Oh last bit of confusion. I'm in the process of filling out my claim for Icelandair and their claims page has this disclaimer

Based on EC 261 - shouldn't they be paying 600EU for anything above 3 hours? Not 300 for 3 hours, and 600 for 4 hours?

They also have a disclaimer saying they may reduce compensation if the replacement flight arrives within 2 hours of the original flight's scheduled time. I didn't think they had the power to just declare that. Am I missing a detail in EC261?