Leased Employee Health Insurance

[Sabre]

I have a doctor who owns an S-Corp and all of his employees plus himself are leased employees.

Part of the doctor's benefit is health insurance which has not been separately stated on his W-2. We contacted the leasing company and they told us the S-corp rules don't apply because he doesn't work for the S-corp but instead he is an employee of the leasing company.

Any thoughts on this issue plus code sites would be appreciated.

Kirk

[Bees Knees]

IRS Pub 15-B says:

Accident and Health Benefits

This exclusion applies to contributions you make to an accident or health plan for an employee, including the following.

• Contributions to the cost of accident or health insurance including qualified long-term care insurance.
• Contributions to a separate trust or fund that directly or through insurance provides accident or health benefits.
• Contributions to Archer MSAs or health savings accounts (discussed in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans).

This exclusion also applies to payments you directly or indirectly make to an employee under an accident or health plan for employees that are either of the following.

• Payments or reimbursements of medical expenses.
• Payments for specific injuries or illnesses (such as the loss of the use of an arm or leg). The payments must be figured without regard to any period of absence from work.

Accident or health plan. This is an arrangement that provides benefits for your employees, their spouses, and their dependents in the event of personal injury or sickness. The plan may be insured or noninsured and does not need to be in writing.

Employee. For this exclusion, treat the following individuals as employees.

• A current common-law employee.
• A full-time life insurance agent who is a current statutory employee.
• A retired employee.
• A former employee you maintain coverage for based on the employment relationship.
• A widow or widower of an individual who died while an employee.
• A widow or widower of a retired employee.
• For the exclusion of contributions to an accident or health plan, a leased employee who has provided services to you on a substantially full-time basis for at least a year if the services are performed under your primary direction or control.

So notice that under the exclusion rules for providing health benefits to employees, a leased employee is also considered an employee if the employer is providing benefits to the leased employee. Thus, the benefits are excluded from the leased employee's wage.

Then IRS Pub 15-B continues:

S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee's wages subject to federal income tax withholding...

This is in the same context and chapter of IRS Pub 15-B that talks about leased employees being treated as employees for the health benefit exclusion.

The key here is who is it who is providing the benefit? If the S corporation is paying the leasing company for the use of the employees, and the S corporation is kicking in the money to provide those leased employees with health insurance, then it is the S corporation providing the health insurance. Thus, since a leased employee can be treated as an employee of the S corporation and have his/her health benefits excluded from income, the S corp 2% shareholders must ALSO be treated as employees. Thus, as employees, they would have to have the health benefits added to wages.

It works both ways...if the leased employees can have their benefits excluded from income because they are being treated as employees of the S corporation, then the 2% shareholders must also be treated as employees of the S corporation and have their benefits added to wages.