Author of 2015-17 replies to questions SEHI, S Corps, 2%ers
Sorry for the long thread title, just wanted to describe it as well as I could to garner some much needed attention to this specific issue (how the new ACA rules affect >2%ers in an S Corp with and without other non-shareholder employees).
I recently received a Word Doc from NCPE; probably the best provider of CPE for tax professionals in the nation (in my opinion, and no, I wasn't paid for the opinion). NCPE does much to reach out to the IRS for guidance on certain issues to probe the IRS so that we as tax professionals can operate under clear rules/guidelines. They did so recently by reaching out to the principal author of Notice 2015-17. Below you will find the Q/A session that went on between NCPE and the author; it is worth a read and it confirms what some of us have been thinking about this guidance that expired mid-way through last year.
Since I can't upload the Word document because it is greater than 19KB (seriously?), please see the entire document pasted below. If this is improper use of the forum, I do apologize; just delete my post. It might be easier for you guys to Copy and Paste this in a Word Doc yourselves so your eyes don't glaze over!!
Treatment of S Corporation Healthcare Arrangements for 2% Shareholder-Employees
The Internal Revenue Service has recently posted guidance on the issue of the 2% Shareholder-Employee of an S Corporation relating to how health care arrangements will be treated in respect of the Affordable Healthcare Act.
The healthcare arrangement through which an S corporation pays or reimburses premiums for individual health insurance covering a 2% shareholder, any 2% shareholder, (as defined in I.R.C § 1372(b)(2) is subject to market reforms of the Affordable Healthcare Act.
26 U.S. Code § 1372 - Partnership Rules to Apply for Fringe Benefit Purposes
(a) General Rule - For purposes of applying the provisions of this subtitle which relate to employee fringe benefits - -
(1) the S corporation shall be treated as a partnership, and
(2) any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership.
(b) 2-Percent Shareholder Defined
For purposes of this section, the term "2-percent shareholder" means any person who owns (or is considered as owning within the meaning of section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.
Additional guidance on the application of market reforms to 2% shareholder-employee health care arrangements is being contemplated by IRS. Until additional guidance is issued, and in any event through the end of 2015, the excise tax under I.R.C.
§ 4980D will not be assessed for any failure to satisfy the market reforms by a 2% shareholder-employee healthcare arrangement.
Unless and until additional guidance provides otherwise, taxpayers may continue to rely on Notice 2008-1, 208-2 I.R.B. 251, for all federal income and employment tax purposes for such arrangements.
When and if IRS provides further guidance, it is a regulatory provision that at least six months lead time be given taxpayers before the provision is effective.
This would lead us to believe that there is no change in the reporting of insurance paid for a 2% shareholder in an S corporation as wages, not subject to FICA and Medicare, with an adjustment to income for health insurance of the self-employed for 2015 and at least until June 30, 2016, if then, based on above.
Deadline Dates for Relief
June 30, 2015 - Any employer reimbursing the health insurance of their employees, other than the 2% shareholder employee.
December 31, 2015 - If the employer is an S Corporation reimbursing the health insurance of a 2% shareholder. See note in paragraph above.
On January 15, 2016, ncpe and the ncpeFellowship was able to reach out to Shad Fagerland, the principal author of IRS Notice 2015-17. He is in the Office of Associate Chief Counsel - Tax Exempt and Government Entities. Responses to our specific questions about the 2% Shareholder in an S Corporation concerning health insurance follow:
Question: It would appear - if one employee, a 2% shareholder in the S corporation and no other employees - ACA has changed nothing - medical insurance paid is in W-2, but not boxes 3 and 5 for FICA and Medicare and the individual receives an AGI adjustment on Form 1040 for the health insurance. That is until further guidance is given.
Answer: Correct, although the same tax treatment would apply if the S corporation had more than one employee. The number of employees is irrelevant.
Question: This is the problem, when terms are used as in the IRS notice ("The Affordable Care Act (ACA) did not change the above rules regarding the federal tax treatment of health and accident premiums paid for a 2% shareholder." Now the question, if the S corporation has other employees, other than the 2% shareholder employee, does the insurance paid for the 2% shareholder employee become subject to FICA and Medicare, and then subsequently does the individual loose the "self-employed health insurance AGI deduction"?
Answer: No, the fact that the S corporation has other employees is irrelevant. The tax treatment described in question 1 continues to apply to 2% shareholders.
Question: There are some instructors teaching that nothing has changed at all and that the S corporation can have multiple employees and all is as it was before the ACA - this is the confusion that must be cleared up. Basically that the S corporation (those with less than 50 employees) can still discriminate and therefore only cover the S corporation shareholder employee with health insurance and all is as it was in Notice 2008-1.
Answer: I am not sure why you think that the ACA would have changed anything about an S corporation’s ability to have multiple employees. I don’t see this addressed anywhere.
Question: In the notices it refers to "fewer than 2 employees" - what if there are multiple 2% and greater shareholder employees - would the treatment outlined in Notice 2008-1 be available to all as long as there were no non-shareholder employees?
Answer: Just to clarify, the reference to fewer than 2 employees relates to whether a plan is treated as a group health plan that is subject to the market reforms; it does not relate to the tax treatment of benefits that are received by 2% shareholders under the plan. The treatment outlined in Notice 2008-1 could be available to multiple 2% shareholders, so long as the arrangement did not cover any non-2% shareholders. The test is not whether the employer has any non-2% shareholder employees, it’s whether any of those non-2% shareholder employees are reimbursed for their individual health insurance premiums.
Question: We do understand that if the S corporation purchases insurance for all employees then as an S corporation, the portion of the insurance premium paid on behalf of the S corp shareholder/employee would be allocated to that portion of the insurance premium to wages while other employees, non shareholders, would have a tax free fringe benefit. Now the question, does the shareholder employee owe FICA and Medicare on these wages and would they have the AGI deduction?
Answer: The tax treatment for 2% shareholders is as described in question 1.
Question: Finally, looking at the "relief provisions" - S corporate shareholder employee with 2% or greater ownership would have relief until end of 2015 - question, is this only if this is the only employee of the S corporation?
Answer: No. Total number of employees of the S corporation is irrelevant.
Question: June 30, 2015 would be if the S corporation had more employees than just the shareholder who owns 2% or more?
Answer: As the notice states, there is no change to the tax treatment of the 2% shareholder. If they would get the AGI deduction before they notice, they’ll still get it after the notice. No change.
Question: Thank you so very much, however, the remaining question is what S corps have the relief provision through 2015 and which lost it on June 30, 2015?
I think single handedly, this is what is the cause of the confusion. and what developed the thoughts that if the S corp had another employee that the S corp shareholder lost the FICA and Medicare free health insurance.
Answer: S corps can continue to reimburse the individual premiums of 2% shareholders. After June 30, 2015, they can no longer reimburse the individual premiums of any non-2% shareholders without potentially triggering the excise tax.
ncpe strives to provide timely and accurate information to the tax professionals we serve. We appreciate the opportunity to provide this supplement to the instructional material of the ACA presentation and are appreciative of the time of Mr. Fagerland.
With our wishes for a prosperous and productive tax season,
ncpe and the ncpeFellowship
Serving the tax professional community!
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