If you haven’t already heard, the IRS released an update on the tax rules for health insurance reimbursement plans as it relates to the Affordable Care Act (ACA) and S Corporations. This update addresses small businesses that do not offer healthcare coverage, but do reimburse employees for insurance purchased on the healthcare exchanges. The IRS is now waiving noncompliance penalties for the 2014 tax year and the first half of 2015. How does this impact your business and what else has changed?
Is there still a noncompliance penalty?
No, the IRS has provided relief for businesses to transition to the new ACA rules. Specifically, any employer with less than 50 full-time employees will not be subject to the infamous $36,500 Section 4980D penalty per employee. The relief applies to employers that are conducting an employee reimbursement plan for 2014 and through June 30th, 2015. However, penalties will still be applied beginning on July 1, 2015.
What about S Corp owners?
As you may recall, notice 2013-54 indicated that if an S Corporation is reimbursing or paying premiums on non-employer sponsored health insurance for more than one S corporation employee, then the reimbursement arrangement may be considered a “group plan” subject to ACA because it covers more than one employee. In this instance, the S Corporation would be required to include FICA on the reimbursed amount because the ACA provisions have been violated. However, per this latest Notice 2015-17, the IRS will not assert the Section 4980D penalty on an S corporation that reimburses the insurance premiums of a more than 2% shareholder. Furthermore, the notice indicates that the IRS and the DOL are contemplating publication of additional guidance on reimbursement plans for 2% plus S Corp owners.
Are the new rules set in stone for S Corps?
As of now, the guidance suggests that S Corporation owners fall within the definition of an employee and are subject to the ACA provisions. However, it is certainly possible that the IRS and/or the Department of Labor (DOL) will issue a clarifying notice that supports IRS Notice 2008-1 and excludes all S Corporation owners from the requirement.
Can employers increase employee pay to cover the cost of insurance?
Yes, the IRS notice confirms that an employer can increase an employee’s compensation as long as it is not conditioned upon the employee using those funds to cover out-of-pocket health insurance costs.
More Questions? Browse Answers or ask your IRS notice 2015-17 questions online.
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