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July 23, 2013

013-Issue 30—On April 1, 2013, the Internal Revenue Service issued proposed regulations providing guidance on the $500,000 deduction limitation for compensation paid by covered health insurance providers (CHIPs) to employees. Don't think you're a CHIP? Keep reading, as this net cast by the IRS is likely to snag some companies not in the health insurance industry.

Background

The proposed regulations have their roots in the Patient Protection and Affordable Care Act, which added Section 162(m)(6) to the Internal Revenue Code. The rationale behind the statute was that health insurance companies would realize substantial revenue growth as a result of the Act's individual mandate to obtain health insurance, and that such windfalls should not be used to enrich highly compensated employees of health insurance companies.

Although we've seen this coming for a while, 2013 is the first year in which CHIPs' deduction on employee compensation will be affected. While the proposed regulations share the same code section as the better-known rules that limit the deduction for executive compensation to $1 million, that is where the similarities end. There are significant differences in the coverage and application of the $500,000 deduction limitation for compensation paid by CHIPs to employees.

According to the statute and the proposed regulations, a CHIP is any health insurance issuer that receives at least 25 percent of its health insurance premiums from providing "minimum essential coverage." If one entity of an aggregated group is considered a CHIP, the parent and all members of the aggregated group are also considered CHIPs, unless a de minimis exception is satisfied. To meet the de minimis exception, premiums received related to providing "minimum essential coverage" must be less than 2 percent of the gross revenues of the aggregated group. CHIP status is determined on a year-by-year basis.

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