IMPORTANT UPDATE INFORMATION!
Treatment of S Corporation Healthcare Arrangements
for 2% Shareholder-Employees
The Internal Revenue Service has recently posted
guidance on the issue of the 2% Shareholder-Employee of an S Corporation
relating to how health care arrangements will be treated in respect of the
Affordable Healthcare Act.
The healthcare arrangement through which an S
corporation pays or reimburses premiums for individual health insurance
covering a 2% shareholder, any 2% shareholder, (as defined in I.R.C § 1372(b)(2)
is subject to market reforms of the Affordable Healthcare Act.
26 U.S. Code § 1372 - Partnership Rules to Apply
for Fringe Benefit Purposes
(a) General Rule - For purposes of applying the
provisions of this subtitle which relate to employee fringe benefits - -
- (1) the S corporation shall be treated as a
- (2) any 2-percent
shareholder of the S corporation shall be treated as a partner of such partnership.
(b) 2-Percent Shareholder Defined
For purposes of this section, the term "2-percent
shareholder" means any person who owns (or is considered as owning within
the meaning of section 318) on any day during the taxable year of the S
corporation more than 2 percent of the outstanding stock of such corporation or
stock possessing more than 2 percent of the total combined voting power of all
stock of such corporation.
Additional guidance on the application of market
reforms to 2% shareholder-employee health care arrangements is being
contemplated by IRS. Until additional
guidance is issued, and in any event through the end of 2015, the excise tax
§ 4980D will not be assessed for any failure to
satisfy the market reforms by a 2% shareholder-employee healthcare arrangement.
Unless and until additional guidance provides
otherwise, taxpayers may continue to rely on Notice 2008-1, 208-2 I.R.B. 251,
for all federal income and employment tax purposes for such arrangements.
When and if IRS provides further guidance, it is a
regulatory provision that at least six months lead time be given taxpayers
before the provision is effective.
This would lead us to believe that there is no
change in the reporting of insurance paid for a 2% shareholder in an S
corporation as wages, not subject to FICA and Medicare, with an adjustment to
income for health insurance of the self-employed for 2015 and at least until
June 30, 2016, if then, based on above.
would appear - if one employee, a 2%
shareholder in the S corporation and no other employees - ACA has
changed nothing - medical insurance paid is in W-2, but not boxes 3 and 5 for
FICA and Medicare and the individual receives an AGI adjustment on Form 1040
for the health insurance. That is until further guidance is given.
Answer. Correct, although the
same tax treatment would apply if the S corporation had more than one employee.
The number of employees is irrelevant.
Question. This is the problem, when terms are used as in
the IRS notice ("The Affordable Care Act (ACA) did not change the above
rules regarding the federal tax treatment of health and accident premiums paid
for a 2% shareholder." Now the question, if the S corporation has
other employees, other than the 2% shareholder employee, does the insurance
paid for the 2% shareholder employee become subject to FICA and Medicare, and
then subsequently does the individual loose the "self-employed health
insurance AGI deduction"?
Answer. No, the fact
that the S corporation has other employees is irrelevant. The tax treatment
described in question 1 continues to apply to 2% shareholders.
Question. There are
instructors teaching that nothing has changed at all and that the S corporation
can have multiple employees and all is as it was before the ACA - this is the
confusion that must be cleared up. Basically that the S corporation
(those with less than 50 employees) can still discriminate and therefore only
cover the S corporation shareholder employee with health insurance and all is
as it was in Notice 2008-1.
Answer. I am not sure
why you think that the ACA would have changed anything about an S corporation’s
ability to have multiple employees. I
don’t see this addressed anywhere.
Question. In the notice
it refers to "fewer than 2 employees" - what if there are multiple 2%
and greater shareholder employees - would the treatment outlined in Notice
2008-1 be available to all as long as there were no non-shareholder employees?
Answer. Just to
clarify, the reference to fewer than 2 employees relates to whether a plan is
treated as a group health plan that is subject to the market reforms; it does
not relate to the tax treatment of benefits that are received by 2%
shareholders under the plan. The treatment outlined in Notice 2008-1 could be
available to multiple 2% shareholders, so long as the arrangement did not cover
any non-2% shareholders. The test is not whether the employer has any non-2%
shareholder employees, it’s whether any of those non-2% shareholder employees
are reimbursed for their individual health insurance premiums.
Question. We do
understand that if the S corporation purchases insurance for all employees then
as an S corporation, the portion of the insurance premium paid on behalf of the
S corp shareholder/employee would be allocated to that portion of the insurance
premium to wages while other employees, non shareholders, would have a tax free
fringe benefit. Now the question, does the shareholder employee owe FICA
and Medicare on these wages and would they have the AGI deduction?
Answer. The tax treatment for
2% shareholders is as described in question 1.
Question. Finally, looking at the "relief
provisions" - S corporate shareholder employee with 2% or greater
ownership would have relief until end of 2015 - question, is this only if this
is the only employee of the S corporation?
Answer. No. Total
number of employees of the S corporation is irrelevant.Question June 30, 2015 would be if the S corporation
had more employees than just the shareholder who owns 2% or more?
Answer. As the notice states,
there is no change to the tax treatment of the 2% shareholder. If they would
get the AGI deduction before they notice, they’ll still get it after the
notice. No change.
Question. Thank you so very much, however, the
remaining question is what S corps have the relief provision through 2015 and
which lost it on June 30, 2015?
I think single handedly, this is what is the cause
of the confusion. and what developed the thoughts that if the S corp had
another employee that the S corp shareholder lost the FICA and Medicare free
Answer. S corps can
continue to reimburse the individual premiums of 2% shareholders. After June
30, 2015, they can no longer reimburse the individual premiums of any non-2%
shareholders without potentially triggering the excise tax.
ncpe strives to provide timely and accurate
information to the tax professionals we serve.
We appreciate the opportunity to provide this supplement to the
instructional material of the ACA presentation and are appreciative of the time
of Mr. Fagerland.
With our wishes for a prosperous and productive tax
season, ncpe and the ncpe Fellowship
the tax professional community!
Call 1-800-682-2163 or Fax (225) 654-8000