We cannot find any definitive answer on how >2% SH of SCorp handles insurance if there is no group sponsored plan. We understand that 2013-54 does not allow insurance premiums to be paid for only certain employees (like owners). Since insurance reimbursement can no longer goes into Box 1 if there is not a specific group plan, but rather now it is fully taxable wages, the question is, since they pay for their own plan, can they put the premium on Line 29, (again, assuming they are a >2% SH and receive wages.)
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I would say no (assuming there is more than just the one owner of the corporation).
The corporation can't "reimburse" insurance AT ALL. They may pay additional pay, but can't "reimburse" the insurance". If the corporation doesn't do that, the insurance is not "established" under the business, and is not eligible for the Self Employed Health Insurance Deduction. -
FWIW, just went to Western CPE business update yesterday. Their conclusion? Since >2% s/h's are covered under a separate code section, their medical premiums are handled just as they have been handled. No change. Only employees are changed.
Yes, the debate went on and on during the session. Instructors like Jennings have said, no, you must change the s/h's this year. Western says you leave as is.
Until there is further guidance from the IRS, my office is leaving s/h's as is; changing all the employees to payroll; and advising all employers about the penalty if they choose to do nothing.
What a year . . . .Comment
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That problem is that it is still a health insurance "reimbursement".
Even if it was successfully argued that it's not an HRA and therefore not subject to the IRC 4980D penalty of $100 per day per participant, it would be discrimination of "highly compensated employees". That would make it subject to a $100 per day per individual penalty for discrimination from Public Welfare part of the ACA in Title 42, §300-gg-22(b)(2)(C).
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OMG. Only if it's a One Member Group can you continue as in the past. Still, there's arguments about whether a One Member Group means only one in the plan or only one employee in the company. If more than one employee, it's probably not business as usual due to ACA.Comment
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So, if there are say 4 employees, one is a shareholder/employee and is the only one who the s-corporation is paying health insurance for... then you can no longer add it to the W-2 and then deduct on 1040 like in the past? Or there will be a $100 per day per participant fine?
It seems to me that the IRS has not provided any guidance on this issue and it is still questionable. I would proceed as usual.... but that $100 per day fine is an awful good deterrent not to do so. At the same time, I am suppose to tell my S-Corp clients they can not deduct their medical insurance this year because of the above?
Found this good article:
If find it interesting that this from the IRS
Was updated in Sept 2014 but not much detailed information on ACA included.Comment
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There are arguments both ways if only one employee in the company, but with multiple ELIGIBLE employees in your case, I think I would put the shareholder's health premiums in Boxes 1, 3, and 5 (instead of the old Box 1 only) and he will deduct it on his 1040. IF the company is paying the premiums, company plan. Reimbursements with multiple employees do not work under ACA. The fact that the S-corp has a plan (even though they do not have to have a plan with less than 50 employees) means they have to comply with ACA. The more classes I take, the more confused I become.Comment
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Yes, I agree the more I study it the more complicated it is.
So S-Corps with multiple employees that paid only shareholder/employee health insurance, s/h health insurance is taxable for SS/Med, thus listing it in Box 3 & 5 on the W-2 in addition to Box 1?
That is not going to go over very well with my clients.Comment
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I have an S-Corp with a more-than-2% SH who is the only one covered out of 3 employees. However, the other two employees have coverage under their spouses' plans, and do not elect to participate. So proceed as usual?Comment
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I was thinking so until the DOL weighed in a few days ago. Now, it seems not. I have to reread the DOL memo and the texts from the multiple courses I took re ACA. One of my S-corp clients uses Paychex and they have their own legal department with their own procedures.Comment
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I've got to find this out because I process payroll for several clients.Comment
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Start with Notice 2013-54. If your clients were using Sec 106 where they could discriminate, that's gone as of 1/1/14. Sec 105 is still there, but your clients can NOT discriminate and must comply with PHS Act 2711 (annual limit requirements) and 2713 (preventative care requirements). They may have to make changes if they have more than one employee, including a shareholder/employee. Then, dig into the latest DOL guidance which prohibits employers from reimbursing individual premiums (thus the raising wages, boxes 1, 3, and 5 instead of reimbursing premiums in box 1 only). The DOL 6 November 2014 guidance specifically impacts S-Corporation and Self-Employed Health Insurance Deduction. But, I'm no expert on exactly how. It's the DOL language that refers to "employees" instead of "participants" and seems to apply the guidance for all but the OMG. Per a recent text from a recent tax class: "The latest Department of Labor, Health and Human Services and the Treasury Departments guidance prohibits all employer provided arrangements, with 2 or more employees, that reimburse individual health insurance premiums without regard to whether the employer treats the money as pre-tax or post-tax income to the employee." What does that mean if the company has the plan instead of reimbursing the employee for his plan? I don't know yet.Comment
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Ok. If you have an S-Corp greater-than-2% SH (single shareholder, actually) whose S-Corp pays his health insurance premiums for him, and the plan is an individual plan -- not group -- then the Corp has to include the payment as wages subj to all taxes, including FICA? Whereas before they included in Box 1 only and he deducted as SEHI?Comment
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I think, and I plan to spend the next month re-reading my texts, if a one member group and an S-corp >2% shareholder/employee, nothing changes. Add an employee, and it has to be a group plan in the name of the company. If more than one employee, S-corp can no longer reimburse or pay directly to insurance company premiums in the individuals' names. S-corp could give all employees raises (therefore, Boxes 1, 3, and 5) and have nothing to do with health insurance.Comment
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This is from a Western CPE eTax Alert as posted on a tax preparers’ message board:
18 Things Small Businesses Must Know about Health Reimbursement Arrangements (HRAs)
If your small business reimburses employee health care costs in any manner, you need to be aware that the law has changed, and there may be actions necessary to take right now to avoid severe tax and legal liabilities.
1. The federal government considers your arrangement to be subject to the extensive legal requirements of a “group health plan,” even if you did not intend it so or think of it that way. The legal requirements include exposure under the Employee Retirement Income Security Act of 1974 for employee welfare benefit plans.
2. To avoid taxes and legal liabilities, the HRA must be integrated with an employer-provided ACA-compliant group health insurance plan.
3. Employers should not reimburse the cost of individual health insurance under any circumstances.*
4. Where an employee is covered by his or her spouse’s plan, employers should never reimburse the cost of the spousal coverage.
5. For purposes of determining whether a violation has occurred, it does not matter whether the reimbursements were made on a pretax or after-tax basis.
6. Taxation of health benefits to the employee is a completely separate issue from the applicability of excise taxes to the employer.
7. Employers who give taxable compensation bonuses should not make reference to any aspect of employee health care costs.
8. The minimum statutory tax penalty for an unintentional violation is 10% of the amount the employer paid. The maximum amount of penalty is $100 per employee, per day of violation; plus (if applicable), wage taxes; plus (if applicable), interest and penalties.
9. Standalone HRAs are prohibited, regardless of whether they are simply informal arrangements or documented employee benefit plans.
10. An integrated HRA must meet additional requirements, including the requirement that they be in writing and be communicated to employees separately from the insurance plan in order to make the benefits tax-free to employees.
11. Employees may not contribute to an HRA on a voluntary salary-deducted basis.
12. Employees who waive health insurance or have other non-employer-provided insurance cannot participate in the HRA.
13. HRAs are not tools to reduce the cost of employee health benefits. In fact, HRAs may trigger the “Cadillac tax” provisions for rich health benefits in the future, because they increase the total health benefits for employees.
14. Improper reimbursements may trigger severe excise penalties under Section 4980D of the Internal Revenue Code. This penalty is $100 per day excise tax per applicable employee (which is $36,500 per year, per employee). Smaller penalties may apply in 2014 if the violation was not due to willful neglect.
15. If the employer is subject to the smaller 10% excise penalty for 2014 and then still does not correct the HRA plan for 2015, there would likely be a greater chance that the higher severe penalty would be assessed for the same repeat violation in the second year.
16. Employers that had a medical reimbursement plan prior to 2014 and have not updated their plan this year may unknowingly be subject to the excise tax. Apparently, there are many small firms that don’t even know about this problem.
17. Employers affected by 14 above should act as quickly as possible to terminate or amend plans and make appropriate payroll tax adjustments if necessary to avoid additional late tax penalties.
18. Excise tax penalties are self-reported on IRS Form 8928, which has not yet been updated for 2014 to include provisions for HRAs.
Disclosure and clarification: The advice in this article is simplified for the purpose of clear communication regarding most small businesses. As with most aspects of tax and benefit law, there are special circumstances that may change this information. This article ignores the possibility of uninsured ACA-compliant health plans or grandfathered health plans simply because these are not common.
*Many of these points do not apply to one-person C corporations. The term “health insurance” in this discussion refers to primary ACA-compliant major medical insurance.
References
Department of Health & Human Services: Application of Affordable Care Act Provisions to Certain Healthcare Arrangements
IRS Notice 2013-54
TD 9705: Minimum Essential Coverage and Other Rules Regarding the Shared Responsibility Payment for Individuals
29 CFR 2510.3-1(j)
26 U.S.C. 4980D: Failure to Meet Certain Group Health Plan Requirements
U.S. Department of Labor: FAQs about Affordable Care Act Implementation (Part XXII)Comment
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