount of remuneration has been attributed to a taxable 
year under a particular attribution method (for example, because a 
payment has been made and the amount of the payment becomes otherwise 
deductible), it is administratively difficult for the attribution 
method to be changed for future years. In addition, the Treasury 
Department and the IRS are concerned that the ability to change 
attribution methods may lead to selective use of methods to maximize 
deductions. Therefore, these proposed regulations provide that a 
covered health insurance provider must use the method chosen to 
attribute remuneration under all of its account balance plans 
consistently for all taxable years. However, the Treasury Department 
and the IRS understand that there may be valid business reasons for 
changing attribution methods, such as a merger or acquisition, change 
in compensation structure, or change in accounting method. Accordingly, 
the Treasury Department and the IRS request comments on the standards 
that should be applied to determine whether and when a method may be 
changed, and how that change would apply if deductions for some portion 
of the deferred deduction remuneration have already been taken.

C. Nonaccount Balance Plans

    These proposed regulations provide that remuneration under a 
nonaccount balance plan (as described in Sec.  1.409A-1(c)(2)(i)(C)) is 
attributable to services performed by an applicable individual in a 
taxable year based on the increase (or decrease) in the present value 
of the applicable individual's benefit under the plan during the 
taxable year. Under this method, the amount of remuneration 
attributable to services performed in a taxable year of a covered 
health insurance provider is equal to the increase (or decrease) in the 
present value of the future payment or payments due under the plan as 
of the last day of the taxable year of the covered health insurance 
provider, increased by any payments made during that year, over (or 
under) the present value of the future payment or payments as of the 
last day of the covered health insurance provider's preceding taxable 
year. For purposes of determining the increase (or decrease) in the 
present value of a future payment or payments, the rules of Sec.  
31.3121(v)(2)-1(c)(2) apply. Like losses under account balance plans, 
losses attributable to any taxable year under a nonaccount balance plan 
may offset other deferred deduction remuneration attributable to 
services performed by the applicable individual in that year (or, if 
there is not sufficient other deferred deduction remuneration for that 
taxable year to offset the entire reduction, the excess may offset 
deferred deduction remuneration in the first subsequent taxable year or 
years in which the applicable individual has deferred deduction 
remuneration to be offset by the loss).
    Any increase (or decrease) in the present value of a future payment 
or payments under a nonaccount balance plan that occurs in a taxable 
year when an applicable individual is not a service provider must be 
attributed to taxable years of the covered health insurance provider 
during which the applicable individual (i) is a service provider and 
(ii) has a legally binding right to a future payment or payments under 
the nonaccount balance plan. The Treasury Department and IRS request 
comments on the appropriate method for attributing this remuneration to 
these taxable years. For taxable years beginning in 2013, and 
thereafter until the Treasury Department and the IRS issue further 
guidance prescribing the method for attributing this remuneration to 
these taxable years, this remuneration may be attributed using any 
reasonable method to taxable years during which the applicable 
individual (i) is a service provider and (ii) has a legally binding 
right to the future payment or payments. For this purpose, a method is 
reasonable only if it is consistent with a reasonable, good faith 
interpretation of section 162(m)(6) and is applied consistently for all 
remuneration provided by the covered health insurance provider under 
substantially similar plans or arrangements.

D. Equity-Based Remuneration

    These proposed regulations provide specific rules for the 
attribution of equity-based remuneration to services performed in 
specific taxable years. They provide that remuneration resulting from 
the exercise of stock options and stock appreciation rights (SARs) 
generally is attributable, on a daily pro rata basis, to services 
performed by the applicable individual over the period beginning on the 
date of grant of the stock option or SAR and ending on the date that 
the stock right is exercised, excluding any days on which an applicable 
individual is not a service provider.
    These proposed regulations further provide that remuneration 
resulting from the vesting or transfer (or transferability) of 
restricted stock for which an election under section 83(b) has not been 
made generally is attributable, on a daily pro rata basis, to services 
performed by the applicable individual over the period beginning on the 
grant date of the restricted stock and ending on the earliest of the 
date on which (i) the substantial risk of forfeiture lapses or (ii) the 
restricted stock is transferred (or becomes transferable), excluding 
any days on which an applicable individual is not a service provider.
    These proposed regulations provide that remuneration resulting from 
restricted stock units (RSUs) is generally attributable, on a daily pro 
rata basis, to services performed over the period beginning on the date 
the applicable individual obtains the legally binding right to the RSU 
and ending on the date the remuneration is paid or made available such 
that it is includible in gross income, excluding any days on which an 
applicable individual is not a service provider.

E. Involuntary Separation Pay

    These proposed regulations provide that involuntary separation pay 
is attributable to services performed by an applicable individual 
during the taxable year of the covered health insurance provider in 
which the involuntary

[[Page 19957]]

separation from service occurs. Alternatively, involuntary separation 
pay may be attributable, on a daily pro rata basis, to services 
performed by the applicable individual beginning on the date that the 
applicable individual obtains a legally binding right to the 
involuntary separation pay and ending on the date of the applicable 
individual's involuntary separation from service with the covered 
health insurance provider and all members of its aggregated group. 
Involuntary separation pay to different individuals may be attributed 
using different methods; however, if involuntary separation payments 
are made to the same individual over multiple taxable years, all the 
payments must be attributed using the same method. These regulations 
define involuntary separation pay as remuneration to which an 
applicable individual obtains a right to payment solely as a result of 
an involuntary separation from service. For these purposes, an 
involuntary separation from service means an involuntary separation 
from service under Sec.  1.409A-1(n).

F. Substantial Risk of Forfeiture

    An applicable individual's right to remuneration may be subject to 
a substantial risk of forfeiture. In response to Notice 2011-2, 
commenters suggested that remuneration be attributed to services 
performed over the period during which amounts are subject to a 
substantial risk of forfeiture (the vesting period). Consistent with 
this suggestion, these proposed regulations provide that in the case of 
remuneration that is subject to a substantial risk of forfeiture and 
that would otherwise be attributed to taxable years of a covered health 
insurance provider in accordance with (i) the general rule that 
attributes remuneration to the taxable year in which an applicable 
individual obtains a legally binding right to the remuneration, (ii) 
the attribution rules applicable to account balance plans, or (iii) the 
attribution rules applicable to nonaccount balance plans, the 
remuneration is attributed to taxable years of the covered health 
insurance provider using a two-step process. First, the remuneration is 
attributed to taxable years of the covered health insurance provider 
pursuant to the legally-binding-right rule or the rules applicable to 
account balance or nonaccount balance plans, as applicable. Second, the 
remuneration that was subject to a substantial risk of forfeiture is 
reattributed on a daily pro rata basis over the period that the 
remuneration was subject to a substantial risk of forfeiture (in other 
words, reattributed evenly over the vesting period).
    If a vesting period ends on a day other than the last day of the 
covered health insurance provider's taxable year, the remuneration 
attributable to that taxable year under the first step of the 
attribution process is divided between the portion of the taxable year 
that includes the vesting period and the portion of the taxable year 
that does not include the vesting period. The amount attributed to the 
portion of the taxable year that includes the vesting period is equal 
to the total amount of remuneration that would be attributable to the 
taxable year under the first step of the attribution process, 
multiplied by a fraction, the numerator of which is the number of days 
during the taxable year that the amount is subject to a substantial 
risk of forfeiture and the denominator of which is the number of days 
in such taxable year. The remaining amount is attributed to the portion 
of the taxable year that does not include the vesting period and, 
therefore, is not reattributed over the vesting period under the second 
step of the attribution process.
    For purposes of these proposed regulations, a substantial risk of 
forfeiture means a substantial risk of forfeiture under Sec.  1.409A-
1(d). If an individual makes an election pursuant to section 83(b), 
then the remuneration included in the individual's gross income is 
applicable individual remuneration that is attributed to the year in 
which the transfer of the property occurs.

VIII. Application of the $500,000 Deduction Limitation

A. In General

    The section 162(m)(6) deduction limitation applies to the aggregate 
applicable individual remuneration and deferred deduction remuneration 
attributable to services performed by an applicable individual for a 
covered health insurance provider in a disqualified taxable year. 
Accordingly, if the applicable individual remuneration and deferred 
deduction remuneration attributable to services performed by an 
applicable individual for a covered health insurance provider in a 
disqualified taxable year exceed $500,000, the amount of the 
remuneration that exceeds $500,000 is not allowable as a deduction in 
any taxable year.

B. Timing of Application of the Deduction Limitation

    The $500,000 deduction limitation with respect to the applicable 
individual remuneration and deferred deduction remuneration 
attributable to services performed by an applicable individual in a 
disqualified taxable year is applied to that remuneration at the time 
that the remuneration otherwise becomes deductible. The deduction 
limitation with respect to an applicable individual for any particular 
disqualified taxable year is applied first to any applicable individual 
remuneration attributable to services performed by the applicable 
individual in that disqualified taxable year. If the amount of the 
applicable individual remuneration is less than the $500,000 deduction 
limitation, all of the applicable individual remuneration is deductible 
by the covered health insurance provider in that disqualified taxable 
year. To the extent the applicable individual remuneration exceeds the 
$500,000 deduction limitation, the covered health insurance provider's 
deduction for the applicable individual remuneration is limited to 
$500,000, and the amount of the applicable individual remuneration that 
exceeds $500,000 and, if applicable, any deferred deduction 
remuneration attributable to services performed by the applicable 
individual in that disqualified taxable year, cannot be deducted in any 
taxable year.
    When the $500,000 deduction limitation is applied to an amount of 
applicable individual remuneration attributable to services performed 
by an applicable individual in a disqualified taxable year, the 
deduction limitation with respect to that applicable individual for 
that disqualified taxable year is reduced by the amount of the 
applicable individual remuneration against which it is applied, but not 
below zero. If the applicable individual also has an amount of deferred 
deduction remuneration attributable to services performed in that 
disqualified taxable year that becomes otherwise deductible in a 
subsequent taxable year, the deduction limitation, as reduced, is 
applied to that amount of deferred deduction remuneration in the first 
taxable year in which it becomes otherwise deductible. If the amount of 
the deferred deduction remuneration that becomes otherwise deductible 
is less than the reduced deduction limitation, then the full amount of 
the deferred deduction remuneration is deductible in that taxable year. 
To the extent that the amount of the deferred deduction remuneration 
exceeds the reduced deduction limitation, the covered health insurance 
provider's deduction for the deferred deduction remuneration is limited 
to the amount

[[Page 19958]]

of the reduced deduction limitation and the amount of the deferred 
deduction remuneration that exceeds the deduction limitation cannot be 
deducted in any taxable year.
    After the deduction limitation with respect to an applicable 
individual for a disqualified taxable year (the original disqualified 
taxable year) is applied to an amount of deferred deduction 
remuneration, the deduction limitation with respect to that applicable 
individual for the original disqualified taxable year is further 
reduced by the amount of the deferred deduction remuneration against 
which it is applied, but not below zero. If the applicable individual 
has an additional amount of deferred deduction remuneration 
attributable to services performed in the original disqualified taxable 
year that becomes otherwise deductible in a subsequent taxable year, 
the deduction limitation, as further reduced, is applied to that amount 
of deferred deduction remuneration in the taxable year in which it is 
otherwise deductible. This process continues for future taxable years 
in which deferred deduction remuneration attributable to services 
performed by the applicable individual in the original disqualified 
taxable year is otherwise deductible. No deduction is allowed for any 
applicable individual remuneration or deferred deduction remuneration 
to the extent that remuneration exceeds the deduction limitation in 
effect at the time it is applied to the remuneration.

C. Application of Deduction Limitation to Payments of Deferred 
Deduction Remuneration

    Any payment of deferred deduction remuneration may include 
remuneration that is attributable to services performed by an 
applicable individual in one or more taxable years of a covered health 
insurance provider under the rules set out in these proposed 
regulations. For example, remuneration resulting from the vesting of 
restricted stock that is subject to a substantial risk of forfeiture 
for three full taxable years of a covered health insurance provider is 
attributable to services performed in each of the three years during 
which the restricted stock was subject to a substantial risk of 
forfeiture. In that case, a separate deduction limitation applies to 
each portion of the payment that is attributed to services performed in 
a different disqualified taxable year of the covered health insurance 
provider. Any portion of the payment that is attributed to a 
disqualified taxable year will be deductible only to the extent that it 
does not exceed the deduction limit that applies to the applicable 
individual for that disqualified taxable year, as that deduction limit 
may have been previously reduced by the amount of any applicable 
individual remuneration or deferred deduction remuneration attributable 
to services performed in that disqualified taxable year that was 
previously deductible. If payments of deferred deduction remuneration 
under an account balance plan or a nonaccount balance plan are paid in 
installments (rather than a single lump-sum), the payments are deemed 
to be made from the deferred deduction remuneration to which they are 
attributable under the applicable attribution rules, with payments 
deemed to be made first with respect to the earliest taxable years to 
which they could be attributed. The proposed regulations contain 
numerous examples to illustrate how these rules apply to services 
performed and compensation payments made over multiple taxable years.

D. Application of the Deduction Limitation to an Aggregated Group

    For purposes of applying the section 162(m)(6) deduction 
limitation, all members of an aggregated group are treated as a single 
employer. Accordingly, one $500,000 deduction limitation applies to the 
aggregate applicable individual remuneration and deferred deduction 
remuneration attributable to services performed by an applicable 
individual during a disqualified taxable year for any member of the 
aggregated group. Each time this deduction limitation is applied to an 
amount of applicable individual remuneration or deferred deduction 
remuneration otherwise deductible by any member of the aggregated 
group, the deduction limitation is reduced by the amount of the 
remuneration against which it is applied, and the reduced deduction 
limitation is then applied to other remuneration attributable to 
services performed by the applicable individual in the original 
disqualified taxable year that is otherwise deductible by any member of 
the aggregated group, in the manner previously described.
    In the case of two or more members of an aggregated group that are 
otherwise entitled to deduct in any taxable year applicable individual 
remuneration or deferred deduction remuneration attributable to 
services performed by an applicable individual in a disqualified 
taxable year that exceeds the applicable deduction limitation for that 
disqualified taxable year, the deduction limitation is prorated and 
allocated to the members of the aggregated group in proportion to the 
applicable individual remuneration or deferred deduction remuneration 
that each otherwise would be entitled to deduct in the taxable year 
(but for section 162(m)(6)).

IX. Corporate Transactions

    A corporation or other person may become a covered health insurance 
provider as a result of a merger, acquisition of assets or stock, 
disposition, reorganization, consolidation, or separation, or any other 
transaction (including a purchase or sale of stock or other equity 
interest) resulting in a change in the composition of its aggregated 
group (generally referred to in these proposed regulations as a 
corporate transaction). For example, as a result of the aggregation 
rules, members of a controlled group of corporations may become covered 
health insurance providers if a health insurance issuer that is a 
covered health insurance provider becomes a member of the controlled 
group. In response to Notice 2011-2, commenters suggested that if a 
person becomes a covered health insurance provider as a result of a 
corporate transaction, the person should not be treated as a covered 
health insurance provider for the taxable year in which the corporate 
transaction occurs. These proposed regulations adopt this suggestion by 
providing transition period relief to ease the administrative burden on 
persons that become covered health insurance providers solely as a 
result of a corporate transaction. Specifically, these proposed 
regulations provide that if a person that is not otherwise a covered 
health insurance provider would become a covered health insurance 
provider solely as a result of a corporate transaction, the person 
generally is not treated as a covered health insurance provider for the 
taxable year in which the transaction occurs (referred to as the 
transition period). The corporation or other person, however, is 
treated as a covered health insurance provider for any subsequent 
taxable year for which it qualifies as a covered health insurance 
provider under the general rules for determining whether a person is a 
covered health insurance provider. A person that was a covered health 
insurance provider immediately before a corporate transaction is not 
eligible for this transition period relief because the person did not 
become a covered health insurance provider solely as a result of a 
corporate transaction.
    However, these proposed regulations provide that in certain 
circumstances the deduction limitation under section 162(m)(6) may 
apply to a person that is not treated as a covered health

[[Page 19959]]

insurance provider during the transition period. Specifically, these 
proposed regulations provide that transition period relief does not 
extend to remuneration provided to applicable individuals of a health 
insurance issuer that is a covered health insurance provider (which is 
not eligible for the transition period because it does not become a 
covered health insurance provider solely as a result of a corporate 
transaction) by other members of the acquiring aggregated group that 
are otherwise eligible for the transition period relief. For example, 
if a health insurance issuer that is a covered health insurance 
provider becomes a member of an acquiring aggregated group that is a 
consolidated group described in Sec.  1.1502-1(h), the other members of 
which are not treated as covered health insurance providers in the year 
in which the corporate transaction occurs because of the transition 
period relief, then any applicable individual remuneration and deferred 
deduction remuneration attributable to services provided by an 
applicable individual of the health insurance issuer for the health 
insurance issuer or for the other members of the acquiring aggregated 
group during the transition period are subject to the deduction 
limitation of section 162(m)(6).
    These proposed regulations also provide rules for covered health 
insurance providers that have short taxable years as a result of a 
corporate transaction. See proposed Sec.  1.162-31(f).

X. Grandfathered Amounts Attributable to Services Performed Before 
January 1, 2010

    The section 162(m)(6) deduction limitation only applies to 
applicable individual remuneration attributable to services performed 
by an applicable individual during taxable years beginning after 
December 31, 2012 and to deferred deduction remuneration attributable 
to services performed by an applicable individual during taxable years 
beginning after December 31, 2009. It does not apply to remuneration 
attributable to services performed during taxable years beginning 
before January 1, 2010. These proposed regulations provide rules for 
determining whether remuneration is attributable to services performed 
in taxable years beginning before January 1, 2010 that are in some ways 
different from the general attribution rules.
    Commenters suggested that deferred deduction remuneration earned or 
granted in taxable years beginning before January 1, 2010, be 
attributed to services performed before that time, regardless of 
whether the remuneration was subject to a substantial risk of 
forfeiture after that time. Commenters reasoned that Congress did not 
intend for the deduction limitation to apply to remuneration 
attributable to taxable years starting before January 1, 2010 (even if 
such remuneration was not vested as of the first day of the taxable 
year beginning after December 31, 2009), because Congress enacted 
section 162(m)(6) to encourage the use of health insurance coverage 
premiums to lower insurance rates for taxable years beginning after 
December 31, 2012 (when health insurance issuers would begin to benefit 
from a substantial increase in new customers). Commenters also asserted 
that the statute should not apply to arrangements that existed before 
the statute was enacted because covered health insurance providers 
could not change those arrangements unilaterally in response to the 
statute.
    In response to these comments, these proposed regulations provide 
that the section 162(m)(6) deduction limitation does not apply to 
deferred deduction remuneration attributable to services performed 
during taxable years beginning before January 1, 2010, regardless of 
whether the remuneration was subject to a substantial risk of 
forfeiture after that time. These proposed regulations provide special 
rules for determining the amount of remuneration attributable to 
services performed in taxable years beginning before January 1, 2010 
with respect to account balance plans, nonaccount balance plans, and 
equity-based remuneration. For account balance plans and nonaccount 
balance plans, these proposed regulations provide that amounts are 
attributed based on the general attribution rules, except that any 
substantial risk of forfeiture is disregarded. For equity-based 
compensation, any remuneration resulting from equity-based compensation 
granted in a taxable year beginning before January 1, 2010, is not 
subject to the deduction limitation. Earnings on these grandfathered 
amounts, including earnings accruing in taxable years beginning after 
December 31, 2009, are also generally treated as remuneration 
attributable to services performed in taxable years beginning before 
January 1, 2010.

XI. Transition Rules for Certain Deferred Deduction Remuneration

    Section 162(m)(6) applies to deferred deduction remuneration 
attributable to services performed in a disqualified taxable year 
beginning after December 31, 2009 that is otherwise deductible in a 
taxable year beginning after December 31, 2012. As described in section 
I.B of this preamble, for taxable years beginning before January 1, 
2013, a covered health insurance provider is any health insurance 
issuer (as defined in section 9832(b)(2)) that receives premiums from 
providing health insurance coverage (as defined in section 9832(b)(1)) 
(a pre-2013 covered health insurance provider). For taxable years 
beginning after December 31, 2012, a covered health insurance provider 
is any health insurance issuer (as defined in section 9832(b)(2)) that 
receives at least 25 percent of its gross premiums from providing 
minimum essential coverage (as defined in section 5000A(f)) (a post-
2012 covered health insurance provider). Thus, the definition of the 
term covered health insurance provider is narrower for taxable years 
beginning after December 31, 2012, than it is for taxable years 
beginning before January 1, 2013.
    After the enactment of section 162(m)(6), commenters suggested that 
if a pre-2013 covered health insurance provider does not qualify as a 
post-2012 covered health insurance provider, the section 162(m)(6) 
deduction limitation should not apply to deferred deduction 
remuneration attributable to services performed during taxable years 
when the health insurance issuer was a pre-2013 covered health 
insurance provider. These commenters cited legislative history 
suggesting that section 162(m)(6) was enacted to encourage health 
insurance issuers to use premiums from new customers to lower health 
insurance rates. 155 Cong. Rec. S12,540 (Dec. 6, 2009) (statement of 
Sen. Lincoln). These commenters reasoned that if a pre-2013 covered 
health insurance is not also a post-2012 covered health insurance 
provider, the health insurance issuer is not benefiting from new 
customers who are paying premiums for minimum essential coverage, and 
the health insurance issuer should not be subject to the deduction 
limitation.
    In response to these comments, Notice 2011-2 provides that the 
section 162(m)(6) deduction limitation applies to deferred deduction 
remuneration attributable to services performed in a taxable year 
beginning after December 31, 2009 and before January 1, 2013 only if 
the covered health insurance provider is a pre-2013 covered health 
insurance provider for the taxable year to which the deferred deduction 
remuneration is attributable and a post-2012 covered health insurance 
provider for the taxable year in which that deferred deduction 
remuneration is otherwise deductible. These proposed regulations adopt 
this transition rule.

[[Page 19960]]

    In response to Notice 2011-2, some commenters requested that the 
transition rule be applied more broadly, so that the section 162(m)(6) 
deduction limitation would not apply to deferred deduction remuneration 
for services attributable to taxable years beginning before January 1, 
2013 if the employer is not a covered health insurance provider in 
2013, regardless of whether the employer is a covered health insurance 
provider for the year the deferred deduction remuneration becomes 
otherwise deductible. The Treasury Department and the IRS have 
concluded that the standard set forth in Notice 2011-2 appropriately 
limits the transition rule to circumstances in which the deferred 
deduction remuneration is otherwise deductible in a taxable year for 
which the covered health insurance provider is not a post-2013 covered 
health insurance provider, and therefore these proposed regulations do 
not adopt this suggestion.

Effect on Other Documents

    These proposed regulations do not affect the applicability of 
Notice 2011-2, (2011-1 CB 260). However, upon the effective date of the 
final regulations, the Treasury Department and the IRS anticipate that 
Notice 2011-2 will become obsolete for periods after the effective date 
of the final regulations.

Proposed Effective Date

    These proposed regulations are proposed to be effective upon 
publication in the Federal Register of a Treasury decision adopting 
these rules as final regulations, and applicable to taxable years that 
begin after December 31, 2012, and end on or after April 2, 2013. 
Taxpayers may rely on these proposed regulations until the issuance of 
final regulations. The Treasury Department and the IRS anticipate that 
the final regulations will be issued before a covered health insurance 
provider is required to file an income tax return reflecting 
application of the section 162(m)(6) deduction limitation. However, to 
the extent the final regulations contain rules more restrictive than 
the rules contained in these proposed regulations, a covered health 
insurance provider will be able to rely on these proposed regulations 
for the purposes of the application of the section 162(m)(6) to its 
first taxable year beginning after December 31, 2012. Although these 
regulations will not apply to taxable years beginning after December 
31, 2012 and ending before April 2, 2013, taxpayers may rely on these 
proposed regulations with respect to those taxable years to the same 
extent as taxpayers may rely with respect to taxable years to which the 
regulations will apply.

Special Analyses

    It has been determined that this notice of proposed rulemaking is 
not a significant regulatory action as defined in Executive Order 
12866. Therefore, a regulatory assessment is not required. It also has 
been determined that section 553(b) of the Administrative Procedure Act 
(5 U.S.C. chapter 5) does not apply to these regulations, and because 
the regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, this regulation has 
been submitted to the Chief Counsel for Advocacy of the Small Business 
Administration for comment on its impact on small business.

Comments and Requests for Public Hearing

    Before these proposed regulations are adopted as final regulations, 
consideration will be given to any written (a signed original and eight 
(8) copies) or electronic comments that are timely submitted to the 
IRS. Treasury and the IRS request comments on all aspects of the 
proposed rules. All comments will be available for public inspection 
and copying. A public hearing will be scheduled if requested in writing 
by any person that timely submits written comments. If a public hearing 
is scheduled, notice of the date, time, and place for the public 
hearing will be published in the Federal Register.

Drafting Information

    The principal author of these proposed regulations is Ilya 
Enkishev, Office of the Division Counsel/Associate Chief Counsel (Tax 
Exempt and Government Entities). However, other personnel from Treasury 
Department and the IRS participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Proposed Amendments to the Regulations

    Accordingly, 26 CFR part 1 is proposed to be amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805.

0
Par. 2. Section 1.162-31 is added to read as follows:


Sec.  1.162-31  The $500,000 deduction limitation for remuneration 
provided by certain health insurance providers.

    (a) Scope. This Sec.  1.162-31 provides rules regarding the 
deduction limitation under section 162(m)(6), which provides that a 
covered health insurance provider's deduction for applicable individual 
remuneration and deferred deduction remuneration attributable to 
services performed by an applicable individual in a disqualified 
taxable year is limited to $500,000. Paragraph (b) of this section 
provides definitions of the terms used in this section. Paragraph (c) 
of this section states the general limitation on deductions under 
section 162(m)(6). Paragraph (d) of this section provides rules on the 
attribution of applicable individual remuneration and deferred 
deduction remuneration to services provided in one or more taxable 
years of a covered health insurance provider. Paragraph (e) of this 
section provides rules on the application of the deduction limitation 
to applicable individual remuneration and deferred deduction 
remuneration that is otherwise deductible under chapter 1 of the 
Internal Revenue Code (Code) but for the deduction limitation under 
section 162(m)(6) (referred to in these regulations as remuneration 
that is otherwise deductible). Paragraph (f) of this section provides 
rules for persons participating in certain corporate transactions. 
Paragraph (g) of this section provides rules on the coordination of 
section 162(m)(6) with sections 162(m)(1) and 280G. Paragraph (h) of 
this section provides rules for determining the amount of remuneration 
that is not subject to the deduction limitation under section 162(m)(6) 
due to application of the statutory effective date (referred to in 
these regulations as grandfathered amounts). Paragraph (i) of this 
section provides transition rules for deferred deduction remuneration 
that is attributable to services performed in taxable years beginning 
after December 31, 2009 and before January 1, 2013. Paragraph (j) of 
this section provides the effective and applicability dates of the 
rules in this section.
    (b) Definitions--(1) Health insurance issuer. For purposes of this 
section, a health insurance issuer is a health insurance issuer as 
defined in section 9832(b)(2).
    (2) Aggregated group. For purposes of this section, an aggregated 
group is a health insurance issuer and each other person that is 
treated as a single employer with the health insurance

[[Page 19961]]

issuer at any time during the taxable year of the health insurance 
issuer under sections 414(b) (controlled groups of corporations), 
414(c) (partnerships, proprietorships, etc. under common control), 
414(m) (affiliated service groups), or 414(o), except that the rules in 
section 1563(a)(2) and (a)(3) (with respect to corporations) and the 
rules in Sec.  1.414(c)-2(c) (with respect to trades or businesses 
under common control) for brother-sister groups and combined groups are 
disregarded.
    (3) Parent entity--(i) In general. For purposes of this section, a 
parent entity is either--
    (A) The common parent of a parent-subsidiary controlled group of 
corporations (within the meaning of section 414(b)) or a parent-
subsidiary group of trades or businesses under common control (within 
the meaning of section 414(c)) that includes a health insurance issuer, 
or
    (B) The health insurance issuer in an aggregated group that is an 
affiliated service group (within the meaning of section 414(m)) or a 
group described in section 414(o).
    (ii) Certain aggregated groups with multiple health insurance 
issuers. If two or more health insurance issuers are members of an 
aggregated group that is an affiliated service group (within the 
meaning of section 414(m)) or group described in section 414(o), the 
parent entity is the health insurance issuer in the aggregated group 
that is designated in writing by the other members of the group to act 
as the parent entity, provided the group treats that health insurance 
issuer as the parent entity consistently for all taxable years. If the 
members of a group that are required to designate in writing a health 
insurance issuer to act as a parent entity fail to do so, or if the 
members of the group fail to treat the health insurance issuer that 
they have designated as the parent entity consistently as such for all 
taxable years, the parent entity of the group is deemed to be an entity 
with a taxable year that is the calendar year (without regard to 
whether the aggregated group includes an entity with a calendar year 
taxable year) for all purposes under this section for which a parent 
entity's taxable year is relevant.
    (4) Covered health insurance provider--(i) In general. For purposes 
of this section and except as otherwise provided in this paragraph 
(b)(4), a covered health insurance provider is--
    (A) A health insurance issuer for any of its taxable years 
beginning after December 31, 2009 and before January 1, 2013 in which 
it receives premiums from providing health insurance coverage (as 
defined in section 9832(b)(1)),
    (B) A health insurance issuer for any of its taxable years 
beginning after December 31, 2012 in which at least 25 percent of the 
gross premiums it receives from providing health insurance coverage (as 
defined in section 9832(b)(1)) are from providing minimum essential 
coverage (as defined in section 5000A(f)),
    (C) The parent entity of an aggregated group of which one or more 
health insurance issuers described in paragraphs (b)(4)(i)(A) or (B) of 
this section are members for the taxable year of the parent entity with 
which, or in which, ends the taxable year of any such health insurance 
issuer, and
    (D) Each other member of an aggregated group of which one or more 
health insurance issuers described in paragraphs (b)(4)(i)(A) or (B) of 
this section are members for the taxable year of the other member 
ending with, or within, the parent entity's taxable year.
    (ii) Self-insured plans. For purposes of this section, a person is 
not a covered health insurance provider solely because it maintains a 
self-insured medical reimbursement plan. For this purpose, a self-
insured medical reimbursement plan is a separate written plan for the 
benefit of employees (including former employees) that provides for 
reimbursement of medical expenses referred to in section 105(b) and 
does not provide for reimbursement under an individual or group policy 
of accident or health insurance issued by a licensed insurance company 
or under an arrangement in the nature of a prepaid health care plan 
that is regulated under federal or state law in a manner similar to the 
regulation of insurance companies, and may include a plan maintained by 
an employee organization described in section 501(c)(9).
    (iii) De minimis exception--(A) In general. A health insurance 
issuer and any member of its aggregated group that would otherwise be a 
covered health insurance provider under paragraph (b)(4)(i) of this 
section for a taxable year beginning after December 31, 2009 and before 
January 1, 2013 is not treated as a covered health insurance provider 
for purposes of this section for that taxable year if the premiums 
received by the health insurance issuer and any other health insurance 
issuers in its aggregated group from providing health insurance 
coverage (as defined in section 9832(b)(1)) are less than two percent 
of the gross revenues of the health insurance issuer and all other 
members of its aggregated group for the taxable year that the health 
insurance issuer and the other members of its aggregated group would 
otherwise be treated as covered health insurance providers under 
paragraph (b)(4)(i) of this section. A health insurance issuer and any 
member of its aggregated group that would otherwise be a covered health 
insurance provider under paragraph (b)(4)(i) of this section for a 
taxable year beginning after December 31, 2012 is not treated as a 
covered health insurance provider under this section for that taxable 
year if the premiums received by the health insurance issuer and any 
other health insurance issuers in its aggregated group for providing 
health insurance coverage (as defined in section 9832(b)(1)) that 
constitutes minimum essential coverage (as defined in section 5000A(f)) 
are less than two percent of the gross revenues of the health insurance 
issuer and all other members of its aggregated group for the taxable 
year that the health insurance issuer and the other members of its 
aggregated group would otherwise be treated as covered health insurance 
providers under paragraph (b)(4)(i) of this section. In determining 
whether premiums constitute less than two percent of gross revenues, 
the amount of premiums and gross revenues must be determined in 
accordance with generally accepted accounting principles.
    (B) One-year grace period. If a health insurance issuer or a member 
of an aggregated group is not treated as a covered health insurance 
provider for a taxable year solely by reason of the de minimis 
exception described in paragraph (b)(4)(iii)(A) of this section, but 
fails to meet the requirements of the de minimis exception described in 
paragraph (b)(4)(iii)(A) of this section for the immediately following 
taxable year, that health insurance issuer or member of an aggregated 
group will not be treated as a covered health insurance provider for 
that immediately following taxable year.
    (C) Examples. The following examples illustrate the principles of 
this paragraph (b)(4). For purposes of these examples, each corporation 
has a taxable year that is the calendar year, unless the example 
provides otherwise.

    Example 1. (i) Corporations Y and Z are members of an aggregated 
group under paragraph (b)(2) of this section. Y is a health 
insurance issuer that is a covered health insurance provider 
pursuant to paragraph (b)(4)(i)(B) of this section and receives 
premiums from providing health insurance coverage that is minimum 
essential coverage during its 2015 taxable year in an amount that is 
less than two percent of the combined gross revenues of Y and Z for 
their 2015

[[Page 19962]]

taxable years. Z is not a health insurance issuer.
    (ii) Y and Z are not treated as covered health insurance 
providers within the meaning of paragraph (b)(4) of this section for 
their 2015 taxable years because they meet the requirements of the 
de minimis exception under paragraph (b)(4)(iii)(A) of this section.
    Example 2. (i) Corporations V, W, and X are members of an 
aggregated group under paragraph (b)(2) of this section. V is a 
health insurance issuer that is a covered health insurance provider 
pursuant to paragraph (b)(4)(i)(B) of this section, but neither W 
nor X is a health insurance issuer. W is the parent entity of the 
aggregated group. V's taxable year ends on December 31, W's taxable 
year ends on June 30, and X's taxable year ends on September 30. For 
its taxable year ending December 31, 2016, V receives $3x of 
premiums from providing minimum essential coverage and has no other 
revenue. For its taxable year ending June 30, 2017, W has $100x in 
gross revenue. For its taxable year ending September 30, 2016, X has 
$60x in gross revenue.
    (ii) In the absence of the de minimis exception, V (the health 
insurance issuer) would be a covered health insurance provider for 
its taxable year ending December 31, 2016. W (the parent entity) 
would be a covered health insurance provider for its taxable year 
ending June 30, 2017 (its taxable year with which, or within which, 
ends the taxable year of the health insurance issuer), and X (the 
other member of the aggregated group) would be a covered health 
insurance provider for its taxable year ending on September 30, 2016 
(its taxable year ending with, or within, the taxable year of the 
parent entity). However, the premiums received by V (the health 
insurance issuer) from providing minimum essential coverage during 
the taxable year that it would otherwise be treated as a covered 
health insurance provider under paragraph (b)(4)(i)(B) of this 
section are less than two percent of the combined gross revenues of 
V, W, and X for the related taxable years that they would otherwise 
be treated as covered health insurance providers under paragraph 
(b)(4)(i) of this section ($3x is less than two percent of $163x). 
Therefore, the de minimis exception of paragraph (b)(4)(iii)(A) of 
this section applies, and V, W, and X are not treated as covered 
health insurance providers for these taxable years.
    Example 3. (i) The facts are the same as Example 2, except that 
V receives $4x of premiums for providing minimum essential coverage 
for its taxable year ending June 30, 2016. In addition, the members 
of the V, W, and X aggregated group were not treated as covered 
health insurance providers for their taxable years ending December 
31, 2015, June 30, 2016, and September 30, 2015, respectively (their 
immediately preceding taxable years) solely by reason of the de 
minimis exception of paragraph (b)(4)(iii)(A) of this section.
    (ii) Although the premiums received by the members of the 
aggregated group from providing minimum essential coverage are more 
than two percent of the gross revenues of the aggregated group for 
the taxable years during which the members would otherwise be 
treated as covered health insurance providers under paragraph 
(b)(4)(i) of this section ($4x is greater than two percent of 
$164x), they were not treated as covered health insurance providers 
for their immediately preceding taxable years solely by reason of 
the de minimis exception of paragraph (b)(4)(iii)(A) of this 
section. Therefore, V, W, and X are not treated as covered health 
insurance providers for their taxable years ending in December 31, 
2016, June 30, 2017, and September 30, 2016, respectively, because 
of the one-year grace period under paragraph (b)(4)(iii)(B) of this 
section. However, the members of the V, W, and X aggregated group 
will be covered health insurance providers for their subsequent 
taxable years if they would otherwise be covered health insurance 
providers for those taxable years under paragraph (b)(4) of this 
section.

    (5) Premiums--(i) For purposes of paragraph (b)(4) of this section, 
the term premiums means amounts received by a health insurance issuer 
from providing health insurance coverage (as defined in section 
9832(b)(1)), except that premiums do not include--
    (A) Amounts received under an indemnity reinsurance contract 
described in paragraph (b)(5)(ii) of this section, or
    (B) Direct service payments described in paragraph (b)(5)(iii) of 
this section.
    (ii) Indemnity reinsurance contract. For purposes of this paragraph 
(b)(5), the term indemnity reinsurance contract means an agreement 
between a health insurance issuer and a reinsuring company under 
which--
    (A) The reinsuring company agrees to indemnify the health insurance 
issuer for all or part of the risk of loss under policies specified in 
the agreement, and
    (B) The health insurance issuer retains its liability to provide 
health insurance coverage (as defined in section 9832(b)(1)) to, and 
its contractual relationship with, the insured.
    (iii) Direct service payments. For purposes of this paragraph 
(b)(5), the term direct service payment means a capitated, prepaid, 
periodic, or other payment made by a health insurance issuer or another 
entity that receives premiums from providing health insurance coverage 
(as defined in section 9832(b)(1)) to another organization as 
compensation for providing, managing, or arranging for the provision of 
healthcare services by physicians, hospitals, or other healthcare 
providers, regardless of whether the organization that receives the 
compensation is subject to healthcare provider, health insurance, 
health plan licensing, financial solvency, or other similar regulatory 
requirements under state insurance law.
    (6) Disqualified taxable year. For purposes of this section, the 
term disqualified taxable year means, with respect to any person, any 
taxable year for which the person is a covered health insurance 
provider.
    (7) Applicable individual--(i) In general. For purposes of this 
section, except as provided in paragraph (b)(7)(ii) of this section, 
the term applicable individual means, with respect to any covered 
health insurance provider for any disqualified taxable year, any 
individual--
    (A) Who is an officer, director, or employee in that taxable year, 
or
    (B) Who provides services for or on behalf of the covered health 
insurance provider during that taxable year.
    (ii) Independent contractors--Remuneration for services provided by 
an independent contractor to a covered health insurance provider is 
subject to the deduction limitation under section 162(m)(6). However, 
an independent contractor will not be treated as an applicable 
individual with respect to a covered health insurance provider for a 
disqualified taxable year if each of the following requirements is 
satisfied:
    (A) The independent contractor is actively engaged in the trade or 
business of providing services to recipients, other than as an employee 
or as a member of the board of directors of a corporation (or similar 
position with respect to an entity that is not a corporation);
    (B) The independent contractor provides significant services (as 
defined in Sec.  1.409A-1(f)(2)(iii)) to two or more persons to which 
the independent contractor is not related and that are not related to 
one another (as defined in Sec.  1.409A-1(f)(2)(ii)); and
    (C) The independent contractor is not related to the covered health 
insurance provider or any member of its aggregated group, applying the 
definition of related person contained in Sec.  1.409A-1(f)(2)(ii), 
subject to the modification that for purposes of applying the 
references to sections 267(b) and 707(b)(1), the language ``20 
percent'' is not used instead of ``50 percent'' each place ``50 
percent'' appears in sections 267(b) and 707(b)(1).
    (8) Service provider. For purposes of this section, the term 
service provider means, with respect to a covered health insurance 
provider for any period, an individual who is an officer, director, or 
employee, or who provides services for, or on behalf of, the covered 
health insurance provider or any member of its aggregated group.
    (9) Remuneration--(i) In general. For purposes of this section, 
except as provided in paragraph (b)(9)(ii) of this section, the term 
remuneration has the

[[Page 19963]]

same meaning as applicable employee remuneration, as defined in section 
162(m)(4), but without regard to the exceptions under section 
162(m)(4)(B) (remuneration payable on a commission basis), section 
162(m)(4)(C) (performance-based compensation), and section 162(m)(4)(D) 
(existing binding contracts), and the regulations under those sections.
    (ii) Exceptions. For purposes of this section, remuneration does 
not include--
    (A) A payment made to, or for the benefit of, an applicable 
individual from or to a trust described in section 401(a) within the 
meaning of section 3121(a)(5)(A),
    (B) A payment made under an annuity plan described in section 
403(a) within the meaning of section 3121(a)(5)(B),
    (C) A payment made under a simplified employee pension plan 
described in section 408(k)(1) within the meaning of section 
3121(a)(5)(C),
    (D) A payment made under an annuity contract described in section 
403(b) within the meaning of section 3121(a)(5)(D),
    (E) Salary reduction contributions described in section 3121(v)(1), 
and
    (F) Remuneration consisting of any benefit provided to, or on 
behalf of, an employee if, at the time the benefit is provided, it is 
reasonable to believe that the employee will be able to exclude the 
value of the benefit from gross income.
    (10) Applicable individual remuneration. For purposes of this 
section, the term applicable individual remuneration means, with 
respect to any applicable individual for any disqualified taxable year, 
the aggregate amount allowable as a deduction under this chapter for 
that taxable year (determined without regard to section 162(m)) for 
remuneration for services performed by that applicable individual 
(whether or not in that taxable year), except that applicable 
individual remuneration does not include any deferred deduction 
remuneration with respect to services performed during any taxable 
year. Applicable individual remuneration for a disqualified taxable 
year may include remuneration for services performed in a taxable year 
before the taxable year in which the deduction for the remuneration is 
allowable. For example, a discretionary bonus granted and paid to an 
applicable individual in a disqualified taxable year in recognition of 
services performed in prior taxable years is applicable individual 
remuneration for that disqualified taxable year. In addition, a grant 
of restricted stock in a disqualified taxable year with respect to 
which an applicable individual makes an election under section 83(b) is 
applicable individual remuneration for the disqualified taxable year of 
the covered health insurance provider in which the grant of the 
restricted stock is made. See paragraphs (d)(1)(iv) and (d)(5)(v) of 
this section for certain remuneration that is not treated as applicable 
individual remuneration for purposes of this section.
    (11) Deferred deduction remuneration. For purposes of this section, 
the term deferred deduction remuneration means remuneration that would 
be applicable individual remuneration for services performed in a 
disqualified taxable year but for the fact that the deduction 
(determined without regard to section 162(m)(6)) for the remuneration 
is allowable in a subsequent taxable year. Whether remuneration is 
deferred deduction remuneration is determined without regard to when 
the remuneration is paid, except to the extent that the timing of the 
payment affects the taxable year in which the remuneration is otherwise 
deductible. For example, payments that are otherwise deductible by a 
covered health insurance provider in an initial taxable year, but are 
paid to an applicable individual by the 15th day of the third month of 
the immediately subsequent taxable year of the covered health insurance 
provider (as described in Sec.  1.404(b)-1T, Q&A-2(b)(1)), are 
applicable individual remuneration for the initial taxable year (and 
not deferred deduction remuneration) because the deduction for the 
payments is allowable in the initial taxable year, and not a subsequent 
taxable year. Except as otherwise provided in paragraph (i) of this 
section (regarding transition rules for certain deferred deduction 
remuneration attributable to services performed in taxable years 
beginning before January 1, 2013), deferred deduction remuneration that 
is attributable to services performed in a disqualified taxable year of 
a covered health insurance provider is subject to the section 162(m)(6) 
deduction limitation even if the taxable year in which the remuneration 
is otherwise deductible is not a disqualified taxable year. Similarly, 
deferred deduction remuneration is subject to the section 162(m)(6) 
deduction limitation regardless of whether an applicable individual is 
a service provider of the covered health insurance provider in the 
taxable year in which the deferred deduction remuneration is otherwise 
deductible. However, remuneration that is attributable to services 
performed in a taxable year that is not a disqualified taxable year is 
not deferred deduction remuneration even if the remuneration is 
otherwise deductible in a disqualified taxable year. See also 
paragraphs (d)(1)(iv) and (d)(5)(v) of this section for certain 
remuneration that is not treated as deferred deduction remuneration for 
purposes of this section.
    (12) Substantial risk of forfeiture. For purposes of this section, 
the term substantial risk of forfeiture has the same meaning as 
provided in Sec.  1.409A-1(d).
    (c) Deduction Limitation--(1) Applicable individual remuneration. 
For any disqualified taxable year beginning after December 31, 2012, no 
deduction is allowed under this chapter for applicable individual 
remuneration that is attributable to services performed by an 
applicable individual in that taxable year to the extent that the 
amount of that remuneration exceeds $500,000.
    (2) Deferred deduction remuneration. For any taxable year beginning 
after December 31, 2012, no deduction is allowed under this chapter for 
deferred deduction remuneration that is attributable to services 
performed by an applicable individual in any disqualified taxable year 
beginning after December 31, 2009, to the extent that the amount of 
such remuneration exceeds $500,000 reduced (but not below zero) by the 
sum of:
    (i) The applicable individual remuneration for that applicable 
individual for that disqualified taxable year; and
    (ii) The portion of the deferred deduction remuneration for those 
services that was deductible under section 162(m)(6)(A)(ii) and this 
paragraph (c)(2) in a preceding taxable year, or would have been 
deductible under section 162(m)(6)(A)(ii) and this paragraph (c)(2) in 
a preceding taxable year if section 162(m)(6) was effective for taxable 
years beginning after December 31, 2009 and before January 1, 2013.
    (d) Services to which remuneration is attributable--(1) Attribution 
to a taxable year--(i) In general. The deduction limitation under 
section 162(m)(6) applies to applicable individual remuneration and 
deferred deduction remuneration attributable to services performed by 
an applicable individual in a disqualified taxable year of a covered 
health insurance provider. When an amount of applicable individual 
remuneration or deferred deduction remuneration becomes otherwise 
deductible (and not before that time), that remuneration must be 
attributed to services performed by an applicable individual in a 
taxable year of the covered health insurance provider

[[Page 19964]]

in accordance with the rules of this paragraph (d). After the 
remuneration has been attributed to services performed by an applicable 
individual in a taxable year of a covered health insurance provider, 
the rules of paragraph (e) of this section are then applied to 
determine whether the deduction with respect to the remuneration is 
limited by section 162(m)(6).
    (ii) Attribution of deferred deduction remuneration to earliest 
years first. If an amount of deferred deduction remuneration that 
becomes otherwise deductible may be attributed to services performed by 
an applicable individual in two or more taxable years of a covered 
health insurance provider in accordance with paragraphs (d)(3) 
(providing for the attribution of amounts credited under an account 
balance plan) or (d)(4) (providing for the attribution of amounts 
credited under a nonaccount balance plan) of this section, the amount 
must be attributed first to services performed by the applicable 
individual in the earliest year to which the amount could be 
attributable under paragraphs (d)(3) or (4) of this section, as 
applicable, and then to the next subsequent taxable year or years to 
which the amount could be attributable under paragraphs (d)(3) or (4) 
of this section, as applicable, until the entire amount has been 
attributed to one or more taxable years of the covered health insurance 
provider.
    (iii) Example. The following example illustrates the principles of 
paragraph (d)(1)(ii) of this section.

    Example. (i) A is an employee of corporation Z, which has a 
taxable year that is the calendar year and is a covered health 
insurance provider for all relevant taxable years. A participates in 
a nonqualified deferred compensation plan that is an account balance 
plan maintained by Z. A's account balances under the plan on the 
last day of all relevant taxable years are as follows: $10,000 for 
2014, $13,000 for 2015, $17,000 for 2016, and $24,000 for 2017. A's 
account balance is fully vested at all times. In accordance with the 
terms of the plan, Z pays $15,000 to A in 2018 and $9,000 to A in 
2019. These amounts are otherwise deductible by Z in the year in 
which they are paid.
    (ii) Because the nonqualified deferred compensation plan is an 
account balance plan, deferred deduction remuneration provided under 
the plan is attributable to services provided by A in accordance 
with paragraph (d)(3)(i) of this section. Z does not use the 
alternate method of allocating earnings and losses permitted under 
paragraph (d)(3)(ii) of this section. Accordingly, the deferred 
deduction remuneration under the plan attributable to services 
provided by A in a taxable year is generally equal to the increase 
in the account balance on the last day of each taxable year over the 
account balance on the last day of the immediately preceding taxable 
year, increased by the amount of any payments made during the 
taxable year. The increases in A's account balances are $10,000 for 
2014, $3,000 for 2015, $4,000 for 2016, and $7,000 for 2017. 
Therefore, pursuant to paragraph (d)(1)(ii), Z must attribute 
$10,000 of the $15,000 payment to services performed by A in 2014, 
$3,000 of the $15,000 payment to services performed by A in 2015, 
and $2,000 of the $15,000 payment to services performed by A in 2016 
(leaving $2,000 remaining to be attributed to 2016). Similarly, Z 
must attribute $2,000 of the $9,000 payment to services performed by 
A in 2016, and the remaining $7,000 of the $9,000 payment to 
services performed by A in 2017.

    (iv) No attribution to taxable years during which no services are 
performed or before a legally binding right arises--(A) In general. For 
purposes of this section, remuneration is not attributable--
    (1) to a taxable year of a covered health insurance provider ending 
before the later of the date the applicable individual begins providing 
services to the covered health insurance provider (or any member of its 
aggregated group) and the date the applicable individual obtains a 
legally binding right to the remuneration, or
    (2) to any other taxable year of a covered health insurance 
provider during which the applicable individual is not a service 
provider.
    (B) Attribution of remuneration before commencement of services or 
legally binding right. To the extent that remuneration would otherwise 
be attributed to a taxable year ending before the later of the date the 
applicable individual begins providing services to the covered health 
insurance provider (or any member of its aggregated group) and the date 
the applicable individual obtains a legally binding right to the 
remuneration in accordance with paragraphs (d)(2) through (d)(8) or 
paragraph (d)(10) of this section, the remuneration is attributable to 
services provided in the taxable year in which the latter of these 
dates occurs. For example, if an applicable individual obtains a 
contractual right to remuneration in a taxable year of a covered health 
insurance provider and the remuneration would otherwise be attributable 
to that taxable year pursuant to paragraph (d)(2) of this section, but 
the applicable individual does not begin providing services to the 
covered health insurance provider until the next taxable year, the 
remuneration is attributable to the taxable year in which the 
applicable individual begins providing services.
    (v) Attribution to 12-month periods. To the extent that a covered 
health insurance provider is required to attribute remuneration on a 
daily pro rata basis under this paragraph (d), it may assume that any 
12-month period has 365 days (and so may ignore the extra day in leap 
years).
    (vi) Remuneration subject to nonlapse restriction or similar 
formula. For purposes of this section, if stock or other equity is 
subject to a nonlapse restriction (as defined in Sec.  1.83-3(h)), or 
if the remuneration payable to an applicable individual is determined 
under a formula that, if applied to stock or other equity, would be a 
nonlapse restriction, the amount of the remuneration and the 
attribution of that remuneration to taxable years must be determined 
based upon application of the nonlapse restriction or formula. For 
example, if the earnings or losses on an account under an account 
balance plan are determined based upon the performance of company 
stock, the valuation of which is based on a formula that if applied to 
the stock would be a nonlapse restriction, then that formula must be 
used consistently for purposes of determining the amount of the 
remuneration credited to that account balance to taxable years and the 
attribution of that remuneration to taxable years.
    (2) Legally binding right. Unless remuneration is attributable to 
services performed in a different taxable year pursuant to paragraphs 
(d)(3) through (d)(8) or paragraph (d)(10) of this section, the 
remuneration is attributable to services performed in the taxable year 
of a covered health insurance provider in which an applicable 
individual obtains a legally binding right to the remuneration. An 
applicable individual does not have a legally binding right to 
remuneration if the remuneration may be reduced unilaterally or 
eliminated by the covered health insurance provider or other person 
after the services creating the right to the remuneration have been 
performed. However, if the facts and circumstances indicate that the 
discretion to reduce or eliminate the remuneration is available or 
exercisable only upon a condition, or the discretion to reduce or 
eliminate the remuneration lacks substantive significance, the 
applicable individual will be considered to have a legally binding 
right to the remuneration. For this purpose, remuneration is not 
considered to be subject to unilateral reduction or elimination merely 
because it may be reduced or eliminated by operation of the objective 
terms of a plan, such as the application of a nondiscretionary,

[[Page 19965]]

objective provision creating a substantial risk of forfeiture.
    (3) Account balance plans--(i) Standard attribution method--(A) In 
general. Except as provided in paragraphs (d)(3)(i)(B) and (d)(3)(ii) 
of this section, the increase (or decrease) in the account balance of 
an applicable individual under a plan described in Sec.  1.409A-
1(c)(2)(i)(A) or (B) (an account balance plan) as of the last day of a 
taxable year of the covered health insurance provider (the measurement 
date), over (or under) the account balance as of the last day of the 
immediately preceding taxable year, is attributable to services 
provided by the applicable individual in the taxable year that includes 
the measurement date. For purposes of determining the increase (or 
decrease) in an account balance in any taxable year, the applicable 
individual's account balance as of the last day of the taxable year 
that includes the measurement date is increased by any payments made 
during that taxable year that reduce the account balance. If an account 
balance plan credits income or earnings based on a method or formula 
that is neither a predetermined actual investment within the meaning of 
Sec.  31.3121(v)(2)-1(d)(2)(i)(B) nor a rate of interest that is 
reasonable within the meaning of Sec.  31.3121(v)(2)-1(d)(2)(i)(B), the 
excess of the amount that would be credited as income or earnings under 
the terms of the plan over the amount that would be credited as income 
or earnings under a reasonable rate of interest (as described in Sec.  
31.3121(v)(2)-1(d)(2)(iii)) must be included in the account balance. 
Increases in the applicable individual's account balance with respect 
to any taxable year are treated as remuneration attributable to 
services performed during that taxable year. Decreases in the 
applicable individual's account balance with respect to any taxable 
year are treated as reductions to deferred deduction remuneration for 
that taxable year and may offset other deferred deduction remuneration 
(but not applicable individual remuneration) attributable to services 
performed by the applicable individual during that taxable year under 
any plan or arrangement (or if there is not sufficient deferred 
deduction remuneration for that taxable year to offset the reduction 
entirely, the excess may offset deferred deduction remuneration in 
first subsequent taxable year or years in which the applicable 
individual has deferred deduction remuneration to be offset by the 
loss).
    (B) Attribution of increases (or decreases) in an account balance 
in taxable years during which an applicable individual is not a service 
provider. [Reserved].
    (ii) Alternative attribution method--(A) Attribution of principal 
additions--(1) In general. Except as provided in paragraph 
(d)(3)(ii)(A)(2), any increase in the account balance of an applicable 
individual in an account balance plan as of the last day of a taxable 
year, increased by any payments made during the taxable year, over the 
account balance as of the last day of the immediately preceding taxable 
year that is not due to earnings or losses (as described in paragraph 
(d)(3)(ii)(C) of this section) is treated as a principal addition and 
is remuneration attributable to services performed during that taxable 
year.
    (2) Attribution of principal additions in taxable years during 
which an applicable individual is not a service provider. [Reserved].
    (B) Attribution of earnings or losses. Earnings or losses on a 
principal addition (including earnings and losses arising after an 
applicable individual ceases to be a service provider) are attributable 
to the services provided by the applicable individual in the same 
disqualified taxable year of the covered health insurance provider to 
which the principal addition is attributed in accordance with paragraph 
(d)(3)(ii)(A) of this section. Earnings are treated as remuneration for 
the taxable year to which they are attributed, and losses are treated 
as reductions to deferred deduction remuneration for that taxable year 
and may offset other deferred deduction remuneration (but not 
applicable individual remuneration) attributable to services performed 
by the applicable individual during that taxable year (or if there is 
not sufficient deferred deduction remuneration to offset the reduction 
entirely during that taxable year, the first subsequent taxable year or 
years in which the applicable individual has deferred deduction 
remuneration to be offset by the loss, if applicable).
    (C) Earnings. Whether remuneration constitutes earnings on a 
principal addition is determined under the principles defining income 
attributable to an amount taken into account under Sec.  31.3121(v)(2)-
1(d)(2). Therefore, for an account balance plan (as defined in Sec.  
31.3121(v)(2)-1(c)(1)(ii)(A)), earnings on an amount deferred generally 
include an amount credited on behalf of the applicable individual under 
the terms of the arrangement that reflects a rate of return that does 
not exceed either the rate of return on a predetermined actual 
investment (as defined in Sec.  31.3121(v)(2)-1(d)(2)(i)(B)), or, if 
the income does not reflect the rate of return on a predetermined 
actual investment, a reasonable rate of interest. For purposes of this 
section, the use of an unreasonable rate of return generally will 
result in the treatment of some or all of the remuneration as a 
principal addition that is attributable to services provided by an 
applicable individual in a taxable year of a covered health insurance 
provider in accordance with paragraph (d)(3)(ii)(A) of this section. 
For purposes of determining whether an account balance plan has a 
reasonable rate of return, the rules of Sec.  31.3121(v)(2)-
1(d)(2)(iii)(A) apply.
    (D) Consistency requirement. If a covered health insurance provider 
applies a method described in either paragraph (d)(3)(i) or paragraph 
(d)(3)(ii) of this section, the covered health insurance provider must 
apply that method consistently for all taxable years for all plans of 
the covered health insurance provider that would be aggregated and 
treated as a single account balance plan under Sec.  1.409A-1(c)(2) if 
one hypothetical applicable individual had deferrals of compensation 
under all of the plans described in this paragraph.
    (4) Nonaccount balance plans--(i) In general. The increase (or 
decrease) in the present value of the future payment or payments to 
which an applicable individual has a legally binding right under a plan 
described in Sec.  1.409A-1(c)(2)(i)(C) (nonaccount balance plan) as of 
a measurement date (as defined in paragraph (d)(3)(i)), over (or under) 
the present value of the future payment or payments as of the last day 
of the immediately preceding taxable year is attributable to services 
provided by the applicable individual in the taxable year of the 
covered health insurance provider that includes the measurement date. 
For purposes of determining the increase (or decrease) in the present 
value of a future payment or payments under a nonaccount balance plan, 
the rules of Sec.  31.3121(v)(2)-1(c)(2) apply (including the 
requirement that reasonable actuarial assumptions and methods be used). 
For purposes of determining the increase (or decrease) in the present 
value of a future payment or payments under a nonaccount balance plan 
attributable to any taxable year, the present value of the future 
payment or payments as of the last day of the taxable year is increased 
by the amount of any payments made during that taxable year. Increases 
in the present value of the future payment or payments to which an 
applicable individual has a legally binding right under a nonaccount 
balance plan with respect to any taxable year are treated as 
remuneration attributable to services

[[Page 19966]]

performed in that taxable year. Decreases in the present value of the 
future payment or payments to which an applicable individual has a 
legally binding right under a nonaccount balance plan with respect to 
any taxable year are treated as reductions to deferred deduction 
remuneration for that taxable year and may offset other deferred 
deduction remuneration (but not applicable individual remuneration) 
attributable to services performed by the applicable individual during 
that taxable year under any plan or arrangement (or if there is not 
sufficient deferred deduction remuneration for that taxable year to 
offset the reduction entirely, the excess may offset deferred deduction 
remuneration in the first subsequent taxable year or years in which the 
applicable individual has deferred deduction remuneration to be offset 
by the loss).
    (ii) Attribution of increases (or decreases) in the present value 
of a future payment or payments in taxable years during which an 
applicable individual is not a service provider. [Reserved].
    (5) Equity-based remuneration--(i) Stock options and stock 
appreciation rights. Remuneration resulting from the exercise of a 
stock option (including an incentive stock option described in section 
422 and an option under an employee stock purchase plan described in 
section 423) or a stock appreciation right (SAR) is attributable to 
services performed by an applicable individual for a covered health 
insurance provider, and it must be allocated on a daily pro rata basis 
over the period beginning on the date of grant (within the meaning of 
Sec.  1.409A-1(b)(5)(vi)(B)) of the stock option or SAR and ending on 
the date that the stock right is exercised, excluding any days on which 
the applicable individual is not a service provider.
    (ii) Restricted stock. Remuneration resulting from the vesting or 
transfer of restricted stock for which an election under section 83(b) 
has not been made is attributable on a daily pro rata basis to services 
performed by an applicable individual for a covered health insurance 
provider over the period, excluding any days on which the applicable 
individual is not a service provider, beginning on the date the 
applicable individual obtains a legally binding right to the restricted 
stock and ending on the earliest of--
    (A) the date the substantial risk of forfeiture lapses with respect 
to the restricted stock, or
    (B) the date the restricted stock is transferred by the applicable 
individual (or becomes transferable as defined in Sec.  1.83-3(d)).
    (iii) Restricted stock units. Remuneration resulting from a 
restricted stock unit (RSU) is attributable to services performed by an 
applicable individual for a covered health insurance provider, and must 
be allocated on a daily pro rata basis, over the period beginning on 
the date the applicable individual obtains a legally binding right to 
the RSU and ending on the date the remuneration is paid or made 
available such that it is includible in gross income, excluding any 
days on which the applicable individual is not a service provider.
    (iv) Partnership interests and other equity. The rules provided in 
this paragraph (d)(5) may be applied by analogy to grants of equity-
based compensation in situations in which the compensation is 
determined by reference to equity in an entity treated as a partnership 
for federal tax purposes, or where compensation is determined by 
reference to equity interests in an entity described in Sec.  1.409A-
1(b)(5)(iii) (for example, a mutual company).
    (6) Involuntary separation pay. Involuntary separation pay is 
attributable to services performed by an applicable individual for a 
covered health insurance provider in the taxable year in which the 
involuntary separation from service occurs. Alternatively, the covered 
health insurance provider may attribute involuntary separation pay to 
services performed by an applicable individual on a daily pro rata 
basis beginning on the date that the applicable individual obtains a 
legally binding right to the involuntary separation pay and ending on 
the date of the involuntary separation from service. Involuntary 
separation pay to different individuals may be attributed using 
different methods; however, if involuntary separation payments are made 
to the same individual over multiple taxable years, all the payments 
must be attributed using the same method. For purposes of this section, 
the term involuntary separation pay means remuneration to which an 
applicable individual has a right to payment solely as a result of the 
individual's involuntary separation from service (within the meaning of 
Sec.  1.409A-1(n)).
    (7) Reimbursements. Remuneration that is provided in the form of a 
reimbursement or benefit provided in-kind (other than cash) is 
attributable to services performed by an applicable individual in the 
taxable year of the covered health insurance provider in which the 
applicable individual makes a payment for which the applicable 
individual has a right to reimbursement or receives the in-kind 
benefit, except that remuneration provided in the form of a 
reimbursement or in-kind benefit during a taxable year of the covered 
health insurance provider in which an applicable individual is not a 
service provider is attributable to services provided in the first 
preceding taxable year of the covered health insurance provider in 
which the applicable individual is a service provider.
    (8) Split-dollar life insurance. Remuneration resulting from a 
split-dollar life insurance arrangement (as defined in Sec.  1.61-
22(b)) under which an applicable individual has a legally binding right 
to economic benefits described in Sec.  1.61-22(d)(2)(ii) (policy cash 
value to which the non-owner has current access within the meaning of 
Sec.  1.61-22(d)(4)(ii)) or Sec.  1.61-22(d)(2)(iii) (any other 
economic benefits provided to the non-owner) is attributable to 
services performed in the taxable year of the covered health insurance 
provider in which the legally binding right arises. Split-dollar life 
insurance arrangements under which payments are treated as split-dollar 
loans under Sec.  1.7872-15 generally will not give rise to deferred 
deduction remuneration within the meaning of paragraph (b)(11) of this 
section, although they may give rise to applicable individual 
remuneration. However, in certain situations, this type of arrangement 
may give rise to deferred deduction remuneration for purposes of 
section 162(m)(6), for example, if amounts on a split-dollar loan are 
waived, cancelled, or forgiven.
    (9) Examples. The following examples illustrate the principles of 
paragraphs (d)(1) through (8) of this section. For purposes of these 
examples, each corporation has a taxable year that is the calendar year 
and is a covered health insurance provider for all relevant taxable 
years; deferred deduction remuneration is otherwise deductible in the 
taxable year in which it is paid, and amounts payable under nonaccount 
balance plans are not forfeitable upon the death of the applicable 
individual.

    Example 1 (Account balance plan with earnings using the standard 
attribution method).  (i) B is an applicable individual of 
corporation Y for all relevant taxable years. On January 1, 2016, B 
begins participating in a nonqualified deferred compensation plan of 
Y that is an account balance plan. Under the terms of the plan, all 
amounts are fully vested at all times, and Y will pay B's entire 
account balance on January 1, 2019. Y credits $10,000 to B under the 
plan annually on January 1 for three years beginning on January 1, 
2016. The account earns interest at a fixed rate of five percent per 
year, compounded annually under the terms of the

[[Page 19967]]

plan, which solely for purposes of this example, is assumed to be a 
reasonable rate of interest. Thus, B's account balance is $10,500 
($10,000 + ($10,000 x 5%)) on December 31, 2016; $21,525 ($10,500 + 
$10,000 + ($20,500 x 5%)) on December 31, 2017; and $33,101 ($21,525 
+ $10,000 + ($31,525 x 5%)) on December 31, 2018. Y attributes 
increases and decreases in account balances under the plan using the 
standard allocation method described in paragraph (d)(3)(i) of this 
section.
    (ii) Under the standard attribution method for account balance 
plans described in paragraph (d)(3)(i) of this section, any increase 
in B's account balance as of the last day of Y's taxable year over 
the account balance as of the last day of the immediately preceding 
taxable year, increased by any payments made during the taxable 
year, is remuneration that is attributable to services provided by B 
in that taxable year. Accordingly, $10,500 of deferred deduction 
remuneration is attributable to services performed by B in Y's 2016 
taxable year (the difference between the $10,500 account balance on 
December 31, 2016 and the zero account balance on December 31, 
2015); $11,025 of deferred deduction remuneration is attributable to 
services performed in Y's 2017 taxable year (the difference between 
the $21,525 account balance on December 31, 2017 and the $10,500 
account balance on December 31, 2016); and $11,576 of deferred 
deduction remuneration is attributable services performed in Y's 
2018 taxable year (the difference between the $33,101 account 
balance on December 31, 2018 and the $21,525 account balance on 
December 31, 2017).
    Example 2 (Account balance plan with earnings using the 
alternate attribution method).  (i) The facts are the same as in 
Example 1, except that Y allocates earnings and losses based on the 
alternative attribution method described in paragraph (d)(3)(ii) of 
this section.
    (ii) Under the alternative attribution method described in 
paragraph (d)(3)(ii) of this section, each principal addition of 
$10,000 is attributed to the taxable year of Y as of which the 
addition is credited, and earnings and losses on each principal 
addition are attributed to the same taxable year to which the 
principal addition is attributed. Therefore, $1,576 of earnings are 
attributable to Y's 2016 taxable year (interest on the 2016 $10,000 
principal addition at five percent for three years compounded 
annually); $1,025 of earnings are attributable to Y's 2017 taxable 
year (interest on the 2017 $10,000 principal addition at five 
percent for two years compounded annually); and $500 of earnings are 
attributable to Y's 2018 taxable year (interest on the 2018 $10,000 
principal addition at five percent for one year).
    Example 3 (Account balance plan with earnings and losses using 
the standard attribution method). (i) The facts are the same as in 
Example 1, except that the earnings under the terms of the plan are 
based on a notional investment in a predetermined actual investment 
(as defined in Sec.  31.3121(v)(2)-1(e)(2)(i)(B)), which results in 
B's account balance increasing by five percent in the 2016 taxable 
year, decreasing by five percent in the 2017 taxable year, and 
increasing again by five percent in the 2018 taxable year. 
Therefore, on December 31, 2016, B's account balance is $10,500 
($10,000 + ($10,000 x 5%)); on December 31, 2017, B's account 
balance is $19,475 ($10,500 + $10,000 - ($20,500 x 5%)); and on 
December 31, 2018, B's account balance is $30,479 ($19,475 + $10,000 
+ ($29,475 x 5%)).
    (ii) Under the standard attribution method for account balance 
plans described in paragraph (d)(3)(i) of this section, increases 
(or decreases) in B's account balance as of the last day of Y's 
taxable year over (or under) the account balance as of the last day 
of the immediately preceding taxable year, increased by any payments 
made during the taxable year, are attributable to services provided 
by B in that taxable year.
    (iii) Accordingly, $10,500 of deferred deduction remuneration is 
attributable to services performed by B in Y's 2016 taxable year 
(the difference between the $10,500 account balance on December 31, 
2016 and the zero account balance on December 31, 2015); $8,975 of 
deferred deduction remuneration is attributable to services 
performed in Y's 2017 taxable year (the difference between the 
$19,475 account balance on December 31, 2017 and the $10,500 account 
balance on December 31, 2016); and $11,474 of deferred deduction 
remuneration is attributable to services performed in Y's 2018 
taxable year (the difference between the $30,949 account balance on 
December 31, 2018 and the $19,475 account balance on December 31, 
2017).
    Example 4 (Account balance plan with earnings and losses using 
the alternative attribution method).  (i) The facts are the same as 
in Example 3, except that Y attributes earnings and losses based on 
the method described in paragraph (d)(3)(ii) of this section.
    (ii) Under the alternative attribution method for account 
balance plans described in paragraph (d)(3)(ii) of this section, 
each $10,000 principal addition is attributed to the taxable year of 
Y as of which the addition is made, and earnings and losses on each 
principal addition are attributed to the same taxable year of Y to 
which the principal addition is attributed. With respect to the 
$10,000 principal addition to B's account for 2016, the account 
balance is $10,500 on December 1, 2016 ($500 of earnings), $9,975 on 
December 31, 2017 ($525 of losses), and $10,474 on December 31, 2018 
($499 of earnings). Accordingly, $474 ($500 - $525 + $499) of net 
earnings is attributable to Y's 2016 taxable year. With respect to 
the $10,000 principal addition to B's account for 2017, the account 
balance is $9,500 on December 31, 2017 ($500 of losses), and $9,975 
on December 31, 2018 ($475 of earnings). Accordingly, $25 in net 
losses are attributable to Y's 2017 taxable year ($500 losses for 
2017 and $475 earnings for 2018). Because losses attributable to a 
taxable year may reduce deferred deduction remuneration attributable 
to that taxable year (but not applicable individual remuneration), 
the $25 loss reduces the $10,000 principal addition to B's account 
in 2017 for purposes of applying the section 162(m)(6) deduction 
limitation. With respect to the $10,000 principal addition to B's 
account in 2018, the account balance is $10,500 on December 31, 
2018. Therefore, the $500 of earnings is attributable to Y's 2018 
taxable year.
    Example 5 (Nonaccount balance plan).  (i) C is an applicable 
individual of corporation X for all relevant taxable years. On 
January 1, 2015, X grants C a vested right to a $100,000 payment on 
January 1, 2020.
    (ii) Under the attribution method for nonaccount balance plans 
described in paragraph (d)(4) of this section, any increase (or 
decrease) in the present value of the future payment that C is 
entitled to receive under the nonaccount balance plan as of the last 
day of X's taxable year, over (or under) the present value of the 
future payment as of the last day of the preceding taxable year, 
increased by any payments made during the taxable year, is 
attributable to services provided by C in that taxable year. X 
determines the present value of the payment using an interest rate 
of five percent for all years, which, solely for purposes of this 
example, is assumed to be a reasonable actuarial assumption. The 
present value of $100,000 payable on January 1, 2020, determined 
using a five percent interest rate, is $82,300 as of December 31, 
2015; $86,400 as of December 31, 2016; $90,700 as of December 31, 
2017; and $95,200 as of December 31, 2018. Accordingly, $82,300 of 
deferred deduction remuneration is attributable to services 
performed by C in X's 2015 taxable year; $4,100 ($86,400 - $82,300) 
of deferred deduction remuneration is attributable to services 
performed by C in X's 2016 taxable year; $4,300 ($90,700 - $86,400) 
of deferred deduction remuneration is attributable to services 
performed by C in X's 2017 taxable year; $4,500 ($95,200 - $90,700) 
of deferred deduction remuneration is attributable to services 
performed by C in X's 2018 taxable year; and $4,800 ($100,000 - 
$95,200) of remuneration is attributable to services performed by C 
in X's 2019 taxable year.
    Example 6 (Nonaccount balance plan).  (i) D is an applicable 
individual of corporation W for all relevant taxable years. D begins 
employment with W on January 1, 2016. On December 31, 2020, D 
obtains the right to a payment from W equal to 10 percent of D's 
highest annual salary multiplied by D's years of service commencing 
on January 1 of the year following D's separation from service. In 
2020, D has an annual salary of $375,000, which increases by $25,000 
on January 1 of each subsequent calendar year. D separates from 
service with W on December 31, 2023, and W pays $360,000 to D on 
January 1, 2024. W determines the present value of amounts to be 
paid under the plan using an interest rate of five percent for all 
years, which, solely for purposes of this example, is assumed to be 
a reasonable actuarial assumption.
    (ii) Under the attribution method for nonaccount balance plans 
described in paragraph (d)(4) of this section, the increase (or 
decrease) in the present value of the future payment to which D is 
entitled under the nonaccount balance plan as of the last day of W's 
taxable year, over (or under) the

[[Page 19968]]

present value of the future payment as of the last day of the 
preceding taxable year, increased by any payments made during the 
taxable year, is attributable to services provided by D in that 
taxable year. W determines the present value of this payment using 
an interest rate of five percent for all years, which solely for 
purposes of this example, is assumed to be a reasonable actuarial 
assumption. As of December 31, 2021, D has the right to a payment of 
$240,000 on January 1, 2024 ($400,000 x 10% x 6 years of service). 
The present value as of December 31, 2021 of $240,000 payable on 
January 1, 2024 is $217,687. Therefore, $217,687 of deferred 
deduction remuneration is attributable to services performed by D in 
W's 2021 taxable year.
    (iii) As of December 31, 2022, D has the right to a payment of 
$297,500 on January 1, 2023 ($425,000 x 10% x 7 years of service). 
The present value as of December 31, 2022 of $297,500 payable on 
January 1, 2023 is $283,333. Therefore, the deferred deduction 
remuneration attributable to services performed by D in W's 2022 
taxable year is $65,546 ($283,333 - $217,680).
    (iv) As of December 31, 2023, D has the right to a payment of 
$360,000 on January 1, 2024 ($450,000 x 10% x 8 years of service). 
The present value as of December 31, 2023 of $360,000 payable on 
January 1, 2024 is $360,000. Therefore, the deferred deduction 
remuneration attributable to services performed by D in W's 2023 
taxable year is $76,767 ($360,000 - $283,333).
    Example 7 (Stock option). (i) E is an applicable individual of 
corporation V for all relevant taxable years. On January 1, 2016, V 
grants E an option to purchase 100 shares of V common stock at an 
exercise price of $50 per share (the fair market value of V common 
stock on the date of grant). On December 31, 2017, E ceases to be a 
service provider of V or any member of V's aggregated group. On 
January 1, 2019, E resumes providing services for V and again 
becomes both a service provider and an applicable individual of V. 
On December 31, 2020, when the fair market value of V common stock 
is $196 per share, E exercises the stock option. The remuneration 
resulting from the stock option exercise is $14,600 (($196 - $50) x 
100).
    (ii) Pursuant to paragraph (d)(5)(i) of this section, the 
remuneration resulting from the exercise of a stock option is 
attributable to services performed by E over the period beginning on 
the date of grant of the stock option and ending on the date that 
the stock right is exercised, excluding any days on which E is not a 
service provider of V. Therefore, the $14,600 is attributed pro rata 
over the 1,460 days from January 1, 2016 to December 31, 2017 and 
from January 1, 2019 to December 31, 2020 (365 days per year for the 
2016, 2017, 2019, and 2020 taxable years), so that $10 ($14,600 
divided by 1,460) is attributed to each calendar day in this period, 
and $3,650 (365 days x $10) of remuneration is attributed to 
services performed by E in each of V's 2016, 2017, 2019, and 2020 
taxable years.
    Example 8 (Restricted stock).  (i) F is an applicable individual 
of corporation U for all relevant taxable years. On January 1, 2017, 
U grants F 100 shares of restricted U common stock. Under the terms 
of the grant, the shares will be forfeited if F voluntarily 
terminates employment before December 31, 2019 (so that the shares 
are subject to a substantial risk of forfeiture through that date) 
and are nontransferable until the substantial risk of forfeiture 
lapses. F does not make an election under section 83(b) and 
continues in employment with U through December 31, 2019, at which 
time F's rights in the stock become substantially vested within the 
meaning of Sec.  1.83-3(b) and the fair market value of a share of 
the stock is $109.50. The deferred deduction remuneration resulting 
from the vesting of the restricted stock is $10,950 ($109.50 x 100).
    (ii) Pursuant to paragraph (d)(5)(ii) of this section, the 
remuneration resulting from the vesting of restricted stock is 
attributable to services performed by F on a daily pro rata basis 
over the period, excluding any days on which F is not a service 
provider of U, beginning on the date F is granted the restricted 
stock and ending on the earliest of the date the substantial risk of 
forfeiture lapses or the date the restricted stock is transferred 
(or becomes transferable as defined in Sec.  1.83-3(d)). Therefore, 
the $10,950 of remuneration is attributed to services performed by F 
over the 1,095 days between January 1, 2017 and December 31, 2019 
(365 days per year for the 2017, 2018, and 2019 taxable years), so 
that $10 ($10,950 divided by 1,095) is attributed to each calendar 
day in this period, and remuneration of $3,650 (365 days x $10) is 
attributed to services performed by F in each of U's 2017, 2018, and 
2019 taxable years.
    Example 9 (Restricted stock units (RSUs)).  (i) G is an 
applicable individual of corporation T for all relevant taxable 
years. On January 1, 2018, T grants G 100 RSUs. Under the terms of 
the grant, T will pay G an amount on December 31, 2020 equal to the 
fair market value of 100 shares of T common stock on that date, but 
only if G continues to provide substantial services to T (so that 
the RSU is subject to a substantial risk of forfeiture) through 
December 31, 2020. G remains employed by T through December 31, 
2020, at which time the fair market value of a share of the stock is 
$219, and T pays G $21,900 ($219 x 100).
    (ii) Pursuant to paragraph (d)(5)(iii) of this section, 
remuneration from the payment under the RSUs is attributed on a 
daily pro rata basis to services performed by G over the period 
beginning on the date the RSUs are granted and ending on the date 
the remuneration is paid or made available, excluding any days on 
which G is not a service provider of T. Therefore, the $21,900 in 
remuneration is attributed over the 1,095 days beginning on January 
1, 2018 and ending on December 31, 2020 (365 days per year for the 
2018, 2019, and 2020 taxable years), so that $20 ($21,900 divided by 
1,095) is attributed to each calendar day in this period, and $7,300 
(365 days x $20) is attributed to service performed by G in each of 
T's 2018, 2019, and 2020 taxable years.
    Example 10 (Involuntary separation pay).  (i) H is an applicable 
individual of corporation S. On January 1, 2015, H and S enter into 
an employment contract providing that S will make two payments of 
$150,000 each to H if H has an involuntary separation from service. 
Under the terms of the contract, the first payment is due on January 
1 following the involuntary separation from service, and the second 
payment is due on January 1 of the following year. On December 31, 
2016, H has an involuntary separation from service. S pays H 
$150,000 on January 1, 2017 and $150,000 on January 1, 2018.
    (ii) Pursuant to paragraph (d)(6) of this section, involuntary 
separation pay may be attributed to services performed by H in the 
taxable year of S in which the involuntary separation from service 
occurs. Alternatively, involuntary separation pay may be attributed 
to services performed by H on a daily pro rata basis beginning on 
the date H obtains a right to the involuntary separation pay and 
ending on the date of the involuntary separation from service. The 
entire $300,000 amount, including both $150,000 payments, must be 
attributed using the same method. Therefore, the entire $300,000 
amount (comprised of two $150,000 payments) may be attributed to 
services performed by H in S's 2016 taxable year, which is the 
taxable year in which the involuntary separation from service 
occurs. Alternatively, the two $150,000 payments may be attributable 
to the period beginning on January 1, 2015 and ending December 31, 
2016, so that $410.96 ($300,000/(365 x 2)) is attributed to each day 
of S's 2015 and 2016 taxable years, and $150,000 ($410.96 x 365) is 
attributed to services performed by H in each of S's 2015 and 2016 
taxable years.
    Example 11 (Reimbursement after termination of services). (i) I 
is an applicable individual of corporation R. On January 1, 2018, I 
enters into an agreement with R under which R will reimburse I's 
country club dues for two years following I's separation from 
service. On December 31, 2020, I ceases to be a service provider of 
R. I pays $50,000 in country club dues on January 1, 2021 and 
$50,000 on January 2, 2022. Pursuant to the agreement, R reimburses 
I $50,000 for the country club dues in 2021and $50,000 in 2022.

    (ii) Pursuant to paragraph (d)(7) of this section, remuneration 
provided in the form of a reimbursement or in-kind benefit after I 
ceases to be a service provider of R is attributed to services 
provided by I in R's taxable year in which I ceases to be an 
officer, director, or employee of R and ceases performing services 
for, or on behalf of, R. Therefore, $100,000 is attributed to 
services performed in R's 2020 taxable year.
    (10) Certain deferred deduction remuneration subject to a 
substantial risk of forfeiture. If remuneration is attributable in 
accordance with paragraph (d)(2) (legally binding right), (d)(3) 
(account balance plan), or (d)(4) (nonaccount balance plan) of this 
section to services performed in a period that includes two or more 
taxable years of a covered health insurance provider during which 
the remuneration is subject to a substantial risk of forfeiture, 
that remuneration must be attributed using a two-step process. 
First, the remuneration must be attributed to the taxable years of 
the covered health insurance provider in accordance with paragraph 
(d)(2), (3), or (4) of this section, as

[[Page 19969]]

applicable. Second, the remuneration attributed to the period during 
which the remuneration is subject to a substantial risk of 
forfeiture (the vesting period) must be reattributed on a daily pro 
rata basis over that period beginning on the date that the 
applicable individual obtains a legally binding right to the 
remuneration and ending on the date that the substantial risk of 
forfeiture lapses. If a vesting period ends on a day other than the 
last day of the covered health insurance provider's taxable year, 
the remuneration attributable to that taxable year under the first 
step of the attribution process is divided between the portion of 
the taxable year that includes the vesting period and the portion of 
the taxable year that does not include the vesting period. The 
amount attributed to the portion of the taxable year that includes 
the vesting period is equal to the total amount of remuneration that 
would be attributable to the taxable year under the first step of 
the attribution process, multiplied by a fraction, the numerator of 
which is the number of days during the taxable year that the amount 
is subject to a substantial risk of forfeiture and the denominator 
of which is the number of days in such taxable year. The remaining 
amount is attributed to the portion of the taxable year that does 
not include the vesting period and, therefore, is not reattributed 
under the second step of the attribution process. For purposes of 
this section, the date on which a substantial risk of forfeiture 
lapses is the date on which the substantial risk of forfeiture 
lapses for any reason, including the death, disability, or 
involuntary termination of employment of the applicable individual, 
or the discretionary action of a covered health insurance provider 
or any other person.
    (11) Examples. The following examples illustrate the principles 
of paragraph (d)(10) of this section. For purposes of these 
examples, each corporation has a taxable year that is the calendar 
year and is a covered health insurance provider for all relevant 
taxable years; deferred deduction remuneration is otherwise 
deductible in the taxable year in which it is paid, and amounts 
payable under nonaccount balance plans are not forfeitable upon the 
death of the applicable individual.

    Example 1 (Account balance plan subject to a substantial risk of 
forfeiture using the standard attribution method). (i) J is an 
applicable individual of corporation Q for all relevant taxable 
years. On January 1, 2016, J begins participating in a nonqualified 
deferred compensation plan that is an account balance plan. Under 
the terms of the plan, Q will pay J's account balance on January 1, 
2021, but only if J continues to provide substantial services to Q 
through December 31, 2018 (so that the amount credited to J's 
account is subject to a substantial risk of forfeiture through that 
date). Q credits $10,000 to J's account annually for five years on 
January 1 of each year beginning on January 1, 2016. The account 
earns interest at a fixed rate of five percent per year, compounded 
annually, which solely for the purposes of this example, is assumed 
to be a reasonable rate of interest. Therefore, J's account balance 
is $10,500 ($10,000 + ($10,000 x 5%)) on December 31, 2016; $21,525 
($10,500 + $10,000 + ($20,500 x 5%)) on December 31, 2017; $33,101 
($21,525 + $10,000 + ($31,525 x 5%)) on December 31, 2018; $45,256 
($33,101 + $10,000 + ($43,101 x 5%)) on December 31, 2019; and 
$58,019 ($45,256 + $10,000 + ($55,256 x 5%)) on December 31, 2020. Q 
attributes increases and decreases in account balances under the 
plan using the standard attribution method described in paragraph 
(d)(3)(i) of this section.
    (ii) Under the standard attribution method for account balance 
plans described in paragraph (d)(3)(i) of this section, any 
increases in J's account balance as of the last day of Q's taxable 
year over the account balance as of the last day of the immediately 
preceding taxable year, increased by any payments made during the 
taxable year, is attributable to services provided by J in that 
taxable year. Accordingly, $10,500 of deferred deduction 
remuneration is initially attributable to services performed by J in 
Q's 2016 taxable year (the difference between the $10,500 account 
balance on December 31, 2016 and the zero account balance on 
December 31, 2015); $11,025 of deferred deduction remuneration is 
initially attributable to services performed by J in Q's 2017 
taxable year (the difference between the $21,525 account balance on 
December 31, 2017 and the $10,500 account balance on December 31, 
2016); $11,576 of deferred deduction remuneration is initially 
attributable to services performed by J in Q's 2018 taxable year 
(the difference between the $33,101 account balance on December 31, 
2018 and the $21,525 account balance on December 31, 2017); $12,155 
of deferred deduction remuneration is attributable to services 
performed by J in Q's 2019 taxable year (the difference between the 
$45,256 account balance on December 31, 2019 and the $33,101 account 
balance on December 31, 2018); and $12,763 of deferred deduction 
remuneration is attributable to services performed by J in Q's 2020 
taxable year (the difference between the $58,019 account balance on 
December 31, 2020 and the $45,256 account balance on December 31, 
2018).
    (iii) Under the attribution method described in paragraph 
(d)(10) of this section, deferred deduction remuneration that is 
attributable to services performed in a period that includes two or 
more taxable years of Q during which the deferred deduction 
remuneration is subject to a substantial risk of forfeiture must be 
reattributed on a daily pro rata basis over the period beginning on 
the date that J obtains a legally binding right to the remuneration 
and ending on the date that the substantial risk of forfeiture 
lapses. Therefore, $33,101 ($10,500 + $11,025 + $11,576) is 
reattributed on a daily pro rata basis over the period beginning on 
January 1, 2016, and ending on December 31, 2018, and $11,034 is 
attributed to each of Q's 2016, 2017, and 2018 taxable years.
    Example 2 (Account balance plan subject to a substantial risk of 
forfeiture using the alternative attribution method). (i) The facts 
are the same as in Example 1, except that Q allocates earnings and 
losses using the alternative attribution method described in 
paragraph (d)(3)(ii) of this section.
    (ii) Under the alternative attribution method for account 
balance plans described in paragraph (d)(3)(ii) of this section, 
earnings and losses on a principal addition are attributed to the 
same disqualified taxable year of Q to which the principal addition 
is attributed. Therefore, the amount initially attributable to Q's 
2016 taxable year is $12,763 (the $10,000 principal addition in 2016 
at five percent interest for five years); the amount initially 
attributable to Q's 2017 taxable year is $12,155 (the $10,000 
principal addition in 2017 at five percent interest for four years); 
the amount initially attributable to Q's 2018 taxable year is 
$11,576 (the $10,000 principal addition in 2018 at five percent 
interest for three years); the amount attributable to Q's 2019 
taxable year is $11,025 (the $10,000 principal addition in 2019 at 
five percent interest for two years), and the amount attributable to 
Q's 2020 taxable year is $10,500 (the $10,000 principal addition in 
2020 at five percent interest for one year).
    (iii) Under the attribution method described in paragraph 
(d)(10) of this section, deferred deduction remuneration that is 
attributable to two or more taxable years of Q during which the 
deferred deduction remuneration is subject to a substantial risk of 
forfeiture must be reattributed on a daily pro rata basis to that 
period beginning on the date that J obtains a legally binding right 
to the remuneration and ending on the date that the substantial risk 
of forfeiture lapses. Therefore, $36,494 ($12,763 + $12,155 + 
$11,576) is reattributed on a daily pro rata basis over the period 
beginning on January 1, 2016, and ending on December 31, 2018, and 
$12,165 is attributed to each of Q's 2016, 2017, and 2018 taxable 
years.
    Example 3 (Nonaccount balance plan subject to a substantial risk 
of forfeiture). (i) K is an applicable individual of corporation J 
for all relevant taxable years. K begins employment with J on 
January 1, 2016 and begins participating in a nonqualified deferred 
compensation plan that is a defined benefit plan. Under the terms of 
the plan, J will pay K an amount equal to ten percent of K's highest 
annual salary multiplied by K's years of service as of K's 
separation from service, but only if K remains employed through 
December 31, 2020 (so that the right to the remuneration is subject 
to a substantial risk of forfeiture through that date). In 2016, K 
has annual salary of $275,000, which increases by $25,000 on January 
1 of each subsequent calendar year. K has a separation from service 
from J on December 31, 2025, and J pays $500,000 to K on January 1, 
2026 pursuant to the terms of the plan. J determines the present 
value of amounts to be paid under the plan using an interest rate of 
five percent for all years, which, solely for purposes of this 
example, is assumed to be a reasonable actuarial assumption.
    (ii) As of December 31, 2016, K has a right to a payment of 
$27,500 on January 1, 2026 ($275,000 x 10% x 1 years of service). 
The present value as of December 31, 2021, of a $27,500 payment to 
be made on January 1, 2026, is $17,727. Therefore, the remuneration 
initially attributable to services performed by K in J's 2021 
taxable year is $17,727 ($17,727-$0).

[[Page 19970]]

    (iii) As of December 31, 2017, K has a right to a payment of 
$60,000 on January 1, 2026 ($300,000 x 10% x 2 years of service). 
The present value as of December 31, 2021, of a $60,000 payment to 
be made on January 1, 2026, is $40,610. Therefore, the remuneration 
initially attributable to services performed by K in J's 2021 
taxable year is $22,884 ($40,610-$17,727).
    (iv) As of December 31, 2018, K has a right to a payment of 
$97,500 on January 1, 2026 ($325,000 x 10% x 3 years of service). 
The present value as of December 31, 2021, of a $97,500 payment to 
be made on January 1, 2026, is $69,291. Therefore, the remuneration 
initially attributable to services performed by K in J's 2021 
taxable year is $28,681 ($69,291-$40,610).
    (v) As of December 31, 2019, K has a right to a payment of 
$140,000 on January 1, 2026 ($350,000 x 10% x 4 years of service). 
The present value as of December 31, 2021, of a $140,000 payment to 
be made on January 1, 2026, is $104,470. Therefore, the remuneration 
initially attributable to services performed by K in J's 2021 
taxable year is $35,179 ($104,470-$69,291).
    (vi) As of December 31, 2020, K has a right to a payment of 
$187,500 on January 1, 2026 ($375,000 x 10% x 5 years of service). 
The present value as of December 31, 2021, of a $187,500 payment to 
be made on January 1, 2026, is $146,911. Therefore, the remuneration 
initially attributable to services performed by K in J's 2021 
taxable year is $42,441 ($146,911-$104,470).
    (vii) As of December 31, 2021, K has a right to a payment of 
$240,000 on January 1, 2026 ($400,000 x 10% x 6 years of service). 
The present value as of December 31, 2021, of a $240,000 payment to 
be made on January 1, 2026, is $197,449. Therefore, the remuneration 
attributable to services performed by K in J's 2021 taxable year is 
$50,537 ($197,449-$146,911).
    (viii) As of December 31, 2022, K has a right to a $297,500 
payment on January 1, 2026 ($425,000 x 10% x 7 years of service). 
The present value as of December 31, 2022, of a $297,500 payment to 
be made on January 1, 2026, is $256,992. Therefore, the remuneration 
attributable to services performed by K in J's 2022 taxable year is 
$59,543 ($256,992-$197,449).
    (ix) As of December 31, 2023, K has a right to a $360,000 
payment on January 1, 2026 ($450,000 x 10% x 8 years of service). 
The present value as of December 31, 2023 of a $360,000 payment to 
be made on January 1, 2026 is $326,532. Therefore, the remuneration 
attributable to services performed by K in J's 2023 taxable year is 
$69,539 ($326,531-$256,992).
    (x) As of December 31, 2024, K has a right to a $427,500 payment 
on January 1, 2026 ($475,000 x 10% x 9 years of service). The 
present value as of December 31, 2024 of a $427,500 payment to be 
made on January 1, 2026 is $407,143. Therefore, the remuneration 
attributable to services performed by K in J's 2024 taxable year is 
$80,612 ($407,143-$326,531).
    (xi) As of December 31, 2025, K has a right to a $500,000 
payment on January 1, 2026 ($500,000 x 10% x 10 years of service). 
The present value as of December 31, 2025 of a $500,000 payment to 
be made on January 1, 2026 is $500,000. Therefore, the applicable 
individual remuneration attributable to services performed by K in 
J's 2025 taxable year is $92,857 ($500,000-$407,143).
    (xii) Under the attribution method described in paragraph 
(d)(10) of this section, deferred deduction remuneration that is 
attributable to two or more taxable years of a covered health 
insurance provider during which the deferred deduction remuneration 
is subject to a substantial risk of forfeiture must be reattributed 
on a daily pro rata basis to that period beginning on the date that 
the applicable individual obtains a legally binding right to the 
remuneration and ending on the date that the substantial risk of 
forfeiture lapses. Therefore, $146,911 ($17,727 + $22,884 + $28,681 
+ $35,179 + $42,441) is reattributed on a daily pro rata basis over 
the period beginning on January 1, 2016, and ending on December 31, 
2020, and, accordingly, $29,382 (($146,911/(5 x 365)) x 365) is 
attributed to services performed by K in each of L's 2016, 2017, 
2018, 2019, and 2020 taxable years.

    (e) Application of the deduction limitation-(1) To aggregate 
amounts. The $500,000 deduction limitation is applied to the aggregate 
amount of applicable individual remuneration and deferred deduction 
remuneration attributable to services performed by an applicable 
individual in a disqualified taxable year. The aggregate amount of 
applicable individual remuneration and deferred deduction remuneration 
attributable to services performed by an applicable individual in a 
disqualified taxable year that exceeds the $500,000 deduction 
limitation is not allowed as a deduction in any taxable year. 
Therefore, for example, if an applicable individual has $500,000 or 
more of applicable individual remuneration attributable to services 
provided to a covered health insurance provider in a disqualified 
taxable year, the amount of that applicable individual remuneration 
that exceeds $500,000 is not deductible in any taxable year, and no 
deferred deduction remuneration attributable to services performed by 
the applicable individual in that disqualified taxable year is 
deductible in any taxable year. However, if an applicable individual 
has applicable individual remuneration for a disqualified taxable year 
that is less than $500,000 and deferred deduction remuneration 
attributable to services performed in the same disqualified taxable 
year that, when combined with the applicable individual remuneration 
for the year, is greater than $500,000, all of the applicable 
individual remuneration is deductible in that disqualified taxable 
year, but the amount of deferred deduction remuneration that is 
deductible in future taxable years is limited to the excess of $500,000 
over the amount of the applicable individual remuneration for that 
year.
    (2) Order of application and calculation of deduction limitation-
(i) In general. The deduction limitation with respect to any applicable 
individual for any disqualified taxable year is applied to applicable 
individual remuneration and deferred deduction remuneration 
attributable to services performed by that applicable individual in 
that disqualified taxable year at the time that the remuneration 
becomes otherwise deductible, and each time the deduction limitation is 
applied to an amount that is otherwise deductible, the deduction 
limitation is reduced (but not below zero) by the amount against which 
it is applied. Accordingly, the deduction limitation is applied first 
to an applicable individual's applicable individual remuneration 
attributable to services performed in a disqualified taxable year and 
is reduced (but not below zero) by the amount of the applicable 
individual remuneration against which it is applied. If the applicable 
individual also has an amount of deferred deduction remuneration 
attributable to services performed in that disqualified taxable year 
that becomes otherwise deductible in a subsequent taxable year, the 
deduction limitation, as reduced, is applied to that amount of deferred 
deduction remuneration in the first taxable year in which it becomes 
otherwise deductible. The deduction limitation is then further reduced 
(but not below zero) by the amount of the deferred deduction 
remuneration against which it is applied. If the applicable individual 
has an additional amount of deferred deduction remuneration 
attributable to services performed in the original disqualified taxable 
year that becomes otherwise deductible in a subsequent taxable year, 
the deduction limitation, as further reduced, is applied to that amount 
of deferred deduction remuneration in the taxable year in which it is 
otherwise deductible. This process continues for future taxable years 
in which deferred deduction remuneration attributable to services 
performed by the applicable individual in the original disqualified 
taxable year is otherwise deductible. No deduction is allowed in any 
taxable year for any applicable individual remuneration or deferred 
deduction remuneration attributable to services performed by an 
applicable individual in a disqualified taxable year to the extent that 
it exceeds the deduction limitation (as reduced, if applicable) for 
that disqualified taxable year at the time

[[Page 19971]]

the deduction limitation is applied to the remuneration.
    (ii) Application to payments--(A) In general. Any payment of 
deferred deduction remuneration may include remuneration that is 
attributable to services performed by an applicable individual in one 
or more earlier taxable years of a covered health insurance provider 
pursuant to paragraphs (d)(2) through (d)(8) and paragraph (d)(10) of 
this section. In that case, a separate deduction limitation applies to 
each portion of the payment that is attributed to services performed in 
a different disqualified taxable year. Any portion of a payment that is 
attributed to a taxable year that is a disqualified taxable year is 
deductible only to the extent that it does not exceed the deduction 
limit that applies with respect to the applicable individual for that 
disqualified taxable year, as reduced by the amount, if any, of 
applicable individual remuneration and deferred deduction remuneration 
attributable to services performed in that disqualified taxable year 
that was deductible in an earlier taxable year.
    (B) Application to series of payments. Under the rule described in 
paragraph (d)(1)(ii) of this section, amounts attributable to services 
performed by an applicable individual pursuant to paragraph (d)(3) or 
(4) of this section must be attributed to services performed by the 
applicable individual in the earliest year that the amount could be 
attributable under paragraph (d)(3) of (4) of this section, as 
applicable. Any portion of a payment that is attributed to services 
performed in a taxable year is treated as paid for all purposes under 
this section, including the calculation of future earnings and the 
attribution of other remuneration.
    (3) Examples. The following examples illustrate the rules of 
paragraphs (e)(1) and (e)(2) of this section. For purposes of these 
examples, each corporation has a taxable year that is the calendar year 
and is a covered health insurance provider for all relevant taxable 
years; deferred deduction remuneration is otherwise deductible in the 
taxable year in which it is paid, and amounts payable under nonaccount 
balance plans are not forfeitable upon the death of the applicable 
individual.

Example 1 (Lump-sum payment of deferred deduction remuneration 
attributable to a single taxable year).
     (i) L is an applicable individual of corporation O. During O's 
2015 taxable year, O pays L $550,000 in salary, which is applicable 
individual remuneration, and grants L a right to $50,000 of deferred 
deduction remuneration payable upon L's separation from service from O. 
L has a separation from service in 2020, at which time O pays L the 
$50,000 of deferred deduction remuneration attributable to services 
performed by L in O's 2015 taxable year.
    (ii) The $500,000 deduction limitation for 2015 is applied first to 
L's $550,000 of applicable individual remuneration for 2015. Because 
the $550,000 otherwise deductible by O in 2015 is greater than the 
deduction limitation, O may deduct only $500,000 of the applicable 
individual remuneration for 2015, and $50,000 of the $550,000 of 
applicable individual remuneration is not deductible for any taxable 
year. The deduction limitation for remuneration attributable to 
services provided by L in O's 2015 taxable year is then reduced to 
zero. Because the $50,000 in deferred deduction remuneration 
attributable to services performed by L in 2015 exceeds the reduced 
deduction limitation of zero, that $50,000 is not deductible for any 
taxable year.

Example 2 (Installment payments of deferred deduction remuneration 
attributable to a single taxable year). (i) M is an applicable 
individual of corporation N. During N's 2016 taxable year, N pays M 
$300,000 in salary, which is applicable individual remuneration, and 
grants M a right to $220,000 of deferred deduction remuneration payable 
on a fixed schedule beginning upon M's separation from service. The 
$220,000 is attributable to services provided by M in N's 2016 taxable 
year. M has a separation from service in 2020. In 2020, N pays M 
$400,000 in salary, which is applicable individual remuneration, and 
also pays M $120,000 of deferred deduction remuneration that is 
attributable to services performed in N's 2016 taxable year. In 2021, N 
pays M the remaining $100,000 of deferred deduction remuneration 
attributable to services performed by M in N's 2016 taxable year.
    (ii) The $500,000 deduction limitation for 2016 is applied first to 
M's $300,000 of applicable individual remuneration for 2016. Because 
the deduction limitation is greater than the applicable individual 
remuneration, N may deduct the entire $300,000 of applicable individual 
remuneration paid in 2016. The $500,000 deduction limitation is then 
reduced to $200,000 by the amount of the applicable individual 
remuneration ($500,000-$300,000). The reduced deduction limitation is 
applied to M's $120,000 of deferred deduction remuneration attributable 
to services performed by M in N's 2016 taxable year that is paid in 
2020. Because the reduced deduction limitation of $200,000 is greater 
than the $120,000 of deferred deduction remuneration, for N's 2020 
taxable year, N may deduct the entire $120,000 of deferred deduction 
remuneration paid in 2020. The $200,000 deduction limitation is reduced 
to $80,000 by the $120,000 in deferred deduction remuneration against 
which it was applied ($200,000-$120,000). The reduced deduction 
limitation of $80,000 is then applied to the remaining $100,000 payment 
of deferred deduction remuneration attributable to services performed 
by M in N's 2016 taxable year. Because the $100,000 in deferred 
deduction remuneration otherwise deductible by N for 2021 exceeds the 
reduced deduction limitation of $80,000, N may deduct only $80,000 of 
the deferred deduction remuneration for the 2021 taxable year, and 
$20,000 of the $100,000 payment is not deductible by N for any taxable 
year.
    Example 3 (Lump-sum payment attributable to multiple years from 
an account balance plan using the standard attribution method).  (i) 
N is an applicable individual of corporation M for all relevant 
taxable years. On January 1, 2013, N begins participating in a 
nonqualified deferred compensation plan sponsored by M that is an 
account balance plan. Under the plan, all amounts are fully vested 
at all times. The balances in N's account (including principal 
additions and earnings) are $50,000 on December 31, 2013, $100,000 
on December 31, 2014, and $200,000 on December 2015. N's applicable 
individual remuneration from M is $425,000 for 2013, $450,000 for 
2014, and $500,000 for 2015. On January 1, 2016, in accordance with 
the plan terms, M pays $200,000 to N, which is a payment of N's 
entire account balance under the plan.
    (ii) To determine the extent to which M is entitled to a 
deduction for any portion of the $200,000 payment under the plan, 
the payment must first be attributed to services performed by N in 
M's taxable years in accordance with the attribution rules set forth 
in paragraph (d) of this section. Under the standard attribution 
method for account balance plans in paragraph (d)(3)(i) of this 
section, remuneration under an account balance plan is attributed to 
services performed by N in M's taxable years in an amount equal to 
the increase (or decrease) in the account balance as of the last day 
of M's taxable year over the account balance as of the last day of 
the immediately preceding taxable year, increased by any payments 
made during that year. Therefore, N's remuneration under the account 
balance plan is attributed to services performed by N in M's taxable 
years as follows: $50,000 ($50,000-$0) in 2013, $50,000 ($100,000-
$50,000) in 2014, and $100,000 ($200,000-$100,000) in 2015.
    (iii) Under the rules in paragraphs (d)(1)(ii) and (e)(2)(ii)(B) 
of this section, the January 1, 2016 payment of $200,000 is deemed a 
payment of remuneration attributed to services performed by N in the 
earliest year that the amount could be attributed under

[[Page 19972]]

paragraph (d)(3)(i) of this section. M's first taxable year to which 
any portion of the payment could be attributed is M's 2013 taxable 
year. Accordingly, $50,000 of the $200,000 payment is attributed to 
services performed by N in M's 2013 taxable year. M's next earliest 
taxable year to which any portion of the payment could be attributed 
is M's 2014 taxable year. Accordingly, $50,000 of the $200,000 
payment is attributed to services performed by N in M's 2014 taxable 
year. M's next earliest disqualified taxable year to which any 
portion of the payment could be attributed is M's 2015 taxable year. 
Accordingly, the remaining $100,000 of the $200,000 payment is 
attributed to services performed by N in M's 2015 taxable year.
    (iv) The portion of the deferred deduction remuneration 
attributed to services performed in a disqualified taxable year 
under paragraph (d) of this section that exceeds the deduction 
limitation for that disqualified taxable year, as reduced through 
the date of payment, is not deductible in any taxable year. For M's 
2013 taxable year, the deduction limitation is reduced to $75,000 by 
the $425,000 of applicable individual remuneration for that year. 
Because $50,000 does not exceed that reduced deduction limitation, 
all $50,000 of the deferred deduction remuneration attributed to 
services performed by N in M's 2013 taxable year is deductible for 
2016, the year of payment. The deduction limitation for remuneration 
attributable to services performed by N that are attributable to 
2013 is then reduced to $25,000, and this reduced limitation is 
applied to any future payment of deferred deduction remuneration 
attributable to services performed by N in 2013. For M's 2014 
taxable year, the deduction limitation is reduced to $50,000 by N's 
$450,000 of applicable individual remuneration for that year. 
Because $50,000 does not exceed that reduced deduction limitation, 
all $50,000 of the deferred deduction remuneration attributed to M's 
2014 taxable year is deductible for 2016, the year of payment. The 
deduction limitation for remuneration attributable to services 
performed by N in 2014 is then reduced to zero, and this reduced 
limitation is applied to any future payment of deferred deduction 
remuneration attributable to services performed by N in 2014. For 
M's 2015 taxable year, the deduction limitation is reduced to zero 
during 2015 by N's $500,000 of applicable individual remuneration 
for that year. Because $100,000 exceeds the reduced limit of zero, 
the $100,000 of the deferred deduction remuneration attributed to 
services performed by N in M's 2015 taxable year is not deductible 
for the year of payment (or any other taxable year). As a result, 
$100,000 of the $200,000 payment ($50,000 + $50,000 + $0) is 
deductible by M for M's 2016 taxable year, and the remaining 
$100,000 is not deductible by M for any taxable year.
    Example 4 (Installment payments attributable to multiple taxable 
years from an account balance plan using the standard attribution 
method). (i) O is an applicable individual of corporation L for all 
relevant taxable years. On January 1, 2016, O begins participating 
in a nonqualified deferred compensation plan sponsored by L that is 
an account balance plan. Under the plan, all amounts are fully 
vested at all times. L credits principal additions to O's account 
each year, and credits earnings based on a predetermined actual 
investment within the meaning of Sec.  31.3121(v)(2)-1(d)(2)(i)(B). 
The balances in O's account (including principal additions and 
earnings) are $100,000 on December 31, 2016, $250,000 on December 
31, 2017, and $450,000 on December 2018. O's applicable individual 
remuneration from L is $500,000 for 2016, $300,000 for 2017, and 
$450,000 for 2018. On January 1, 2019, L pays O $400,000 in 
accordance with the plan terms. As a result of the payment, O's 
remaining account balance is $50,000 ($450,000 - $400,000). On 
December 31, 2019, O's account balance is increased to $200,000 by 
additional credits made during the year. O's applicable remuneration 
from L is $200,000 for 2019. On January 1, 2020, L pays O $200,000 
in accordance with the plan terms.
    (ii) To determine the extent to which L is entitled to a 
deduction for any portion of either of the payments under the plan, 
O's payments under the plan must first be attributed to services 
performed by O in L's taxable years in accordance with the 
attribution rules set forth in paragraph (d) of this section. Under 
the standard attribution method for account balance plans described 
in paragraph (d)(3)(i) of this section, remuneration is attributed 
to services performed by O in L's taxable years in an amount equal 
to the increase in O's account balance as of the last day of L's 
taxable year over the account balance as of the last day of the 
immediately preceding taxable year, increased by any payments made 
during that year. Therefore, O's deferred deduction remuneration 
under the plan is attributed to L's taxable years as follows: 
$100,000 ($100,000 - $0) in 2016, $150,000 ($250,000 - $100,000) in 
2017, $200,000 ($450,000 - $250,000) in 2018, and $150,000 ($200,000 
- $450,000 + $400,000) in 2019.
    (iii) Under the rules in paragraphs (d)(1)(ii) and (e)(2)(ii)(B) 
of this section, the January 1, 2019 payment of $400,000 is deemed a 
payment of remuneration attributed to services performed by O in the 
earliest taxable year that the amount could be attributed under 
paragraph (d)(3)(i) of this section. L's first taxable year to which 
any portion of the payment could be attributed is L's 2016 taxable 
year. Accordingly, $100,000 of the $400,000 payment is attributed to 
services performed by O in L's 2016 taxable year. L's next earliest 
taxable year to which any portion of the payment could be attributed 
is L's 2017 taxable year. Accordingly, $150,000 of the $400,000 
payment is attributed to services performed by O in L's 2017 taxable 
year. L's next earliest taxable year to which any portion of the 
payment could be attributed is L's 2018 taxable year. Accordingly, 
the remaining $150,000 of the $400,000 payment is attributed to 
services performed by O in L's 2018 taxable year. Because the 
portion of the $400,000 payment attributed to L's 2018 taxable year 
is less than the total deferred deduction remuneration attributed to 
L's 2018 taxable year, the excess deferred deduction remuneration 
($50,000) is treated as paid in a subsequent taxable year.
    (iv) The portion of the deferred deduction remuneration 
attributed to services performed in a disqualified taxable year 
under paragraph (d) of this section that exceeds the deduction 
limitation for that disqualified taxable year, as reduced, is not 
deductible for any taxable year. For L's 2016 taxable year, the 
deduction limitation is reduced to zero by the $500,000 of 
applicable individual remuneration for that year. Because $100,000 
exceeds the reduced deduction limitation of zero, the $100,000 of 
the deferred deduction remuneration is not deductible for L's 2019 
taxable year, the year of payment, or any other taxable year. For 
L's 2017 taxable year, the deduction limitation is reduced to 
$200,000 by the $300,000 of applicable individual remuneration for 
that year. Because $150,000 does not exceed that reduced deduction 
limitation, the $150,000 of the deferred deduction remuneration is 
deductible for 2019, the year of payment. The deduction limitation 
for remuneration attributable to services performed by O in 2017 is 
then reduced to $50,000, and this reduced limitation is applied to 
any future payment of deferred deduction remuneration attributable 
to services performed by O in 2017. For L's 2018 taxable year, the 
deduction limitation is reduced to $50,000 by the $450,000 of 
applicable individual remuneration for that year. Because the 
$150,000 of deferred deduction remuneration exceeds the reduced 
deduction limitation of $50,000, $100,000 of the $150,000 
attributable to services performed by O in L's 2018 taxable year is 
not deductible for L's 2019 taxable year, the year of payment, or 
any other taxable year. As a result, $200,000 of the $400,000 
payment ($0 + $150,000 + $50,000) is deductible by L for L's 2019 
taxable year, and the remaining $200,000 is not deductible by L for 
any taxable year.
    (v) Applying the rules in paragraphs (d)(1)(ii) and 
(e)(2)(ii)(B) of this section to the January 1, 2020 payment of 
$200,000, the payment is deemed a payment of deferred deduction 
remuneration attributed to services performed by O in the earliest 
taxable year that the amount could be attributed under paragraph 
(d)(3)(i) of this section. L's first taxable year to which any 
portion of the payment could be attributed is L's 2018 taxable year 
because all of the deferred deduction remuneration attributed to 
earlier taxable years was deemed paid as part of the January 1, 2019 
payment. Accordingly, $50,000 of the $200,000 payment is attributed 
to services performed by O in L's 2018 taxable year (because the 
remaining portion of the deferred deduction remuneration under the 
plan originally attributed to services performed by O in L's 2018 
taxable year was deemed paid as part of the January 1, 2019 
payment). L's next earliest taxable year to which any portion of the 
payment is attributed is L's 2019 taxable year. Accordingly, 
$150,000 of the $200,000 payment is attributed to services performed 
by O in L's 2019 taxable year.
    (vi) The portion of the deferred deduction remuneration 
attributed to a disqualified taxable year under paragraph (d) of 
this section that exceeds the deduction limitation

[[Page 19973]]

for that disqualified taxable year, as reduced, is not deductible 
for any taxable year. For L's 2018 taxable year, the deductible 
limitation is reduced to zero by the $450,000 of applicable 
individual remuneration for that year and the $50,000 of deferred 
deduction remuneration deducted in 2019. Because $50,000 exceeds the 
reduced deduction limitation of zero, $50,000 of the deferred 
deduction remuneration is not deductible for L's 2020 taxable year, 
the year of payment, or any other taxable year. For L's 2019 taxable 
year, the deduction limitation is not reduced because there is no 
applicable individual remuneration for that year. Because $150,000 
does not exceed the unreduced $500,000 limitation, the $150,000 of 
the deferred deduction remuneration is deductible for L's 2020 
taxable year, the year of payment. As a result, $150,000 of the 
$200,000 payment ($0 + $150,000) is deductible by L for L's 2020 
taxable year, and the remaining $50,000 is not deductible by L for 
any taxable year.
    Example 5 (Installment payments attributable to multiple taxable 
years from an account balance plan using the alternative attribution 
method for account balance plans). (i) The facts are the same as set 
forth in Example 4, paragraph (i), except as set forth in this 
paragraph (i). L uses the alternative method for attributing 
remuneration from an account balance plan. Principal additions under 
the plan are $50,000 in 2016 and 2017, $100,000 in 2018, and 
$125,000 in 2019. As of the January 1, 2019 initial payment date, 
earnings on the 2016, 2017, and 2018 are $125,000, $75,000, and 
$50,000 respectively.
    (ii) To determine the extent to which L is entitled to a 
deduction for any portion of either payment under the plan, the 
payments to O under the plan must first be attributed to services 
performed by O in F's taxable years in accordance with the 
attribution rules set forth in paragraph (d) of this section. Under 
the alternative attribution method for account balance plans in 
paragraph (d)(3)(ii) of this section, the amount of remuneration 
under an account balance plan attributed to services performed in a 
taxable year is equal to the sum of the principal additions credited 
to the plan for that taxable year plus (or minus) the earnings (or 
losses) credited on those principal additions.
    (iii) Under the rule in paragraphs (d)(1)(ii) and (e)(2)(ii)(B) 
of this section, the $400,000 payment on January 1, 2019, is deemed 
to constitute a payment of remuneration attributed to services 
performed by O in the earliest taxable year that the amount could be 
attributed under paragraph (d)(3)(ii) of this section. L's first 
taxable year to which any portion of the payment could be attributed 
is L's 2016 taxable year. Accordingly, $175,000 of the $400,000 
payment is attributed to services performed by O in L's 2016 taxable 
year. The next earliest taxable year of L to which any portion of 
the payment could be attributed is L's 2017 taxable year. 
Accordingly, $125,000 of the $400,000 payment is attributed to 
services performed by O in L's 2017 taxable year. L's next earliest 
taxable year to which any portion of the payment could be attributed 
is L's 2018 taxable year. Accordingly, the remaining $100,000 of the 
$400,000 payment is attributed to services performed by O in L's 
2018 taxable year. Because the portion of the $400,000 payment 
attributed to L's 2018 taxable year is less than the total deferred 
deduction remuneration attributable to services performed by O in 
L's 2018 taxable year, the excess deferred deduction remuneration 
($50,000) is treated as paid in a subsequent taxable year.
    (iv) The portion of the deferred deduction remuneration 
attributable to services performed in a disqualified taxable year 
under paragraph (d) of this section that exceeds the deduction 
limitation for that disqualified taxable year, as reduced, is not 
deductible for any taxable year. For L's 2016 taxable year, the 
deduction limitation is reduced to zero by the $500,000 of 
applicable individual remuneration for that year. Because $175,000 
exceeds the reduced deduction limitation of zero, the $175,000 is 
not deductible for L's 2019 taxable year, the year of payment, or 
any other taxable year. For L's 2017 taxable year, the deduction 
limitation is reduced to $200,000 by the $300,000 of applicable 
individual remuneration for that year. Because $125,000 does not 
exceed the reduced deduction limitation, the $125,000 payment is 
deductible for 2019. For L's 2018 taxable year, the deduction 
limitation is reduced to $50,000 by the $450,000 of applicable 
individual remuneration for that year. Because $100,000 exceeds the 
reduced limitation of $50,000, $50,000 of the $100,000 attributable 
to L's 2018 taxable year is not deductible for 2019, the year of 
payment, or any other taxable year. As a result, $175,000 of the 
$400,000 payment ($0 + $125,000 + $50,000) is deductible by L for 
L's 2019 taxable year, and the remaining $225,000 is not deductible 
by L for any taxable year.
    (v) Earnings through January 1, 2020 on the excess deferred 
deduction remuneration attributable to L's 2018 taxable year 
($50,000) that was not paid as part of the January 1, 2019 payment 
are $10,000. Earnings through January 1, 2020 on the $100,000 in 
principal credited to O's account on January 1, 2019 are $15,000. 
Therefore, as of January 1, 2020, O's remaining deferred deduction 
remuneration under the plan is attributed to L's taxable years as 
follows: $60,000 ($50,000 + $10,000) to 2018 and $140,000 ($125,000 
+ $15,000) to 2019. Applying the rules in paragraphs (d)(1)(ii) and 
(e)(2)(ii)(B) to the January 1, 2020 payment of $200,000, the 
payment is deemed a payment of deferred deduction remuneration 
attributed to services performed by O in the earliest taxable year 
that the amount could be attributed under paragraph (d)(3)(ii) of 
this section. L's first taxable year to which any portion of the 
payment could be attributed is L's 2018 taxable year because all of 
the deferred deduction remuneration attributed to earlier taxable 
years was deemed paid as part of the January 1, 2019 payment. 
Accordingly, $60,000 of the $200,000 payment is attributed to 
services performed by O in L's 2018 taxable year. L's next taxable 
earliest taxable year to which any portion of the payment could be 
attributed is F's 2019 taxable year. Accordingly, $140,000 of the 
$200,000 payment is attributed to services performed by O in L's 
2019 taxable year.
    (vi) The portion of the deferred deduction remuneration 
attributed to a disqualified taxable year under paragraph (d) of 
this section that exceeds the deduction limitation for that 
disqualified taxable year, as reduced, is not deductible for any 
taxable year. For L's 2018 taxable year, the deductible limitation 
is reduced to zero by the $450,000 of applicable individual 
remuneration for that year and the payment of $50,000 of deferred 
deduction remuneration attributable to that year. Because $60,000 
exceeds the reduced deduction limitation of zero, the $60,000 is not 
deductible for the year of payment (or any other taxable year). For 
L's 2019 taxable year, the deduction limitation is not reduced 
because there is no applicable individual remuneration for that 
year. Because $140,000 does not exceed the unreduced $500,000 
limitation, the $140,000 is deductible for 2020, the year of 
payment. As a result, $140,000 of the $200,000 payment ($0 + 
$140,000) is deductible for L's 2020 taxable year, and the remaining 
$60,000 is not deductible by L for any taxable year.
    (4) Application of deduction limitation to aggregated groups of 
covered health insurance providers--(i) In general. The total combined 
deduction for applicable individual remuneration and deferred deduction 
remuneration attributable to services performed by an applicable 
individual in a disqualified taxable year allowed for all members of an 
aggregated group that are treated as covered health insurance providers 
for any taxable year is limited to $500,000. Therefore, if two or more 
members of an aggregated group that are treated as covered health 
insurance providers may otherwise deduct applicable individual 
remuneration or deferred deduction remuneration attributable to 
services provided by an applicable individual in a disqualified taxable 
year, the applicable individual remuneration and deferred deduction 
remuneration otherwise deductible by all members of the aggregated 
group is combined, and the deduction limitation is applied to the total 
amount.
    (ii) Proration of deduction limitation. If the total amount of 
applicable individual remuneration or deferred deduction remuneration 
attributable to services performed by an applicable individual in a 
disqualified taxable year that is otherwise deductible by two or more 
members of an aggregated group in any taxable year exceeds the $500,000 
deduction limitation (as reduced by previous applications to applicable 
individual remuneration or deferred deduction remuneration, if 
applicable), the deduction limitation is prorated based on the 
applicable individual remuneration and deferred deduction remuneration 
otherwise deductible by

[[Page 19974]]

the members of the aggregated group in the taxable year and allocated 
to each member of the aggregated group. The deduction limitation 
allocated to each member of the aggregated group is determined by 
multiplying the deduction limitation for the disqualified taxable year 
(as previously reduced, if applicable) by a ratio, the numerator of 
which is the applicable individual remuneration and deferred deduction 
remuneration otherwise deductible by that member in that taxable year 
that is attributable to services performed by the applicable individual 
in the disqualified taxable year, and the denominator of which is the 
total applicable individual remuneration and deferred deduction 
remuneration otherwise deductible by all members of the aggregated 
group in that taxable year that is attributable to services performed 
by the applicable individual in the disqualified taxable year. The 
amount of applicable individual remuneration or deferred deduction 
remuneration otherwise deductible by a member of the aggregated group 
in excess of the portion of the deduction limitation allocated to that 
member is not deductible in any taxable year.
    (5) Examples. The following examples illustrate the rules of 
paragraph (e)(4) of this section. For purposes of these examples, each 
corporation has a taxable year that is the calendar year and is a 
covered health insurance provider for all relevant taxable years, and 
deferred deduction remuneration is otherwise deductible by the covered 
health insurance provider in the taxable year in which it is paid.
    Example 1. (i) Corporations I, J, and K are members of the same 
aggregated group under paragraph (b)(3) of this section. In 2016, C 
is an employee of, and performs services for, I, J, and K. C's total 
applicable individual remuneration for 2016 is $1,500,000, which 
consists of $750,000 of applicable individual remuneration for 
services provided to K; $450,000 of applicable individual 
remuneration for services provided to J; and $300,000 of applicable 
individual remuneration for services to I.
    (ii) Because I, J, and K are members of the same aggregated 
group, the applicable individual remuneration otherwise deductible 
by them is aggregated for purposes of applying the deduction 
limitation. Further, because the aggregate applicable individual 
remuneration otherwise deductible by I, J, and K for 2016 exceeds 
the deduction limitation for C for that taxable year, the deduction 
limitation is prorated and allocated to the members of the 
aggregated group in proportion to the applicable individual 
remuneration otherwise deductible by each member of the aggregated 
group for that taxable year. Therefore, the deduction limitation 
that applies to the applicable individual remuneration otherwise 
deductible by K is $250,000 ($500,000 x ($750,000/$1,500,000)); the 
deduction limitation that applies to the applicable individual 
remuneration otherwise deductible by J is $150,000 ($500,000 x 
($450,000/$1,500,000)); and the deduction limitation that applies to 
applicable individual remuneration otherwise deductible by I is 
$100,000 ($500,000 x ($300,000/$1,500,000)). Therefore, for the 2016 
taxable year, K may not deduct $500,000 of the $750,000 of 
applicable individual remuneration paid to C ($750,000 - $250,000); 
J may not deduct $300,000 of the $450,000 of applicable individual 
remuneration paid to C ($450,000 - $150,000); and I may not deduct 
$200,000 of the $300,000 of applicable individual remuneration paid 
to C ($300,000 - $100,000).
    Example 2. (i) The facts are the same as Example 1, except that 
C's total applicable individual remuneration for 2016 is $400,000, 
which consists of $75,000 for services provided to K; $150,000 for 
services provided to J; and $175,000 for services provided to I. In 
addition, C becomes entitled to $60,000 of deferred deduction 
remuneration attributable to services provided to K in 2016, which 
is payable on April 1, 2018, and $75,000 of deferred deduction 
remuneration attributable to services provided to J in 2016, which 
is payable on April 1, 2019.
    (ii) Because C's total applicable individual remuneration of 
$400,000 for 2016 for services provided to K, J, and I does not 
exceed the $500,000 limitation, K, J, and I may deduct $75,000, 
$150,000, and $175,000, respectively, for 2016. The deduction 
limitation is then reduced to $100,000 by the total applicable 
individual remuneration deductible by all members of the aggregated 
group ($500,000 - $400,000). The deduction limitation, as reduced, 
is then applied to any deferred deduction remuneration attributable 
to services provided by C in 2016 in the first subsequent taxable 
year that it becomes deductible, which is the $60,000 payment made 
on April 1, 2018. Because the $60,000 of deferred deduction 
remuneration otherwise deductible by K does not exceed the $100,000 
deduction limitation, K may deduct the entire $60,000 for its 2018 
taxable year. The $100,000 deduction limitation is then reduced by 
the $60,000 of deferred deduction remuneration deductible by K for 
2018, and the reduced deduction limitation of $40,000 ($100,000 - 
$60,000) is applied to the $75,000 of deferred deduction 
remuneration that is otherwise deductible for 2019. Because the 
deferred deduction remuneration of $75,000 otherwise deductible by J 
exceeds the reduced deduction limitation of $40,000, J may deduct 
only $40,000, and the remaining $35,000 ($75,000 - $40,000) is not 
deductible by J for that taxable year or any other taxable year.
    Example 3. (i) The facts are the same as Example 2, except that 
C's deferred deduction remuneration of $75,000 attributable to 
services performed by C in J's 2016 taxable year is payable on July 
1, 2018.
    (ii) The results are the same as Example 2, except that the 
reduced deduction limitation of $100,000 is prorated between K and J 
in proportion to the deferred deduction remuneration otherwise 
deductible by them for 2018. Accordingly, $44,444 of the remaining 
deduction limitation is allocated to K ($100,000 x ($60,000/
$135,000)), and $55,556 of the remaining deduction limitation is 
allocated to J ($100,000 x ($75,000/$135,000)). Because the $60,000 
of deferred deduction remuneration otherwise deductible by K exceeds 
the $44,444 deduction limitation applied to that remuneration, K may 
deduct only $44,444 of the $60,000 payment, and $15,556 may not be 
deducted by K for any taxable year. Similarly, because the $75,000 
of deferred deduction remuneration otherwise deductible by J exceeds 
the $55,556 deduction limitation applied to that remuneration, J may 
deduct only $55,556 of the $75,000 payment, and $19,444 may not be 
deducted by J for that taxable year or any other taxable year.

    (f) Corporate transactions--(1) Treatment as a covered health 
insurance provider in connection with a corporate transaction--(i) In 
general. Except as otherwise provided in this paragraph (f), a person 
that participates in a corporate transaction is a covered health 
insurance provider for the taxable year in which the corporate 
transaction occurs and any subsequent taxable year if it would 
otherwise be a covered health insurance provider under paragraph (b)(4) 
of this section for that taxable year. For example, if a member of an 
aggregated group purchases a health insurance issuer that is a covered 
health insurance provider (so that the health insurance issuer becomes 
a member of the aggregated group), each member of the acquiring 
aggregated group generally will be a covered health insurance provider 
for the taxable year in which the corporate transaction occurs and each 
subsequent taxable year in which the health insurance issuer continues 
to be a member of the group, unless the de minimis exception applies. 
For purposes of this paragraph (f), the term corporate transaction 
means a merger, acquisition of assets or stock, disposition, 
reorganization, consolidation, or separation, or any other transaction 
(including a purchase or sale of stock or other equity interest) 
resulting in a change in the composition of an aggregated group.
    (ii) Transition period relief for persons becoming covered health 
insurance providers solely as a result of a corporate transaction--(A) 
In general. Except as provided in paragraph (f)(1)(ii)(B) of this 
section, a person that is not a covered health insurance provider 
before a corporate transaction, but would (except for application of 
this paragraph (f)(1)(ii)(A)) become a covered health insurance 
provider solely as a

[[Page 19975]]

result of the corporate transaction, is not treated as a covered health 
insurance provider subject to the deduction limitation of section 
162(m)(6) in the taxable year of that person in which the corporate 
transaction occurs (the transition period).
    (B) Certain applicable individuals. The transition period relief 
described in paragraph (f)(1)(ii)(A) of this section does not apply 
with respect to the remuneration of any individual who is an applicable 
individual of a health insurance issuer that is a covered health 
insurance provider during its taxable year in which the corporate 
transaction occurs, even with respect to remuneration attributable to 
services performed by the applicable individual for a person that is 
eligible for the transition period relief described in paragraph 
(f)(1)(ii)(A) of this section. Therefore, each member of an acquiring 
aggregated group that would become a covered health insurance provider 
solely as a result of a corporate transaction, but is not treated as a 
covered health insurance provider under the transition period relief 
described in paragraph (f)(1)(ii)(A) of this section, is still subject 
to the deduction limitation of section 162(m)(6) for a taxable year 
during the transition period with respect to applicable individual 
remuneration and deferred deduction remuneration attributable to 
services performed by anyone who is an applicable individual of the 
acquired health insurance issuer that is a covered health insurance 
provider.
    (iii) Short taxable years--(A) Taxable year ending as a result of a 
corporate transaction. As a result of a corporate transaction, a 
covered health insurance provider's taxable year may end, resulting in 
a short taxable year. For example, the taxable year of the covered 
health insurance provider ends if it becomes, or ceases to be, a member 
of a consolidated group by reason of Sec.  1.1502-76(b)(1)(ii)(A)(1). A 
covered health insurance provider whose taxable year ends as a result 
of a corporate transaction is treated as a covered health insurance 
provider for that short taxable year if the covered health insurance 
provider is a covered health insurance provider within the meaning of 
paragraph (b)(4) of this section for the short taxable year that ends 
as a result of the corporate transaction, provided that, for purposes 
of this paragraph (f)(1)(iii)(A), the de minimis exception set forth in 
paragraph (b)(4)(iii)(A) of this section is available for that short 
taxable year only if it applied to the covered health insurance 
provider for the preceding taxable year.
    (B) Taxable year beginning as a result of a corporate transaction. 
As a result of a corporate transaction, a covered health insurance 
provider may begin a new taxable year. For example, if as a result of a 
corporate transaction, a health insurance issuer that is a covered 
health insurance provider joins a consolidated group within the meaning 
of Sec.  1.1502-1(h), or a covered health insurance provider ceases to 
be a member of an aggregated group as a result of a distribution to 
which section 355 applies, the covered health insurance provider begins 
a short taxable year. A health insurance issuer that is a covered 
health insurance provider whose taxable year begins as a result of a 
corporate transaction is treated as a covered health insurance provider 
for the taxable year that begins as a result of the corporate 
transaction if the covered health insurance provider is otherwise a 
covered health insurance provider within the meaning of paragraph 
(b)(4) of this section for the taxable year that begins as a result of 
a corporate transaction, even if it becomes a member of an acquiring 
aggregate group the other members of which are not treated as covered 
health insurance providers during that taxable year by reason of the 
transition period relief under paragraph (f)(1)(ii)(A) of this section, 
provided that, for purposes of this paragraph (f)(1)(iii)(B), the one-
year grace period set forth in paragraph (b)(4)(ii)(B) of this section 
is available for that short taxable year.
    (C) Deduction limitation not prorated for short taxable years. If a 
corporate transaction results in a short taxable year for a covered 
health insurance provider, the $500,000 deduction limitation for the 
short taxable year is neither prorated nor reduced. For example, if a 
corporate transaction results in a short taxable year of three months, 
the deduction limitation under section 162(m)(6) for that short taxable 
year is $500,000 (and is not reduced to $125,000).
    (2) Application to partnerships. The rules in paragraph (f) of this 
section apply by analogy to transactions involving entities treated as 
partnerships for purposes of federal taxation.
    (3) Examples. The following examples illustrate the principles of 
this paragraph (f). For purposes of these examples, each corporation 
has a taxable year that is the calendar year unless stated otherwise, 
and none of the corporations qualify for the de minimis exception under 
paragraph (b)(4)(iii) of this section.

    Example 1. (i) Corporation J merges with and into corporation H 
on June 30, 2015, such that H is the surviving entity. As a result 
of the merger, J's taxable year ends on June 30, 2015. For its 
taxable year ending June 30, 2015, J is a covered health insurance 
provider. For all taxable years before the taxable year of the 
merger, H is not a covered health insurance provider. However, 
solely as a result of the merger, H becomes a covered health 
insurance provider for its 2015 taxable year.
    (ii) Corporation J is a covered health insurance provider for 
its short taxable year ending June 30, 2015. Corporation H is not 
treated as a covered health insurance provider for its 2015 taxable 
year by reason of the transition period relief in paragraph 
(d)(1)(ii)(A) of this section. However, H will be a covered health 
insurance provider for its 2016 taxable year and all subsequent 
taxable years for which it is a covered health insurance provider 
under paragraph (b)(4) of this section.
    Example 2. (i) On January 1, 2016, corporations D, E, and F are 
members of a controlled group within the meaning of section 414(b). 
F is a health insurance issuer that is a covered health insurance 
provider under paragraph (b)(4)(i)(B) of this section. D and E are 
not health insurance issuers (but are treated as covered health 
insurance providers pursuant to paragraph (b)(4)(i)(C) and (D) of 
this section). F's taxable year is a fiscal year ending on September 
30. P is an applicable individual of F for all taxable years. On May 
1, 2016, a controlled group within the meaning of section 414(b) 
consisting of corporations C and B purchases all of the stock of 
corporation F, resulting in a controlled group within the meaning of 
section 414(b) consisting of corporations C, B, and F. C and B are 
not health insurance issuers. The C, B, and F controlled group is a 
consolidated group within the meaning of Sec.  1.1502-1(h). Thus, 
F's taxable year ends on May 1, 2016 by reason of Sec.  1.1502-
76(b)(1)(ii)(A)(1), and F becomes part of the C, B, and F 
consolidated group for the taxable year ending December 31, 2016.
    (ii) D and E are covered health insurance providers for the 
taxable year ending December 31, 2016 because they were in an 
aggregated group with F for a portion of their taxable year. 
Accordingly, D and E are subject to the deduction limitation under 
section 162(m)(6) for their taxable years ending December 31, 2016. 
C and B are not treated as covered health insurance providers for 
their taxable year ending December 31, 2016, by reason of the 
transition period relief of paragraph (d)(1)(ii)(A) of this section. 
F, however, is a covered health insurance provider for its taxable 
year ending May 1, 2016, and for its taxable year ending December 
31, 2016.
    (iii) P is an applicable individual whose remuneration is 
subject to the deduction limitation under section 162(m)(6) for F's 
short taxable year ending May 1, 2016. In addition, remuneration for 
services by P for C, B or F after May 1, 2016, during the taxable 
year of the consolidated group ending December 31, 2016, is subject 
to the deduction limitation under section 162(m)(6), even though C 
and B are not

[[Page 19976]]

treated as covered health insurance providers for their taxable year 
ending December 31, 2016 by reason of the transition period relief 
of paragraph (d)(1)(ii)(A) of this section.
    Example 3. (i) The same facts as Example 2, except that E is a 
health insurance issuer that is a covered health insurance provider 
under paragraph (b)(4) of this section, and F is not a health 
insurance issuer.
    (ii) F is a covered health insurance provider for its short 
taxable year ending May 1, 2016. However, because F is not a health 
insurance issuer that is a covered health insurance provider, F is 
not treated as a covered health insurance provider for its short, 
post-acquisition taxable year ending December 31, 2016, during which 
it is a member of the consolidated group comprised of C, B, and F.
    (iii) P is an applicable individual whose remuneration is 
subject to the deduction limitation under section 162(m)(6) and 
paragraph (c) of this section for F's short taxable year ending May 
1, 2016. However, because F is not a health insurance issuer, 
remuneration for P's services for C, B or F after May 1, 2016, 
during the taxable year of the consolidated group ending December 
31, 2016, are not subject to the deduction limitation under section 
162(m)(6).

    (g) Coordination--(1) Coordination with section 162(m)(1). If 
section 162(m)(1) and section 162(m)(6) would both otherwise apply with 
respect to the remuneration of an applicable individual, the deduction 
limitation under section 162(m)(6) applies without regard to section 
162(m)(1). For example, if an applicable individual is both a covered 
employee of a publicly held corporation (see sections 162(m)(2) and 
(3); Sec.  1.162-27) and an applicable individual within the meaning of 
paragraph (b)(7) of this section, remuneration earned by the applicable 
individual that is attributable to a disqualified taxable year of a 
covered health insurance provider is subject to the $500,000 deduction 
limitation under section 162(m)(6) with respect to such disqualified 
taxable year, without regard to section 162(m)(1).
    (2) Coordination with disallowed excess parachute payments--(i) In 
general. The $500,000 deduction limitation of section 162(m)(6) is 
reduced (but not below zero) by the amount (if any) that would have 
been included in the applicable individual remuneration or deferred 
deduction remuneration of the applicable individual for a taxable year 
but for being disallowed by reason of section 280G.
    (ii) Example. The following example illustrates the rule of this 
paragraph (g)(2).

    Example. Corporation A, a covered health insurance provider, 
pays $750,000 of applicable individual remuneration to P, an 
applicable individual, during A's disqualified taxable year ending 
December 31, 2016. Of the $750,000, $300,000 is an excess parachute 
payment as defined in section 280G(b)(1), the deduction for which is 
disallowed by reason of that section. The excess parachute payment 
reduces the $500,000 deduction limitation to $200,000 ($500,000--
$300,000). Therefore, A may deduct only $200,000 of the $750,000 in 
applicable individual remuneration, and $250,000 of the payment is 
not deductible by reason of section 162(m)(6).

    (h) Grandfathered amounts attributable to services performed in 
taxable years beginning before January 1, 2010--(1) In general. The 
section 162(m)(6) deduction limitation does not apply to remuneration 
attributable to services performed in taxable years of a covered health 
insurance provider beginning before January 1, 2010. For purposes of 
this paragraph (h), whether remuneration is attributable to services 
performed in a taxable year beginning before January 1, 2010, is 
determined by applying an attribution method in paragraph (h)(2) of 
this section.
    (2) Identification of services performed in taxable years beginning 
before January 1, 2010--(i) Account balance plans. Deferred deduction 
remuneration provided under an account balance plan (as defined in 
Sec.  1.409A-1(c)(2)(i)(A) and (B)) is attributable to services 
performed in a taxable year beginning before January 1, 2010 if it is 
attributable to services performed before that date under paragraph 
(d)(3) of this section, without regard to whether that remuneration is 
subject to a substantial risk of forfeiture on or after that date.
    (ii) Nonaccount balance plans. The amount of remuneration 
attributable to services performed in taxable years beginning before 
January 1, 2010 under a nonqualified deferred compensation plan that is 
a nonaccount balance plan (as defined in Sec.  1.409A-1(c)(2)(i)(C)), 
equals the present value of the remuneration to which the applicable 
individual would have been entitled under the plan if the applicable 
individual voluntarily terminated services without cause on the last 
day of the first taxable year of the covered health insurance provider 
beginning before January 1, 2010 and received a payment of the benefit 
available from the plan on the earliest possible date allowed under the 
plan to receive a payment of benefits following the termination of 
service, and received the benefit in the form with the maximum value. 
Notwithstanding the foregoing, for any subsequent taxable year of the 
covered health insurance provider, this amount may increase to equal 
the present value of the benefit the applicable individual actually 
becomes entitled to receive, in the form and at the time actually paid, 
determined under the terms of the plan (including applicable limits 
under the Code) as in effect on the last day of the first taxable year 
beginning before January 1, 2010 without regard to any further services 
rendered by the individual after that date or any other events 
affecting the amount of, or the entitlement to, benefits (other than 
the applicable individual's election with respect to the time or form 
of an available benefit). For purposes of calculating the present value 
of remuneration under this paragraph (h)(2)(ii), reasonable actuarial 
assumptions and methods, determined as of the date the remuneration is 
valued, must be used. The present value as of the last day of the first 
taxable year beginning before January 1, 2010 is determined without 
regard to whether the remuneration under the nonaccount balance is 
subject to a substantial risk of forfeiture on or after that date.
    (iii) Equity-based remuneration. For purposes of this section, all 
remuneration resulting from a stock option, stock appreciation right, 
restricted stock, or restricted stock unit and the right to any 
associated dividends or dividend equivalents (together, referred to as 
equity-based remuneration) granted before the first day of the taxable 
year of the covered health insurance provider beginning on or after 
January 1, 2010, is attributable to services performed in taxable years 
beginning before January 1, 2010, regardless of the date on which the 
equity-based remuneration is exercised (in the case of a stock option 
or SAR), the date on which the amounts due under the equity-based 
remuneration are paid or includible in income, or whether the equity-
based remuneration is subject to a substantial risk of forfeiture on or 
after the first day of the taxable year of the covered health insurance 
provider beginning on or after January 1, 2010. For example, 
appreciation in the value of restricted shares granted before the first 
day of the taxable year beginning on or after January 1, 2010 is 
treated as remuneration that is attributable to services performed in 
taxable years beginning before January 1, 2010, regardless of whether 
the shares are vested at that time.
    (i) Transition rules for certain deferred deduction remuneration--
(1) Transition rule for deferred deduction remuneration attributable to 
services performed in taxable years of the covered health insurance 
provider beginning after December 31, 2009 and before January 1, 2013. 
The deduction

[[Page 19977]]

limitation under section 162(m)(6) applies to deferred deduction 
remuneration attributable to services performed in a disqualified 
taxable year of a covered health insurance provider beginning after 
December 31, 2009 and before January 1, 2013, only if that remuneration 
is otherwise deductible in a disqualified taxable year of the covered 
health insurance provider beginning after December 31, 2012. However, 
if the deduction limitation applies to deferred deduction remuneration 
attributable to services performed by an applicable individual in a 
disqualified taxable year of a covered health insurance provider 
beginning after December 31, 2009 and before January 1, 2013, the 
deduction limitation is calculated as if it had been applied to the 
applicable individual's applicable individual remuneration and deferred 
deduction remuneration deductible in those taxable years.
    (2) Example. The following examples illustrate the principles of 
this paragraph (i). For purposes of these examples, each corporation 
has a taxable year that is the calendar year, and deferred deduction 
remuneration is otherwise deductible by the covered health insurance 
provider in the taxable year in which it is paid.
    Example 1. (i) Q is an applicable individual of corporation Z. 
Z's 2010, 2011, and 2012 taxable years are disqualified taxable 
years. Z's 2013, 2014, and 2015 taxable years are not disqualified 
taxable years. However, Z's 2016 taxable year and all subsequent 
taxable years are disqualified taxable years. Q receives $200,000 of 
applicable individual remuneration from Z for 2012, and becomes 
entitled to $800,000 of deferred deduction remuneration that is 
attributable to services performed by Q in 2012. Z pays Q $350,000 
of the deferred deduction remuneration in 2015, and the remaining 
$450,000 of the deferred deduction remuneration in 2016. These 
payments are otherwise deductible by Z in 2015 and 2016, 
respectively.
    (ii) Deferred deduction remuneration attributable to services 
performed by Q in Z's 2010, 2011, and 2012 taxable years that is 
otherwise deductible in Z's 2013, 2014, or 2015 taxable years is not 
subject to the deduction limitation under section 162(m)(6) by 
reason of the transition rule under paragraph (i)(1) of this 
section. However, deferred deduction remuneration attributable to 
services performed in Z's 2010, 2011, and 2012 taxable years that is 
otherwise deductible in a later taxable year that is a disqualified 
taxable year (in this case, Z's 2016 and subsequent taxable years) 
is subject to the deduction limitation under section 162(m)(6). 
Accordingly, the deduction limitation with respect to applicable 
individual remuneration and deferred deduction remuneration 
attributable to services performed by Q in 2012 is determined by 
reducing the $500,000 deduction limitation by the $200,000 of 
applicable individual remuneration paid to Q by Z for 2012 
($500,000-$200,000). Under the transition rule of paragraph (i)(1) 
of this section, no portion of the reduced deduction limitation of 
$300,000 for the 2012 taxable year is applied against the $350,000 
payment made in 2015, and accordingly, the deduction limitation is 
not reduced by the amount of that payment. The reduced deduction 
limitation is then applied to Q's $450,000 of deferred deduction 
remuneration attributable to services performed by Q in 2012 that is 
paid to Q and becomes otherwise deductible in 2016. Because the 
reduced deduction limitation of $300,000 is less than the $450,000 
otherwise deductible by Z in 2016, Z may deduct only $300,000 of the 
deferred deduction remuneration, and $150,000 of the $450,000 
payment is not deductible by Z in that taxable year or any taxable 
year.
    Example 2. (i) R is an applicable individual of corporation Y, 
which is a covered health insurance provider for all relevant 
taxable years. During 2010, Y pays R $400,000 in salary and grants R 
a right to $200,000 in deferred deduction remuneration payable on a 
fixed schedule in 2011, 2012, and 2013. Pursuant to the fixed 
schedule, Y pays R $50,000 of deferred deduction remuneration in 
2011, $50,000 of deferred deduction remuneration in 2012, and the 
remaining $100,000 of deferred deduction remuneration in 2013.
    (ii) Because the deduction limitation for deferred deduction 
remuneration under section 162(m)(6)(A)(ii) is effective for 
deferred deduction remuneration that is attributable to services 
performed by an applicable individual during any disqualified 
taxable year beginning after December 31, 2009 that would otherwise 
be deductible in a taxable year beginning after December 31, 2012, 
only the deferred deduction remuneration paid by Y in 2013 is 
subject to the deduction limitation. However, the limitation is 
applied as if section 162(m)(6) and paragraph (c)(2) of this section 
were effective for taxable years beginning after December 31, 2009 
and before January 1, 2013. Accordingly, the deduction limitation 
with respect to remuneration for services performed by R in 2010 is 
determined by reducing the $500,000 deduction limitation by the 
$400,000 of applicable individual remuneration paid to R for 2010 
($500,000-$400,000). The reduced deduction limitation of $100,000 is 
further reduced to zero by the $50,000 of deferred deduction 
remuneration attributable to services performed by R in Y's 2010 
taxable year that is deductible in each of 2011 and 2012 (($100,000-
$50,000-$50,000). Because the deduction limitation is reduced to 
zero, none of the $100,000 of deferred deduction remuneration 
attributable to services performed by R in Y's 2010 taxable year and 
paid to R in 2013 is deductible.

    (j) Effective/Applicability dates. These regulations apply to 
taxable years that begin after December 31, 2012, and end on or after 
April 2, 2013. These regulations are effective on publication of final 
regulations in the Federal Register.

Steven T. Miller,
Deputy Commissioner for Services and Enforcement.
[FR Doc. 2013-07533 Filed 4-1-13; 8:45 am]
BILLING CODE 4830-01-P