Mix and Match

[J Simmons]

O owns 100% of Corp C, a C corporation, and O receives Form W-2 pay from Corp C.

O also owns 100% of Corp S, an S corporation, and does not receive a Form W-2 from Corp S, although others (non-owners) do receive Form W-2 pay from Corp S.

Corp C and Corp S are obviously a control group.

Corp C and Corp S sponsor an HRA for their EEs.

Is O eligible for the HRA because he is an EE of Corp C? Would the answer differ if O also received Form W-2 pay from Corp S?

Or is O ineligible as though a 'partner' because he owns more than 2% of Corp S which is a part of the control group, whether or not he also has Form W-2 pay from Corp S?

[J Simmons]

O might be ineligible as a 'partner' because he owns more than 2% of Corp S which is a part of the control group, whether or not he also has Form W-2 pay from Corp S--at least that is what S Derrin Watson says in his new blog column, Who's the Employer? relaunched on Nov 3, 2008, at its new home at Sungard

[Guest Sieve]

John --

In Watson's hypo, the C corp employees were leased to the S corp where they performed their services. Wouldn't his answer be different if these were 2 legitimate businesses, each with a separate business purpose, and each performed independent services?

[J Simmons]

Hey, Larry,

I took Derrin's answer to be that if the owners were actually EEs of the S corp (despite being on the C corp's payroll and leased to the S corp), then they'd be ineligible for the health plan. It seemed to be whether the owners were in reality EEs of an S corp that Derrin thought would wire them out of the health plan, regardless of whether also EEs of the C corp. The implication seems to be that if only EEs of the C corp and not also in reality of the S corp, the fact that they are owners of both a C corp and S corp that are part of a control group would not disqualify them from the health plan.

My OP was prompted by the concern that as constituent parts of a control group, a 'single' employer, the S corp being in the mix might make the owner/EEs ineligible for the health plan. Not knowing of any legal authority on the issue, I would think that it is not of which type of entity an owner is or is not an EE, but the ownership in the ER that is what disqualifies the the EE from tax-favored health plan participation. Since a control group is a 'single' employer, ownership in that single employer is at least in part ownership in an S corp. I'm not entirely comfortable with Derrin's approach, at least not until perhaps it can be backed up with a citation.

[Guest Sieve]

John --

Seems to me that Derrin is correct in his hypo because the C corp is just an entity established to shield the e'ees from their real employment, which is with an S corp. If the employee's services with the C corp were legitimate, and separate from services with the S corp, then I think participation through the C corp would be ok to the extent of the C corp income. I do see your point, but don't think you aggregate ownership under 414(b) & © BEFORE applying the health care rules, which would mean you'd not treat ownership in the S corp against an owner of a C corp (although I don't know whether there's authority either way).

What is the concern about W-2 comp. with the S corp? Won't the owner of an S corp, even if pulling in no W-2 comp, still have self-employment income and still be considered an employee of the S corp--or do all S corp owners have W-2 comp rather than self-employment income?

[J Simmons]

I like what I see you and Derrin advocating, but wish there were some ruling on it.

Non-owner EEs of an S corp may enjoy tax-free health benefits provided by the S corp. So too may non-owner EEs of a C Corp. It does not appear to be status an as EE then that wires you out of the tax-free health benefit situation.

Rather, it is an otherwise qualifying EE owning an interest in the ER that is not a C corp. If the 'ER' is a control group that includes a C corp and a pass-thru entity, it's hard to see how the EE on the C corp's payroll but who also owns stock in the S corp escapes the stain of that ownership in the control group 'ER' whether or not also on the S corp's payroll (or in reality, an S corp EE).