You are really making a correction for the error in layer of air between you (assuming you are where the altimeter is) and the ground. If you need to know true altitude, you have to make a correction whenever the temperature is non-ISA, both above and below. But the one that kills you (quickest) is when the temperature is below ISA and you are close to the ground. In our company we may correct for any non ISA temperature but we HAVE to correct for temperatures equal to or less than ISA-15˚. When making corrections for flying over high terrain, technically only the distance between the surface and the altimeter needs correcting however I think most people would correct the entire distance between MSL and the altimeter - if for no other reason than you don't know the elevation of the surface we are flying over.
PM