Final Rule: Compensation Limit on CHIPs
Who: All officers, directors, employees and anyone providing services for, or on behalf of a “Covered Health Insurance Provider” (CHIP).
1. For taxable years starting with 2013, a company is classified as a CHIP if at least 25% of its premiums are from providing “minimum essential coverage” as defined by ACA.
2. For taxable years 2010-2012, a health insurance issuer is a CHIP if it receives any premiums from providing health insurance.
When: Any year after 2009 in which a company is a CHIP. “Interim Rules” apply from 2010 until “Final Regulations,” which apply to taxable years beginning on or after September 23, 2014.
What: The ACA has an individual compensation deductibility limit of $500,000 per year for any individual providing services to a CHIP. Individuals can be paid more, but the business can only deduct $500,000 as a business expense.
Executive Summary: A $500,000 deduction limit applies to the compensation of all individuals who provide services to a CHIP, not just the company’s executives. Exceptions are as follows:
Employers with Self-insured Plans and VEBAs – an employer (or VEBA) with a “self-insured medical reimbursement plan” will not be considered a CHIP.
De Minimis Exemption – a company will not be considered as a CHIP if its sales of minimum essential health insurance are less than 2% of the company’s aggregated gross revenues for the year. If a company is exempt under this provision, it will automatically continue to be exempt for the following year.
Reinsurance Premiums – premiums received under an indemnity reinsurance contract will not be treated as premiums received for providing health insurance. The reinsurance relationship must be a shared risk reimbursement relationship with the insurer. The insurer must have the contractual relationship with the covered individuals.
Stop-loss Coverage – premiums for stop-loss coverage are not considered as premiums received for providing health insurance. (This is subject to further review by Treasury, the Department of Labor, and H.H.S.).
Covered Individuals – Independent contractors will not be covered as employees of a CHIP, if they are providing significant services to two or more unrelated entities.
Corporate Transactions – An entity will not be considered a CHIP for the tax year in which a transaction resulted in an entity not otherwise a CHIP becoming a CHIP. However, the entity will be subject to the deduction limit in subsequent years.
The $500,000 limit applies to aggregate “applicable individual remuneration” and “deferred deduction remuneration.” The final ruling includes detailed rules on how to attribute remuneration to the correct tax year. In general, remuneration is considered the amounts legally binding with rights to the remuneration. Attribution rules are set for the following categories of compensation:
Account Based Plans Involuntary Separation Pay
Non-account balance plans Reimbursements
Equity Based Remuneration Split Dollar Life Insurance
(e.g. Stock options, restricted stock, partnerships)
Actions: If your company is considered to be a CHIP you will need to understand the added tax consequences to your company of employees with compensation above $500,000. You should check with your CFO and independent auditor to see if the above conditions apply or not. There may be some ways to adjust compensation to mitigate or minimize the added corporate taxes. If you are an employee of a CHIP with compensation above $500,000 you will want to check with senior management and/or corporate Human Resource to determine if your compensation is likely to be altered in light of the added taxes.
The information presented and contained within this article was submitted by Ronald E. Bachman, President & CEO of Healthcare Visions and Chairman of the IHC Editorial Advisory Board. This information is general information only, and does not, and is not intended to constitute legal advice. You should consult legal advisors to determine the laws and regulations applicable to your company. Any opinions expressed within this document are solely the opinion of the individual author.