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S CORP SHAREHOLDERS AND SMALL EMPLOYERS

MEDICAL INSURANCE REIMBURSEMENT


Starting in 2016, an S Corp which has more than one employee (other than the shareholder/owner) can no longer simply include the health insurance reimbursement amount in the shareholder's W-2 in Box 1 and move one. The health insurance reimbursement may need to be included in Box 1, 3 and 5 on the shareholder's W-2 (subject to FICA) in order to avoid ACA penalties unless additional guidance is released by IRS.


An S Corp which only has one employee (the shareholder) is exempt from the ACA rules so it can continue to reimburse its single employee/shareholder's health insurance premiums, either paying directly to the insurance company on the employee/shareholder's behalf or reimbursing the employee/shareholder as long as the employee/shareholder submits documentation supporting the amount of premiums paid to the insurance company. It is unclear whether starting in 2016 these insurance reimbursements need to only increase Box 1 wages or if they also need to increase Box 3 and 5 wages. For now (at least through 2015), tax payers can still rely on Notice 2008-01 which means they need not be included in Box 3 or Box 5.


Keep in mind the S/E health insurance deduction is only available to the shareholder for months that they were not eligible to participate in any other subsidized health insurance plan maintained by an employer of the taxpayer, whether through another job the shareholder has, or through the shareholder's spouse's employer.


Similarly, S Corps can no longer simply reimburse employees for health insurance premiums they paid. Employers must either have a qualified plan that meets ACA requirements (no annual limit on benefits, and provides preventative services) or they must not have anything that even remotely looks like a health plan. Employers can increase W-2 wages for employees so that employees can purchase their own insurance, but there must be no stipulation that the increase be used for health insurance. It is simply a pay increase full taxable to the employee for FICA purposes. 


IRS provided reprieve from the $100 per day per employee ACA penalties through the end of 2015 for S Corps. Outside of an S Corp, similar rules are in place for small employers (less than 50 FTEs), but the IRS reprieve from ACA penalties is only good through June 30, 2015. The reprieve does not apply to small employers who offered stand-alone HRAs or other medical reimbursement plans - this relief only applies to employers who provide insurance premium reimbursements to their employees.


For 2014, this reprieve only provides relief from ACA penalties. IRS could still challenge reimbursements given to employees or to S Corp shareholders that were not fully subject to FICA taxes, i.e. if there was no qualified health insurance plan in 2014 and the employer reimbursed premiums for employees, those reimbursements should have been included in the employees' W-2 as fully taxable wages. Amended W-2s may be required in order to be considered in compliance for 2014. Form 8928 does not need to be filed to report any non-compliance through the period of relief provided by IRS.


Please contact us, or your benefits provider, if you would like additional information to ensure you are in compliance with the new ACA requirements.