health insurance and S corp owners

[winnie]

Not wanting to deal with health insurance during tax season, I just ignored the IRS Headliner of 5/16/06 and thought I would deal with it in 2007. Since I can't put it off any longer, I have done research elsewhere, read in TTB, reread RR 61-146 and read all of the threads that I found here on the topic. I am as confused as ever. But this much I understand: The IRS is taking a position that the health insurance must be in the corporate name to eventually meet the requirements for the deduction on the front of the shareholder's 1040. I also understand that many of you think the IRS does not have the right. A couple of questions that I would so appreciate help on.

First: Can the S corporation discriminate with health insurance and only pay insurance for shareholder/owners or perhaps only full time employees or whoever they choose to pay insurance for and still have that be deductible? I understand that under an HRA that would not be possible. I have a few S corporations with employees, but they can't afford to pay health insurance for all, but need insurance for themselves. So if the company could get a plan in the company name and could choose to pay insurance only for the folks they wanted to, that would meet the IRS position.

Second: What are you telling your companies where the owner/shareholders have been paying their own insurance that is in their personal name? Up until now, I have been deducting that on the face of the 1040, although I see that not all of you would agree with that.

Thank you for your help.

Winnie in NC

[DaveO]

I wrote my congressman about that headliner

A Staffer called me back and reported that my congressman had spoken to the IRS about this as I was not the only person to contact him. He said the IRS quickly informed him that, "It was just a headliner without any force of law, not like proposed or final regulations". I realize this doesn't answer your questions, in fact there may not be a good answer yet.. Here is the text of my letter

Dear XXX
I’m writing to you in regards to recent developments within the IRS. On May 15, 2006 the IRS released Headliner 163. In that headliner they discuss treatment of premiums paid for health insurance benefits provided for the benefit of a 2% or greater shareholder in a Sub-S corporation. It would deny the “above the line” deduction for health insurance premiums currently enjoyed by these small business owners unless the policy is issued in the name of the corporation.

I’m sure you are aware that the Sub-S Corporation is the preferred entity for millions of small business owners. In fact, it is the entity of choice for the Mom and Pop or family owned business, allowing pass through of income and loss.

This change would adversely affect taxpayers in states such as Nebraska where insurance will not generally be issued in the name of the corporation unless it’s a full group policy. This headliner effectively squeezes these persons out of the health insurance market.

Surely it’s not the intention of Congress to allow the IRS to deny, through this headliner, health insurance to the thousands of small business owners in Nebraska and other affected states. Given the strong words of President Bush words regarding health insurance in the State of the Union address I would hope not.

Please look into this matter and remind the IRS that the power to levy and collect taxes is solely vest in Congress. Also please advise me of your position on this subject.

[RJM]

IRC Sec 106- Can discriminate

Winnie- under Sec 106, and the related regulations and rulings, it is permitted to discriminate among employee groups with respect to health insurance benefits in an employer-provided plan. For example, only managers or only executives may be extended this employee benefit.

As an aside, under Sec 105,regarding medical reimbursement plans, it is NOT permitted to discriminate with the benefit between different employee groups.

Also as an aside, if the Sec 106 health insurance plan is run through a Sec 125 Cafeteria Plan, then discrimination limits also apply, and, generally only 25% of the total S125 plan benefit may be allocated to owner-employees (much more to this restrix....).

On your second point, here in WI it seems that nearly all insurers will not issue a single-employee health insurance policy in the name of a business. They will only issue group policies with a minimum of 2 insureds. Don't know if this is state law or not. I tell S-Corp owners to run the policy thru the corp, and provide coverage for employees, even if it is 100% funded by the employee.

-Bob

[Bees Knees]

The Internal Revenue Code may allow discrimination under Section 106 plans, but there could be other laws that prohibit discrimination. For example, continuation coverage requirements under COBRA cannot discriminate, and various state rules and regulations would prohibit an employer from discriminating.

Generally, under any fringe benefit type plan, there are ways to exclude certain employees and still meet discrimination tests. For example, employer matching to 401(k) plans can require an employee work at least 1 year and work at least 1,000 hours per year, before becoming eligible. Group-Term Life Insurance plans where up to $50,000 of coverage can be provided tax free to the employee can pass the non-discrimination test if at least 70% of all employees benefit from the plan and at least 85% of employees who participate are not key employees. Obviously that means you can discriminate against up to 30% of your employees.

I would check the rules for your state with an insurance company that specializes in small employer plans and see what you can do in your state. Maybe under your state, the rules are as simple as saying everyone must have worked at least 3 years and average over 30 hours of work per week before they are eligible for coverage.

[winnie]

thanks

Thank you all for your thoughtful responses.