There is no question that the Affordable Care Act (ACA) has dramatically impacted the health insurance industry and how companies approach coverage for their employees. The strict requirements and stiff penalties have most companies on edge. What’s more, the regulations in the ACA, IRS notices and the Department of Labor guidance are complicated and in some respect conflict. This is apparent when trying to understand the rules for S Corporations that reimburse employees for non-employer sponsored health insurance. As per IRS notice 2008-1 and everything we’ve read prior to the ACA, reimbursements for individual health insurance plans on behalf of S Corp owners, have been subject to income tax, but not FICA. Has that changed as a result of the ACA?
Are S Corp Owners Subject To FICA?
The basic rules have not changed from the prior years. Specifically, employers can still reimburse or pay a more than 2% shareholder’s health insurance premiums, include the premium reimbursement in the shareholder’s W-2 (subject to income tax, not FICA), and deduct the additional compensation amount as per announcement 92-16 and IRC Section 3121(a). If case you’re wondering, a non-employer sponsored health insurance plan is one in which the employer reimburses the employee for an individual health insurance plan — meaning the employer did not provide the insurance.
Beginning in 2014, there is an added twist to the rules as a result of the ACA provisions. Specifically, if the S Corporation is reimbursing or paying premiums on non-employer sponsored health insurance for more than one S corporation employee, then it appears that 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, if the S corporation only reimburses the medical insurance premium (or pays the premium directly to the insurance company) for one S corporation shareholder/employee and no other employee (shareholder/employee or other employee), the reimbursement arrangement would only cover one current employee and the ACA provisions should not apply to that employer payment plan. In this case, FICA would not apply to the reimbursement.
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.
How do we correct the mistake?
If you identify a mistake in how you are withholding taxes for S Corporation owners, it can be corrected. Specifically, FICA can still be paid and corrected on the W-2 if the returns have not been filed yet (Refer: IRM 20.2.12). If they have already been filed, the FICA taxes will still need to be paid and the taxes reflected through a corrected W-2. If the employer does not receive the employee’s portion of the FICA, then those taxes will be reported as taxable income for that employee in the following year.
What are the penalties for failure to conform to the rules?
There are potential fines of up to $100 per day per employee per violation. That could amount to $36,500 per year per employee per violation.
Is there any relief if our S Corp fails to meet the requirement?
Not exactly. However, IRC Section 4980D(c)(1) states that the penalty will not apply when exercising reasonable diligence and when failures are corrected with certain periods IRC Section 4980D(c)(2). It may be very difficult to prove reasonable diligence, although the IRS notice 2008-1 does appear to conflict in part with the ACA provisions.
More Questions? Browse Answers or ask your affordable care act tax questions online.
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