Subchapter S shareholder health insurance premiums

[Ringers]

Here is my summary of the problem regarding the manner in which the health insurance premiums for shareholders (greater than 2%) of Subchapter S corporations for the year 2014 and the manner in which I will treat them on the Corporation and shareholder 1040 tax returns.

Background:
A. The IRS regs have not changed on the proper way to handle shareholder health insurance premiums—add them to W-2 wages NOT subject to employment taxes and have the shareholder deduct them as SE health insurance premiums on 1040 page 1 Line 29
B. In November, the Department of Labor stated that any reimbursement of health insurance premiums by any employer (including Sub S Corps) that has more than 1 employee subjects that employer to a $100 per day penalty per employee, or $36500 per employee per year beginning in 2014.

Based on these two conflicting rulings, here is how I plan to proceed:

1. For single person Sub S Corps I will handle the situation per the IRS regs as I have done in the past, including the premiums for the single shareholder/employee in wages NOT subject to FICA, etc. and deducting the premiums on 1040 line 29.
2. For Sub S Corps that have at least one more employee in addition to the shareholder or more than one shareholder/employee that PAYS the premiums directly for All employees, I will treat the insurance premiums to employees as tax free fringe benefits and treat the Shareholder premiums following the IRS guidelines to obtain the shareholders tax-free treatment of the premiums.
3. For Sub S Corps that have more than one employee that do NOT pay the premiums for employees other than the shareholders, I will show the premiums as distributions to the shareholders and not put them on the W-2 forms. Then I will deduct the premiums that were paid as if they were premiums paid directly by the shareholders themselves (out of their distributions) and deduct them as Schedule A medical expenses. I will tell the shareholders that if the position is ever made clear by the IRS and DOL, then I will issue amended W-2 forms, amended 1120S forms, and amended 1040 forms to exclude the premiums from taxation per the IRS regs.


Any comments, criticisms, revisions, etc. would be GREATLY appreciated.

[ATSMAN]

Post ACA, It is my understanding that any reimbursement will have to be added to the W2 subject to FICA. The only exception is if the premiums are directly paid to a group policy that covers all employees. So those old tricks do not apply any more to sub S owners!

[TXEA]

I agree with everything you wrote (except for HI premiums in distributions) except I would not pay anything resembling health insurance premiums through the S-Corp for 2015. In other words, do not run them through distributions. Just have the shareholder pay the premium from personal funds.

As for 2014, running Shareholder HI premiums through distributions is very gray.

[JON]

Distributions

how can calling health insurance for a stockholder a distribution cause any problem.. I think that is the safest way to treat it, unless the stockholder is part of the company's group plan or the only employee of the business then treat it the same as last year for those two situations.

[TXEA]

Jon -

I agree in theory that this should solve the problem; however, let's consider the following:

A. Did the shareholder pass a board resolution authorizing the distribution each month when the health premium was paid? Most state charters require such resolution. If the IRS wants to review the distributions account, then they will request copies.

B. Was the premium made payable to a health insurance company. If so, it may appear to be discrimination that corporate funds were used to pay premiums for the shareholder while not covering other employees? If so, the discrimination rules could apply. See note below.

C. Reasonable Comp Issue - under the old rules, the health insurance was part of the compensation of the S-Corp shareholder and could be argued as such if reasonable compensation was questioned. However, if the health insurance now becomes distributions, is compensation still reasonable?

D. In light of the potential penalties involved, why risk it at all? As I've told many, this is a bankrupt penalty, not a $50.00 fine. Until we get more guidance, I am recommending the health insurance for an S-Corp shareholder who has employees who are not covered be paid personally by the shareholder.

*** Note - Remember, the DOL guidance mentioned that the mere reimbursement or paying of a premium gives the appearance of a group health plan. If you have that "appearance" and discrimination, then the penalty applies (100/day X #EE's). Not a risk I will take.

I don't think there is any reasonable course to take other than complete elimination of any evidence of health insurance premiums being paid by the corporation where discrimination exists.

[geekgirldany]

Although I see TXEA point on the distributions, how many clients do we have that paid personal items out of their S-Corp even though you tell them not to? I still have a couple and code it to distributions. I think it would be safe for 2014, going forward though I am telling them to pay it personally.

[ATSMAN]

The IRS also knows that many Sub S shareholders have personal expenses paid out of the corporation as you mentioned.

TXEA is correct. Going forward we have to be very careful. It is not worth the penalties!

[Bees Knees]

The $100 per day penalty applies to violating the market reform rules. TheTaxBook, Health Care Edition, addresses this on page 4-20. You can't reimburse employee health insurance costs without violating the new Market Reform rules that went into affect starting Jan. 1, 2014. Trying to treat it as a distribution or a taxable benefit does not solve the problem. All previous guidance allowing S corps to reimburse employee costs is irrelevant. HRAs are a thing of the past. The government wants you to go to the SHOP through the Marketplace and set up a plan for helping pay the cost of employee health insurance. The SHOP is basically the same thing as an HRA, only it is through the government approved process - the Marketplace.

[peggysioux]

Subchapter S Shareholder HI Premium

Ringer's remark:

2. For Sub S Corps that have at least one more employee in addition to the shareholder or more than one shareholder/employee that PAYS the premiums directly for All employees, I will treat the insurance premiums to employees as tax free fringe benefits and treat the Shareholder premiums following the IRS guidelines to obtain the shareholders tax-free treatment of the premiums.


Could someone provide clarification for me - if a shareholder meets the above criteria, when you say "treat the Shareholder premiums following the IRS guidelines to obtain the shareholders tax-free treatment", would the shareholder premiums be handled like employees and shown on W-2 as such, or would the shareholder premiums be handled as previously and added to W-2 and deducted on 1040?

Thank you for your clarification.

Peggy Sioux

[ATSMAN]

May I direct you to:

http://www.calt.iastate.edu/article/updated-aca%E2%80%99s-thorny-impact-more-2-s-corporation-shareholders

[peggysioux]

Subchapter S Shareholder HI Premium

May I direct you to:

http://www.calt.iastate.edu/article/...n-shareholders

Atsman, thank you for the link to the very informative article. Could you tell me if you think my take on this situation is correct:

Situation:

S-Corp offers insurance to employees and shareholder and S-Corp pays the premiums so if there is no question of discrimination than the handling of taxation of fringe benefits for the shareholder is unchanged from previous years, correct?

But shareholder will have another issue if they are paying 100% of the premium for the shareholder and only 50% for employees which will than also cause the very large penalties so should the s-corp apply the medical premiums as shareholder distribution in that case?

Input would be appreciated.

Peggy Sioux

[ATSMAN]

Atsman, thank you for the link to the very informative article. Could you tell me if you think my take on this situation is correct:

Situation:

S-Corp offers insurance to employees and shareholder and S-Corp pays the premiums so if there is no question of discrimination than the handling of taxation of fringe benefits for the shareholder is unchanged from previous years, correct?

But shareholder will have another issue if they are paying 100% of the premium for the shareholder and only 50% for employees which will than also cause the very large penalties so should the s-corp apply the medical premiums as shareholder distribution in that case?

Input would be appreciated.

Peggy Sioux

You have a discrimination issue if co pays 100% for shareholders and only 50% for rank and file employees. I would not recommend paying games.

[peggysioux]

Subchapter S Shareholder HI Premium

You have a discrimination issue if co pays 100% for shareholders and only 50% for rank and file employees. I would not recommend paying games.

But if S-Corp falls into the first scenario than the rules for 2014 are the same as 2013, is that correct?

[ATSMAN]

But if S-Corp falls into the first scenario than the rules for 2014 are the same as 2013, is that correct?

Yes.

Health insurance premiums paid by the S corporation would be deductible by the S corporation as compensation to the more-than-2% shareholder-employee and included in the more-than-2% shareholder's Form W-2 as wages.

The above background law has not changed. What has changed is the ability of S corporations to reimburse their employees (including more-than-2% shareholder employee) for health insurance premiums used to purchase an individual health insurance policy without running afoul of ACA market reforms

[peggysioux]

Subchapter S Shareholder HI Premiums

Thank you for the clarification.

PeggySioux