How Health Insurance Complicates S Corporation Reporting (article)

How Health Insurance Complicates S Corporation Reporting (article)

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The Affordable Care Act (ACA) brought changes to employer-provided plans, and it added an additional wrinkle to the already complex subject involving health insurance plans for S corporations.

Tax Treatment for S Corporation Shareholder-Employee Health Insurance

Health InsuranceEmployer-provided insurance received in-kind by an employee as compensation is one type of employee incentive commonly referred to as a fringe benefit. C corporations deduct the costs paid to provide health insurance to their employees, although these employees generally do not recognize this fringe benefit as taxable compensation. S corporation employees are afforded similar treatment; however, a shareholder-employee owning more than 2 percent of the S corporation (2-percent shareholder) is subject to different rules.

Health insurance premiums furnished to 2-percent shareholders must be included as taxable compensation. Because 2-percent shareholders cannot participate in a cafeteria plan, all premiums on account of such persons are treated as “employer-provided” (including those ostensibly designated “employee” and/or “employer” portions). The health insurance premiums for such persons are not subject to income tax withholding, nor are the premiums subject to Social Security, Medicare or unemployment taxes. Additionally, 2-percent shareholders may qualify for a personal tax deduction in an equivalent amount.

Individual Deductions Available for Health Insurance Costs

Health insurance provided by the S corporation to the 2-percent shareholder (including that provided to his or her spouse or dependents) is treated as taxable compensation in the manner described previously. As an offset, an individual can take a “Self-Employed Health Insurance Deduction” for the amount paid toward health insurance if:

  • The S corporation makes the premium payments on a policy covering the 2-percent shareholder and his or her spouse or dependents; or
  • The 2-percent shareholder makes the premium payments on a policy covering such 2-percent shareholder and his or her spouse or dependents, furnishes proof of the premium payment to the S corporation, and the S corporation reimburses the 2-percent shareholder; and in either case,
  • The amount of such premium payments is reported as taxable compensation on the 2-percent shareholder’s Form W-2.

Proper compliance with these rules permits the 2-percent shareholder an “above the line deduction” (i.e., one that is used to determine adjusted gross income so it is not subject to potential limitations) for the amount of such premium payments. These rules do not require a policy covering the 2-percent shareholder to be in the name of the S corporation. If a 2-percent shareholder pays the premiums directly and does not seek reimbursement from the S corporation, the premiums paid are reportable among itemized deductions as medical and dental expenses. These amounts are included as itemized deductions only to the extent they exceed 10 percent of the taxpayer’s adjusted gross income.

Exceptions



A 2-percent shareholder is not able to take the deduction if the amount is greater than the individual’s share of earned income from the S corporation (which includes the 2-percent shareholder’s FICA taxable cash wages from the S corporation). Additionally, a 2-percent shareholder is not able to take the deduction if the individual is eligible to participate in another subsidized health plan from any employer or from a spouse’s employer.

Complying with ACA

The ACA did not affect the aforementioned regime involving 2-percent shareholders, but it did establish new parameters that group health plans must meet. Employers that do not meet certain ACA provisions may face excise taxes and other penalties.

No matter the type of entity, health insurance plans must meet certain provisions under ACA, including standards related to the cost of health insurance premiums and the type of coverage provided. Excise taxes for failing to meet ACA can be as high as $100 per day per employee. 

Plans are prohibited from imposing annual limits on key health coverage, and the IRS clarified in Notice 2013-54 that plans providing reimbursement to employees for their insurance costs may violate the provisions. Arrangements involving reimbursement to S corporation 2-percent shareholders under an “employer payment plan” potentially are subject to these provisions as well.

S corporations involved with these arrangements generally can avoid this provision if the health plan has only a single employee, regardless of whether the employee is a 2-percent shareholder. Arrangements where a second employee is a spouse or child of a 2-percent shareholder (who is the first employee) would still be considered one-employee plans, meeting the exception to the ACA requirements.

Additionally, IRS Notice 2015-17 provided further relief for S corporations by permitting an exemption from the ACA excise tax, through the end of 2015 and until further guidance is issued, for arrangements involving reimbursement by the S corporation for premiums covering 2-percent shareholders.

Evaluate Arrangements Closely

To help shareholder-employees maximize the benefits of their health insurance coverage, S corporations should consider the structure of their health coverage offering. Given the uncertainty around ACA compliance, S corporations may want to shift to a “direct-pay” model, where the employee’s compensation is increased as a method of assistance to acquire health insurance; however, the incremental compensation increase should not be tied directly to the cost of insurance.

A tax professional experienced with tax planning for S corporation health insurance and other employee fringe benefits can assist with the determination of what works best for your corporation. Please contact your local CBIZ MHM tax professional for more information.


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CBIZ MHM is the brand name for CBIZ MHM, LLC, a national professional services company providing tax, financial advisory and consulting services to individuals, tax-exempt organizations and a wide range of publicly-traded and privately-held companies. CBIZ MHM, LLC is a fully owned subsidiary of CBIZ, Inc. (NYSE: CBZ).

How Health Insurance Complicates S Corporation Reporting (article)Health insurance plans for S corporations are already complicated, but the Affordable Care Act doesn't make them any easier to manage....2016-11-29T15:05:00-05:00

Health insurance plans for S corporations are already complicated, but the Affordable Care Act doesn't make them any easier to manage.