S Corps, health insurance, and ACA

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Hayden
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S Corps, health insurance, and ACA

Post by Hayden » Wed Jan 22, 2014 6:06 pm

Wanted to make S Corp owners aware of a really important issue regarding new health insurance requirements under ACA, as explained in this blog:

http://evergreensmallbusiness.com/s-cor ... obamacare/

Even if you have fewer than 50 employees, the non-discrimination provisions of the ACA could affect you.

SeattleCPA
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Re: S Corps, health insurance, and ACA

Post by SeattleCPA » Wed Jan 22, 2014 6:29 pm

Hi Hayden, thanks for posting link to my blog...

And this issue *really* is a potentially big deal for small businesses especially the four million S corporations in the country (many of who don't think they need to worry about ACA because the employer mandate only applies to firms with 50 or more employees)...

The surprise is that the discrimination testing applies to small employers--even those to whom the mandate doesn't apply.

And then the scary part is that while failing a discrimination test in past (on something like a fringe benefit plan) might mean that you lost a deduction or something, here the penalty is calculated based on employees you discriminated against... And those penalties run at rate of $100 per day per employee or $36,500 per year.

So with a couple of employees, you could theoretically be looking at $73K in penalties.

SteveKL
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Re: S Corps, health insurance, and ACA

Post by SteveKL » Wed Jan 22, 2014 8:11 pm

SeattleCPA,

I am still confused on how the ACA requirement affects S-corp owners. Consider an S-corp with one owner, who is also a W-2 employee. In addition to the owner, there are a dozen non-owner employees. In your estimation, which of the following scenarios will trigger the penalty provision addressed in your blog post?

1. S-corp maintains a company medical insurance plan, and offers coverage to all eligible employees on a partial cost-shared basis. Owner opts for coverage, and company pays premium. None of the employees opt for coverage. Owner is the sole covered employee under the plan.

2. S-corp does not maintain the policy. Instead, the owner buys health insurance on the ACA exchange. Since there is no company plan, employees also obtain coverage on the exchange (or not; S-corp does not have anything to do with employees' insurance choices). Owner and employees all pay their premiums after-tax.

3. Same scenario as #2 (above) except the S-corp pays the owner's individual plan premiums directly to the insurance provider, and reports these payments in Box 14 on the employee's W-2 per the provision at http://www.irs.gov/uac/Newsroom/Dont-Mi ... f-Employed

If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2.

Put another way, is it the payment of premiums (any premiums) for health insurance on behalf of the S-corp owner that triggers the ACA penalty, or does it only apply when the company maintains an insurance plan in which non-owner employees do not participate?

Thank you for your perspective, Steve!

SeattleCPA
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Re: S Corps, health insurance, and ACA

Post by SeattleCPA » Wed Jan 22, 2014 10:38 pm

SteveKL wrote:SeattleCPA,

I am still confused on how the ACA requirement affects S-corp owners. Consider an S-corp with one owner, who is also a W-2 employee. In addition to the owner, there are a dozen non-owner employees. In your estimation, which of the following scenarios will trigger the penalty provision addressed in your blog post?

1. S-corp maintains a company medical insurance plan, and offers coverage to all eligible employees on a partial cost-shared basis. Owner opts for coverage, and company pays premium. None of the employees opt for coverage. Owner is the sole covered employee under the plan.

2. S-corp does not maintain the policy. Instead, the owner buys health insurance on the ACA exchange. Since there is no company plan, employees also obtain coverage on the exchange (or not; S-corp does not have anything to do with employees' insurance choices). Owner and employees all pay their premiums after-tax.

3. Same scenario as #2 (above) except the S-corp pays the owner's individual plan premiums directly to the insurance provider, and reports these payments in Box 14 on the employee's W-2 per the provision at http://www.irs.gov/uac/Newsroom/Dont-Mi ... f-Employed

If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2.

Put another way, is it the payment of premiums (any premiums) for health insurance on behalf of the S-corp owner that triggers the ACA penalty, or does it only apply when the company maintains an insurance plan in which non-owner employees do not participate?

Thank you for your perspective, Steve!
Hi Steve,

I think you're okay with scenario #1 as long as plan is ACA compliant... i.e., if you have everyone (other than owner) decide not to participate, you're okay.

In scenario #2, there's not insurance so there's not discrimination so you're okay there... but you don't get any self-employed health insurance deduction, no payroll tax savings etc.

In scenario #3, which has been what people typically do, you've got a problem because premium reimbursement doesn't work... it isn't an ACA compliant plan... and here with a dozen employees you've got about $420K of penalties. BTW I think there's a $500,000 limit to the penalty... I think that's right...

It's the discrimination that triggers the penalty per the law. Again, note the penalty supposed won't be assessed until IRS writes the regs. I think that's why the IRS website still talks about the "old" way of doing this.

Hope that helps.

Steve

P.S. SteveKL, I didn't acknowledge the earlier very kind comments you made in response to another post I'd made. That was very nice. Thank you. :happy

GeauxBR
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Re: S Corps, health insurance, and ACA

Post by GeauxBR » Wed Jan 22, 2014 10:48 pm

Our family business is an s corp. We only have 4 employees (family) and we all are on our spouse's insurance from their employers. So we don't do anything insurance related.

Is there anything in particular we should be looking out for?

SteveKL
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Re: S Corps, health insurance, and ACA

Post by SteveKL » Wed Jan 22, 2014 11:01 pm

GeauxBR wrote:Is there anything in particular we should be looking out for?
IMO there is nothing health-insurance-related that should affect your S-corp operations, since you are all providing for your families' insurance needs outside your company, and not trying to deduct or reimburse any premiums through the company.

SeattleCPA (who posted above) has an excellent article on his blog that covers many aspects of S-corp organization and taxation that might otherwise be overlooked. If you haven't read it, I highly recommend http://evergreensmallbusiness.com/small ... rt-primer/

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Hayden
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Re: S Corps, health insurance, and ACA

Post by Hayden » Thu Jan 23, 2014 9:25 am

SeattleCPA, again, thank you for raising this issue. I think most S Corp owners have no idea about this.

One last wrinkle. What about company contributions to an employee's HSA? Is that thought of as a health insurance payment, which would trigger the non discrimination penalties (SteveKL's scenario 3 )?

Or are HSA contributions not health insurance premiums, so the non discrimination rules don't apply?

soccerdad12
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Re: S Corps, health insurance, and ACA

Post by soccerdad12 » Thu Jan 23, 2014 10:13 am

SteveKL wrote: 1. S-corp maintains a company medical insurance plan, and offers coverage to all eligible employees on a partial cost-shared basis. Owner opts for coverage, and company pays premium. None of the employees opt for coverage. Owner is the sole covered employee under the plan.
Don't think this is an option. We were told that at least 80% of eligible employees of our S-Corp had to participate in the plan or the insurance companies (BC/BS, Aetna etc...) won't even write the plan. I think the owner would be out of luck and have to get a personal policy as well.

SeattleCPA
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Re: S Corps, health insurance, and ACA

Post by SeattleCPA » Thu Jan 23, 2014 6:51 pm

soccerdad12 wrote:
SteveKL wrote: 1. S-corp maintains a company medical insurance plan, and offers coverage to all eligible employees on a partial cost-shared basis. Owner opts for coverage, and company pays premium. None of the employees opt for coverage. Owner is the sole covered employee under the plan.
Don't think this is an option. We were told that at least 80% of eligible employees of our S-Corp had to participate in the plan or the insurance companies (BC/BS, Aetna etc...) won't even write the plan. I think the owner would be out of luck and have to get a personal policy as well.
As a practical matter, I think what we S corporation shareholders need to do is have an ACA compliant plan and rely on the insurer's policy requirements.

So I think it's possible that SteveKL's approach will work if plan is ACA compliant and one of the rules isn't violated...

But SoccerDad12? I think you raise a good, practical point...

I said this in the blog post, but I think at some point not too far into the future, small businesses have only a couple of options: Insure or offer to insure everybody with an ACA compliant plan... Insure nobody.

The reason for this is that while the employer mandate doesn't force you to provide employees with insurance, the $100 per day per employee penalty means you can't take any risks.

BTW I didn't mention this in post, but if you're a small business who is, er, misclassifying employees as independent contractors I think that's pretty risky too (or at least it will be starting in a few months probably).

A final point just so someone doesn't think I'm trying to foment some sort of political argument here: What the ACA does for small employers and healthcare fringe benefits is what pension laws have always required for small employers. E.g., you can't break the discrimination rules or bad stuff happens. :(

markfaix
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Re: S Corps, health insurance, and ACA

Post by markfaix » Fri Jan 24, 2014 5:23 pm

@SeattleCPA -

Thanks for your blog post and comments.

Do the ACA nondiscrimination rules apply to other entities aside from S corps, like LLPs or LLCs taxed as partnerships?

SeattleCPA
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Re: S Corps, health insurance, and ACA

Post by SeattleCPA » Sat Jan 25, 2014 2:01 pm

hi Mark,

That's a good question. And I don't think I have a good answer. But here's my first impression...

One can think about ACA's discrimination rule applicability for small employers along a continuum, I think.

At one end, e.g., you have the small C corporation with a handful of employees including a shareholder-employee. And in this situation, the discrimination rules clearly apply and gosh the owner(s) need to be careful once the penalties start getting assessed.

At the other of the continuum, you have the sole proprietorship, and in this case the sole proprietor isn't an employee of course. And so I think everybody agrees this man or woman gets to take the self-employed health insurance deduction without fear or risk of anything related to the ACA.

So then, in between these two extremes, you have small partnerships (including LLCs and LLPs taxed as small partnerships) and small S corporations.

What I think is that right now, you want to treat small S corporations like a regular corporation because the accounting means the health insurance gets deducted (as wages) on the corporation return. Or at least that's a good low risk guess about how the tax accounting works.

But maybe Congress or the IRS will provide an approach that lets small S corporation shareholder-employees continue to use the self-employed health insurance deduction... that would only seem fair to me.

For small partnerships, logically, you'd think the tax accounting treatment would look more sole proprietorship because the health insurance deduction doesn't appear on the entity tax return but on the partner's 1040 return. Though one rub here is that to take the deduction on the partner's 1040 return, the health insurance needs to be paid for by the partnership and the policy needs to be a group policy... but if you had a group policy paid for by the partnership, maybe you could discriminate because the deduction gets taken not on the partnership return but on the partner's 1040 return?

I guess another way of saying this is that I don't think Congress intended for the ACA to eliminate the self-employed health insurance deduction...

And then, to come back to this worry: With the penalties so huge, I would discourage anyone from taking an adventurous position on their tax return.

And to inject one other very random thought: I wonder if these ACA penalties (when possibly relevant) aren't reasons to incorporate a small business if it isn't already incorporated. Or to operate as an LLC... I believe many small businesses would be mortally wounded by any event that results in, say, $100K or $200K of nondeductible, ACA penalties.

huskerfan
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Re: S Corps, health insurance, and ACA

Post by huskerfan » Mon Jan 27, 2014 9:12 am

Am I right to assume that this has been delayed and won't be enforced this year?

http://www.cnbc.com/id/101347430

But it seems that it's something to keep a close eye on for the coming year and structure your health care plan around. Also, does anyone know where dental plans fit into this if they're from a separate provider than health insurance?

SeattleCPA
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Re: S Corps, health insurance, and ACA

Post by SeattleCPA » Mon Jan 27, 2014 2:20 pm

huskerfan wrote:Am I right to assume that this has been delayed and won't be enforced this year?

http://www.cnbc.com/id/101347430

But it seems that it's something to keep a close eye on for the coming year and structure your health care plan around. Also, does anyone know where dental plans fit into this if they're from a separate provider than health insurance?
Yeah, that's an article that talks about the same point of the post... that the non-discrimination rules apply to all employers (even small ones). But IRS won't begin to assess penalty until they write the regs.

The point to keep in mind is that if you're a small business employer doing this today (discriminating) you probably don't want to delay fixing the discrimination because (a) the penalties are gigantic and (b) few of small business owners monitor issuance of treasury regs... :confused

bluemarlin08
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Re: S Corps, health insurance, and ACA

Post by bluemarlin08 » Mon Jan 27, 2014 2:58 pm

Suppose there is one shareholder and 2 non shareholders that are on their spouses coverage?

SeattleCPA
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Re: S Corps, health insurance, and ACA

Post by SeattleCPA » Mon Jan 27, 2014 11:36 pm

bluemarlin08 wrote:Suppose there is one shareholder and 2 non shareholders that are on their spouses coverage?
Yeah, I think that's problematic... or at least potentially pretty risky. Probably your plan discriminates. Sorry. :(

BTW, I have my fingers crossed that IRS or Congress might do something to self the self-employed health insurance deduction in a case like yours.

Also, right now (early 2014) the penalty isn't being assessed...

Code Commit
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Re: S Corps, health insurance, and ACA

Post by Code Commit » Tue Jan 28, 2014 11:02 am

SeattleCPA, thanks a lot for your post (and the whole blog, which is fantastic). May I ask you one clarification? I believe our case falls as a special case of example #1 that you included, but just want to make sure.

Our S-corp has only 2 employees - me and my spouse. The S-corp pays for the entire premium. I opt for family coverage and spouse declines coverage due to spousal coverage. Do the ACA changes affect anything related anti-discriminatory testing in this case? We file taxes as married-joint if that makes a difference. Thank you.

SeattleCPA
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Re: S Corps, health insurance, and ACA

Post by SeattleCPA » Tue Jan 28, 2014 12:57 pm

Code Commit wrote:SeattleCPA, thanks a lot for your post (and the whole blog, which is fantastic). May I ask you one clarification? I believe our case falls as a special case of example #1 that you included, but just want to make sure.

Our S-corp has only 2 employees - me and my spouse. The S-corp pays for the entire premium. I opt for family coverage and spouse declines coverage due to spousal coverage. Do the ACA changes affect anything related anti-discriminatory testing in this case? We file taxes as married-joint if that makes a difference. Thank you.
So I think you're okay. I.e., in this case things work sort of like they do for a solo 401(k)... you can cover both spouses in manner you describe... you don't have to worry about employee discrimination. You don't need to have a group plan, etc. In a sense, you don't have "real" employees... or at least not employees IRS or Dept of Labor worries about you discriminating against...

Thank you, too, for kind words about the blog. :)

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