Subchapter S shareholder 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:

1.   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
2. 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.

[Jack from Ohio]

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:

1.   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
2. 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.

All items struck through are NOT ALLOWED.  Any compensation in lieu of a company provided group health plan must be added as wages subject to FICA.  PERIOD.  It CANNOT BE TAX FREE FRINGE BENEFITS.

 

Read the regs again.

[Lee B]

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.

 

As Jack says, this will only work, if the owner(s) and the eligible employees are covered by a group policy

which meets the specified requirements.

[Ringers]

Jack and Lee,

 

By "paying the premiums"  in #2 I meant paying the premiums of a group policy, NOT reimbursement for individual policy premiums or policies acquired on the exchange.

 

In #3, the shareholder is allowed to take a distribution in addition to his W-2 wages, as long as he has basis.  It does not matter what the distribution is used for--it could be for gambling, a vacation or even (gasp!) health insurance.  The only reason I was showing a distribution to the shareholder was to simplify amending the 1120S and his W-2 IF the situation ever gets resolved between the IRS and DOL.  The distribution in no way affects the W-2 or the taxable income from the K-1.

[Lee B]

Jack and Lee,

 

By "paying the premiums"  in #2 I meant paying the premiums of a group policy, NOT reimbursement for individual policy premiums or policies acquired on the exchange.

 

In #3, the shareholder is allowed to take a distribution in addition to his W-2 wages, as long as he has basis.  It does not matter what the distribution is used for--it could be for gambling, a vacation or even (gasp!) health insurance.  The only reason I was showing a distribution to the shareholder was to simplify amending the 1120S and his W-2 IF the situation ever gets resolved between the IRS and DOL.  The distribution in no way affects the W-2 or the taxable income from the K-1.

 

I realize that many times other expenditures, which are not actual quarterly distributions of profit, end up

 

being categorized as distributions. However when those other expenditures are regular monthly "personal"

 

expenses we have to advise our clients that if they are audited the IRS may take the position that these

 

regular monthly "personal" expenses are wages subject to employment taxes, especially if the S corp owners

 

are not taking reasonable compensation.

[Randall]

I was thinking like Ringers with his addition that #2 had to be with a qualified group plan.  And also cbslee's caution about distributions.

Jack, would you agree to #2 if the plan was a qualified group plan?

[Randall]

I'm no longer thinking like Ringers.  Not wanting to chance the distribution being considered reimbursement.  Adding premiums to W2 subject to Social Security and Medicare tax.

 

A related question.  With premiums added to W2 subject to both income tax and employment taxes, the client continues to get the 1040 page 1 deduction.  Is that correct?  If so, the client will get a better deduction than Sch A medical deduction.

[Jack from Ohio]

I'm no longer thinking like Ringers.  Not wanting to chance the distribution being considered reimbursement.  Adding premiums to W2 subject to Social Security and Medicare tax.

 

A related question.  With premiums added to W2 subject to both income tax and employment taxes, the client continues to get the 1040 page 1 deduction.  Is that correct?  If so, the client will get a better deduction than Sch A medical deduction.

Your client can only take self-employed health insurance deduction on the front of the 1040 if he is GREATER THAN 2% Shareholder.  If he IS, then the added compensation is only added to box 1 of the W-2.

 

If the client is NOT an greater than 2% shareholder, additional compensation is added to boxes 1,3 & 5.  Schedule A is their only option for deduction.

[Lion EA]

What about the greater than 2% shareholder who has their company reimburse their health premiums and has other employees/nonshareholders?  Add it to 1 and deduct on the front.  Add it to 1, 3, 5 and deduct on A?  Some combination?

[Jack from Ohio]

What about the greater than 2% shareholder who has their company reimburse their health premiums and has other employees/nonshareholders?  Add it to 1 and deduct on the front.  Add it to 1, 3, 5 and deduct on A?  Some combination?

Shareholders, box 1, front of 1040.  Employees, boxes 1,3 & 5, schedule A.

[Randall]

But Jack, that seems to contradict earlier comments.  If client is greater than 2% shareholder, S corp has more than one employee, there is no 'group plan', then I thought what everyone was saying that it must be in boxes 1,3 & 5.

Edited January 25, 2015 by Randall

[Lee B]

But Jack, that seems to contradict earlier comments.  If client is greater than 2% shareholder, S corp has more than one employee, there is no 'group plan', then I thought what everyone was saying that it must be in boxes 1,3 & 5.

 

After attending a class on Monday presented by the Oregon Society of CPA s, that covered this in depth, I have modified my position as follows:

 

1.  The Regs issued November 6th change HRA s which affects the Self Employed Health Insurance     Deduction for S Corp shareholders.      

 

2.   The ACA Marketplace Reform Regs are in direct conflict with IRS guidance for S Corp shareholders and partners ( See Pub 535, IRS Notice 2008-1, Rev Rule 91-26,  and Ann 92-16 all of these remain unchanged.)

 

3.   Until this conflict is resolved, we need substantial authority to rely on prior IRS guidance.

 

4.  By subjecting the reimbursed premiums to Social Security and Medicare and including the reimbursed premiums in Box 3 and Box 5 wages, the assertion that there is a Group Plan which is subject to ACA Market Reform Penalties is significantly reduced.

 

5.  The argument in favor of this position is the reasonable cause exception under Sec 4980D©(1)

      based on our reliance on Pub 535, IRS Notice 20089-1, Rev Rule 91-26 and Ann 92-16 all of which still exist unchanged.

 

I take no credit for this strategy. The strategy originated with the National Tax Partners of CliftonLarsonAllen, the 10th largest CPA Firm in country with more than 1,000 CPA s employed who prepared over 100,000 tax returns last year. This strategy is the official position of CliftonLarsonAllen according to the course presenter and coauthor Andrew R Biebl CPA, one of the National Tax Partners for the firm.

[Randall]

cbslee,

 

This is in line with my previous thinking.  So, by subjecting to Social Security and Medicare tax, there should not be risk of the penalty.  However, if by doing this, the s shareholder (even if greater than 2% Jack?) can no longer deduct premiums on 1040, page 1, but only on Sch A.  Is that also what you came away with?

[Lee B]

cbslee,

 

This is in line with my previous thinking.  So, by subjecting to Social Security and Medicare tax, there should not be risk of the penalty.  However, if by doing this, the s shareholder (even if greater than 2% Jack?) can no longer deduct premiums on 1040, page 1, but only on Sch A.  Is that also what you came away with?

 

I am going to deduct the greater than 2 % shareholder's premiums as Self Employed Health Insurance on 

 

page 1 Form 1040. After all that is what the current unchanged  IRS guidance says you can do.

 

The strategy that I relayed in my previous post is an end run around the ACA Market Reforms.

 

Is the strategy totally risk free, No it isn't.

 

CliftonLarsonAllen believes that the penalty although it  would be unlikely, would be limited to 10 %

 

of the Health Insurance Premiums reported in Box 1, 3 , 5. The value of a $15,000 Health Insurance

 

Deduction on page 1 of Form 1040 is definitely greater than a 10 % penalty as long as the taxpayer is in the

 

25 % bracket or higher.

Edited January 25, 2015 by cbslee

[KEYWEST_RICKS]

IS ANYONE ELSE WITH ME THAT NOTICE 2015-17 ISSUED TODAY SOLVES THIS PROBLEM IN THE SHORT TERM AND REIMBURSEMENTS ARE NOT AN ISSUE NOW

[jklcpa]

IS ANYONE ELSE WITH ME THAT NOTICE 2015-17 ISSUED TODAY SOLVES THIS PROBLEM IN THE SHORT TERM AND REIMBURSEMENTS ARE NOT AN ISSUE NOW

 

 

I saw that earlier and wondered the same thing.  I haven't had a chance to look into it further yet.  Anyone else?

[Randall]

Skimmed thru it.  Sounds like relief for 2014 and first half of 2015.  But I'll have to read thru it more thoroughly.

[Lee B]

Unless you're seeing something that I am not seeing, this has to do with qualified non-profit health insurance insurers.

[jklcpa]

Unless you're seeing something that I am not seeing, this has to do with qualified non-profit health insurance insurers.

 

 

This is what I received earlier today from IRS through their Guidewire email:

 

Notice 2015-17 provides transition relief from the assessment of excise tax under section 4980D for small employers (in particular, employers who are not applicable large employers) who reimburse or pay a premium for an individual health insurance policy for an employee. Notice 2015-17 also addresses the treatment for federal tax and for market reform purposes of arrangements reimbursing premiums of 2%-shareholder employees of S corporations. Finally, Notice 2015-17 addresses application of the market reforms to certain employer arrangements to fund Medicare premium payments or to provide a TRICARE-related health reimbursement arrangement (HRA). 

Notice 2015-17 will be in IRB 2015-10, dated March 9, 2015.

[Lee B]

Finally found an article on Accounting Today's website :

 

This looks like a delaying action in the hopes that Congress will deal with this problem.

Delaying implementation really doesn't solve anything except that we won't have taxpayers

paying a $ 100 a day penalty for 2014. On the other hand look at all the gyrations

everyone has gone thru to clean up S Corp owners health insurance.

Are we going to go back and amend thousands of Form 941s, 940s, W -2s , W - 3s not to mention state quarterlys.

 

What a frgging mess !

 

 

Treasury Delays Enforcement of Standalone Health Reimbursement Arrangement B

 

inShare1

 

 

Washington, D.C. (February 18, 2015)

By Michael Cohn

The Treasury Department said Wednesday that it would delay enforcement of an Affordable Care Act prohibition relating to standalone health reimbursement arrangements until July 1.

 

A standalone HRA is an employer-provided benefit that offers participants a spending account to reimburse them for qualified medical expenses. However, in light of the ACA’s ban against health plans with an annual dollar limit on essential benefits, standalone HRAs have been deemed impermissible.

 

Notice 2015-17, released Wednesday by the Treasury and the Internal Revenue Service, provides transition relief from the assessment of excise tax under Section 4980D of the Tax Code for small employers (in particular, employers who are not applicable large employers) who reimburse or pay a premium for an individual health insurance policy for an employee. Notice 2015-17 also addresses the treatment for federal tax and for market reform purposes of arrangements reimbursing premiums of 2 percent-shareholder employees of S corporations. Finally, Notice 2015-17 addresses application of the market reforms to certain employer arrangements to fund Medicare premium payments or to provide a TRICARE-related health reimbursement arrangement.

 

Business groups such as the National Association for the Self-Employed and the National Association of Home Builders applauded the move. “The announcement today by the Treasury Department that it has offered a short-term delay in the enforcement of a prohibition on Health Reimbursement Arrangements is welcome news for our community, but a long-term, legislative solution is still urgently needed,” said Katie Vlietstra, vice president for government relations and public affairs for the National Association for the Self-Employed. “America’s smallest employers need the stability of a permanent fix in order to continue to utilize this critical tool to help provide health care coverage to their employees.”

The National Association of Home Builders also issued a statement in support of the delay. “While today’s announcement by the Treasury Department is a step forward in helping small businesses to provide affordable health coverage to their employees, a short-term delay isn’t good enough,” said NAHB chairman Tom Woods, a home builder from Blue Springs, Mo. “Congressional action is needed to make this change permanent.”

 

NAHB CEO Jerry Howard discussed the issue of standalone HRAs in a meeting with Health and Human Services Secretary Sylvia Burwell on Feb. 5. In addition, NAHB is calling on Congress to advance legislation based on the bipartisan bill introduced by Reps. Charles Boustany, R-La., and Mike Thompson, D-Calif., in the waning days of the 113th Congress that would reverse the IRS regulation preventing small businesses from providing employees with standalone HRAs.

 

“We look forward to working with Reps. Boustany and Thompson to re-introduce legislation that will require the IRS to reverse its regulation preventing small businesses from providing standalone HRAs so that they can provide better health coverage to their employees at lower costs,” said Woods. 

 

The NASE also backs the legislation. “We support Congressmen Boustany and Thompson’s plans to re-introduce their bipartisan legislation focused on offering a permanent correction to this issue,” said Vlietstra. “This bipartisan legislation would order the IRS to reverse its regulation preventing small businesses from providing standalone HRAs so that they can support their employees and help them obtain affordable health care. Their legislation, combined with the momentum by Senate Republicans and Democrats to address this issue, will help millions of small business owners and should be passed by Congress as soon as possible. HRAs have long-been used to help small business owners provide some level of financial support for their employees. As an unintended consequence of the Affordable Care Act, the prohibition placed upon the use of HRAs is detrimental to small businesses and their employees across the country. Although we welcome this temporary, first step, we look forward to working with members on both sides of the aisle in Congress on a more permanent solution to this situation.”

 

Small business owners could have faced fines of up to $100 per day per employee for helping their employees purchase health insurance, according to Senator Chuck Grassley, R-Iowa, who proposed an amendment to fix this problem during a Senate Finance Committee mark-up last month. He said Wednesday that he is pursuing a permanent fix. 

 

“I’ve heard from several Iowa small business owners who feared they could be subject to thousands of dollars in penalties simply because they helped their employee pay for health insurance in 2014,” Grassley said in a statement. “For these and other affected businesses, the penalty relief is welcome news, but ultimately it only delays the inevitable. Small businesses are still prohibited from reimbursing their employees to purchase health insurance. It’s just a matter of when they have to come into compliance with the law. Small businesses and their employees still will be hurt going forward.  Congress has to fix this problem. This is the kind of problem that Obamacare created because it was poorly considered and rushed into law

[easytax]

Here is a decent article from Forbes written by Tony Nitti discussing this:  http://www.forbes.com/sites/anthonynitti/2015/02/18/in-last-minute-move-irs-spares-small-employers-big-obamacare-penalties-for-2014/

 

Today, the IRS issued Notice 2015-17, which provides that if an employer had fewer than 50 employees, they will not be subject to the penalty in 2014 or from January 1 through June 30, 2015.

In addition, offending S corporations who reimburse premiums of more than 2% shareholders will not be subject to the penalty before January 1, 2016.

[TAXMAN]

So lets go back up to a previous comment. Do we now go back and undo all the w-2's, 941, etc that were done to avoid those DOL penalty. I have some of those S-Corps with that issue on them.

[Lee B]

So lets go back up to a previous comment. Do we now go back and undo all the w-2's, 941, etc that were done to avoid those DOL penalty. I have some of those S-Corps with that issue on them.

 

I will evaluate it on a case by case basis. Off the top of my head I have 3 for sure that require redoing Forms

 

940,941,W -2/W-3 and the state quarterly reports.

 

Thank god, I haven't efiled any W -2 s yet.

 

Plus I have payroll catchup work for the current quarter.

 

What a mess !

Edited February 19, 2015 by cbslee

[Randall]

Also, check me on this.  I read it as applying only to the 2% S shareholder, and not to his employees.  If S Corp  has paid some of their insurance, it still needs to go on their W2 for income tax purposes and FICA tax.

[Lee B]

To the extent that the S Corp has paid for or reimbursed the S Corp owner for his health insurance premiums,

the rules go back to the way they were for 2013. Box 1 Wages, not subject to social security and medicare

deductible as S E Health Insurance on line 29 page 1 Form 1040, until the rules are changed again ?