SEHI limitations - a NEW wrinkle needing an answer

[Bees Knees]

The IRS came out with something that curtailed ones ability to reimburse for medical insurance.

You are referring to the Market Reform Rules and the $100 per day per employee penalty for reimbursing health insurance. That applies to employer group health reimbursement plans (HRAs) when the employer has 2 or more employees. Reimbursing a single employee (such as a sole prop reimbursing his wife's Medicare) is not affected by that penalty.

Besides, IRS just came out with a Notice stating the penalty for having an HRA will not apply until after June 30, 2015, so 2014 tax returns are no longer in danger of having that $100 per day penalty.

[Bees Knees]

I would also like to add that the IRS has been taking heavy bombardment from the tax profession industry for their rather ridiculous rule that HRAs are subject to the Market Reform Rules.

ACA introduced a new concept. That health insurance companies should no longer be allowed to place annual or lifetime limits on health benefits. The problem stems from individuals who came down with catastrophic illnesses such as cancer or heart disease. After years of treatment, all of a sudden the patient reached the insurance company's $1 million dollar lifetime limit, and the person making his/her insurance premium payments each year all of a sudden no longer had health insurance. And because the patient now had a pre-existing condition, that patient no longer could get health insurance from anyone else.

ACA solved that two ways: 1) Insurance companies can no longer refuse to provide health insurance based on a pre-existing condition. 2) Insurance companies can no longer place annual or lifetime limits on the amount of medical expenses the insured individual incurs. Congress included employer group health plans in this rule because many large companies self-insure, meaning rather than buy group health insurance through an insurance company, the employer itself pays for the medical expenses through a self-insured plan. If the insurance company or the employer group health insurance plan violates these rules, IRC §4980D imposes a $100 per day per individual penalty for the length of time the insurance company or employer is in non-compliance.

That is the law. So what does IRS do? IRS (along with their good buddies at HHS) decide to write regulations that interpret this rule. IRS decides that employer reimbursement plans under IRC §105(b) are by definition employer group health plans and as such are subject to these rules. It does not matter that the HRA is reimbursing individual health insurance coverage, which by the way IS in compliance with the market reform rules. The fact that the employer provided HRA in itself limits the amount of benefits it will provide, it now is in violation of IRC §4980D.

This is ridiculous because the HRA is being used to purchase health insurance for the individual employees, and that health insurance purchased does not place annual or lifetime limits on the coverage. The IRS is going beyond Congressional intent here. OR, the other possibility (which IRS admits in their latest Notice), is that Congress intended to kill HRAs and instead make small employers go to the SHOP.

I doubt that Congress was smart enough to even know what an HRA is. Congress wanted insurance companies to no longer place annual or lifetime limits on coverage, and IRS decided (with help from HHS) that they were going to persecute HRAs in favor of the SHOP. And for that, everyone in the preparer industry is up in arms. There is no logical reason for penalizing a small employer for reimbursing health insurance premiums that DO comply with the ACA Market Reform Rules. IRS is out to lunch on this one.

That's my opinion, and I am sticking with it....

[kathyc2]

The IRS came out with something that curtailed ones ability to reimburse for medical insurance. I bring this up relative to the issue of deducting a spouse's Medicare Premium as SEHI since it almost always is taken from the spouse's SS, it would have to be reimbursed to make the argument that it is deductible as SEHI. .

In my opinion not for a Schedule C based on the following:

Unlike an S or Partner the sole-proprietor is not a legal and separate entity.
The legal name of the "business" is the taxpayer and the business name is a d/b/a.
There is no requirement that a separate banking account be in place for the sole-proprietors business dealings.

If the business does not have separate bank account, what would the "reimbursement" look like?

I've been doing this for my C clients since the memorandum came out. Even amended a couple for prior years. My feeling is that it is more likely than not to stand in the event or an audit, so all returns that come out of my office include the spouse Medicare deduction for all clients that qualify for any SEHI deduction.

[FEDUKE404]

Need to reassess

The return for stated client in OP is now "in the works." The more I read, the more confused I become.

Reading between the lines (to include IRS Pub 535 and the oft-cited IRS -8037 memorandum) it appears to me the emphasis has now changed from "a policy which..." to "amounts you pay for..." Subtle, but significant.

With that in mind, I am leaning very heavily to using for the husband's Sch C the following:

1 - Premiums for husband's Medicare Advantage plan*
2 - Premiums for wife's Medicare Advantage plan*
3 - Premiums for 25 YOA child's (but not dependent) health insurance coverage*
4 - Premiums for husband's Medicare B**

* - Funding for this coverage comes from a single monthly-deduction from the husband's retirement plan proceeds
** - Funding for Medicare B premiums comes from a reduction in monthly Social Security benefits received by the husband

Medicare B coverage for spouse (paid from spouse's monthly Social Security benefits) is **NOT** going to be used for the SEHI adjustment to income. Mu justification for not using spouse's Medicare B premiums is the fact that the owner of the Schedule C simply does not "pay" those premiums.

FWIW: The couple will also have sufficient medical expenses to itemize on Schedule A, so to a certain extent this skirmish is to minimize AGI-related issues. Of course, the newest wrinkle is that NC no longer considers any itemized medical deductions, so for state purposes the only hope is to put as much as possible on line 29 of Form 1040.

So, what say you now during the first week of April? ?

FE

[Burke]

I agree completely with your assessment, FEDUKE404. I would never use the spouse's Medicare premiums deducted from her SS check and not reimbursed by the business as SEHI. Only in the case where they were reimbursed by the business would I consider it, and then only reluctantly. IRS is out to lunch on this one.

[Corduroy Frog]

My Two Cents

Federal Duke, here are my two cents, and maybe not worth even that much. Congratulations to your folks for winning the NCAA basketball title.

Let's dispense with the "established in the name of the company" issue. There's no question that the language still exists in the IRS pubs and probably stems from Code/Regs. If you continue to stick with this definition because it still exists, then I cannot fault this position, and his deduction for SEHI is going to be extremely limited.

However, the IRS itself has torpedoed this facade of "established in the name of the company" and have turned this straight and narrow application into a thousand winding roads. Consider they have allowed medicare payments deducted from social security as qualifying. My software even allows a feature which carries the medicare deduction to the SEHI.

And the SEHI has ALWAYS allowed for family coverage. Historically there has never been a dismantling of the deduction because different costs are applied to different family members. Note that the ACA has now qualified children up to age 27 to be covered under the policy and this is true even if the child is not a dependent. The IRS has not allowed children over 24 to be a dependent and also never sliced into the deductibility of the SEHI for any family member covered under the policy. So carving up the cost of a policy into the owner, wife, and child should not affect the deductibility.

Because "family coverage" is respected, the acceptance of medicare for the business owner translates into deductibility for his wife's medicare as well. The husband/wife undergo a change in circumstances when they reach medicare age, and most people automatically are covered on a MANDATORY basis. Most people are able to significantly reduce their insurance premiums when medicare kicks in, and the net effect is a lower SEHI deduction. If people have been deducting SEHI to include spouses, it is not fair to disallow spouse medicare if the owner's medicare is allowable.

As has been discussed many times, nothing in tax treatment has to be "fair" or even "reasonable". But if this were my client I would take the policy and both medicare deductions. The medicare coverage plus the supplemental policy actually supplant what used to be deductible before they were forced into medicare. (Medicare is not optional) I would also explain to the client that the IRS is in a transitional state of defining what may/maynot qualify and the deduction is subject to review.

Mathematically, here is why I think IRS should be happy:

Former situation: Client has a policy covering his whole family for $1200/month, total $14,400 SEHI deduction.

New situation: Client pays $104/month medicare, spouse pays $104/month medicare, and supplemental policy
now costs $170/month. Total of ALL costs is $4,536 annually, meaning his SEHI deduction is $10,000 less than
previously. IRS should be deliriously happy.

If there were yet a second policy, I would not deduct that.

[Burke]

. If people have been deducting SEHI to include spouses, it is not fair to disallow spouse medicare if the owner's medicare is allowable. If there were yet a second policy, I would not deduct that.

In the case of the owner's Medicare, he is paying it. In the case of the spouse's Medicare, he is not. She is, and its not a family plan. Each Medicare recipient's benefit falls under their own choice of coverages (i.e, Part B, Part D, etc.) If he or his company paid it (or reimbursed her for it), then maybe.......

PS: I sent you a PM on a former post.

[Burke]

I wanted to add to your lengthy, well-thought-out post giving adequate consideration to your reasoning process in the matter even if I disagree with the decision. Let me throw this out for discussion -- where is the fairness in the SEHI deduction at all? Why should a self-employed person be able to deduct his personal health insurance premiums as an above-the-line item when everybody else has to put them on Schedule A and let the chips fall where they may?

[FEDUKE404]

Reaching the end of the SEHI road

Along the lines of that old TV commercial, "When EF Hutton talks...people listen . ." I do appreciate the comments from Burke and Corduroy Frog.

The new wrinkle in my example is that the client (owner of Schedule C) went from a single monthly payment for one policy that covered client/spouse/child to a single monthly payment for three "separate" policies (due merely to an administrative change) that covered client/spouse/child. Funding in both situations was provided ("paid") via retirement funds belonging to the Schedule C owner.

At one time, the Schedule C owner was not of Medicare age, so SEHI only consisted of payments for the one (family) policy. At a later date, the changeover from one to three occurred. And then at a later date, the Schedule C owner became Medicare eligible.

The spouse has been Medicare eligible for several years (disability) but those Medicare B premiums were never included in the "husband's" SEHI adjustment to income.

I think the old "policy in the name of the company" rule has been put to rest some time ago. Somewhat later, the IRS finally clarified the rules that the business owner's Medicare B premiums could be part of SEHI. It should be noted that there were many posts on these boards saying that Medicare B premiums could never be included, but if "common sense" is a factor I feel that inclusion of them was/is correct.

However, under the current guidelines, I still cannot justify claiming the Medicare B premiums of the spouse as a SEHI adjustment for the client's Schedule C income. Others may differ in their opinion, but it is quite clear to me that the Schedule C owner did *NOT* "pay" such premiums for the spouse.

So, for 2014, I plan to allow the Schedule C owner to use the cost of the "three" policies and the Medicare B premiums paid by the owner. The Medicare B premiums for the spouse will slide over to Schedule A.

Perhaps next year the IRS will add a new wrinkle to the discussion.

Oh yes: Corduroy Frog - Thanks for the comments on Les Diables Bleu. I still would have liked to take on those agitated kittens from the Commonwealth of Kentucky.

Also, Burke raised an interesting point as to why only the self-employed folks get the SEHI break. So much for consideration of that "common sense" component.

Thanks again to all for aiding in this discussion and the prior related ones.

FE

[Lion]

If you're an employee with employer-paid HI, then it never appears in your W-2 Box 1 nor Form 1040 Line 7. So, for the SE, there is some sense to making that adjustment on Form 1040 Page 1. (I was one of those that never thought we'd be able to deduct Medicare as SE HI.)

[Burke]

If that is the reasoning they used to authorize the SEHI deduction in the first place, it still is not "fair." Since employer-paid health insurance for an employee (W-2) is not subject to FICA either, then why not let the self-employed deduct it on Sche C?

[Lion]

Well, it was once 50% on page one and then a higher percentage and then 100%. And, for one year (two?) it was a reduction on Form SE. So, like all things from a committee, Congress has played with it depending on which lobbyists throw around the most money or who needs votes from what constituency. It's not logical. It's the law. And, as we're all seeing with Obamacare, the intent is not necessarily the result. But, it does level the playing field more than not being a page one adjustment. Argue with your Congresspeople.