Tax Free Premium Reimbursement- S corp loophole?

[Flyboyjohn]

Despite the new general prohibition on pre-tax payment or reimbursement of individual health insurance premiums it appears that corporate payment or reimbursement of 2% S corp shareholder premiums is still essentially pre-tax via the IRC 162(l) deduction taken on the shareholders individual return.

See IRS Notice 2008-1 which has not been rescinded to my knowledge.

Anybody disagree?

[J Simmons]

Obamacare does not apply beyond providing health coverage/benefits to active employees. The 2% or greater S corp shareholder is under the IRC not considered an employee, but a self-employed person like a partner in a partnership. So, arguably the rulings under Obamacare prohibiting reimbursement of an employee's individual health insurance premiums would seem not to apply to a 2% or greater S corp shareholder.

[masteff]

I agree w/ J Simmons.

The prohibition on pre-tax payments for employee's individual health insurance policies results from rules specifically addressing group health plans. See Notice 2013-54.

As J Simmons notes and as discussed in Notice 2008-1, the S-corp 2% shareholder deduction is by virtue of it being a business expense for a self-employed person. Technically speaking, it is deducted from AGI, rather than excluded from AGI (pre-tax payroll deductions are excluded from AGI which is why you don't deduct them on your tax return).

[Flyboyjohn]

I'm now reconsidering. Notice 2013-54 applies to "any" arrangement that pays or reimburses individual policy premiums making it an "employer payment plan" subject to the draconian $100/day/person penalties.

While the 162(l) tax deduction might still be avaialble it's certainly not worth the risk of penalties.

[masteff]

I would redirect you to Notice 2008-1:

"In order for the 2-pecent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the 2-percent shareholder-employees Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040, U.S. Individual Income Tax Return."

Per this, the S-corp is required to pay it post-tax which is completely allowed by Notice 2013-54.

You might also consider Rev Proc 2014-41 and Reg 1.162(l)-1T which discuss the interaction of 162(l) and the premium tax credit.

http://www.irs.gov/pub/irs-drop/rp-14-41.pdf

https://www.federalregister.gov/articles/2014/07/28/2014-17695/rules-regarding-the-health-insurance-premium-tax-credit

Edit:

Here's the part from 2013-54 which says after-tax is okay...

"An employer payment plan, as the term is used in this notice, does not include an employer-sponsored arrangement under which an employee may choose either cash or an after-tax amount to be applied toward health coverage. Individual employers may establish payroll practices of forwarding post-tax employee wages to a health insurance issuer at the direction of an employee without establishing a group health plan, if the standards of the DOL’s regulation at 29 C.F.R. §2510.3-1(j) are met."

[GBurns]

Section 162 pertains to the business operations only and have no bearing on the tax return of the individual.

Also please read the above post by mastiff.

[Flyboyjohn]

Wanted to reopen this discussion to see if anybody had seen anything new in the past 2 1/2 months in the way of official guidance or authoritative commentary on the issue, thanks.

[Peter Gulia]

I continue to care about this issue because to me it seems strange to deny an otherwise available tax treatment merely because a corporation buys individual insurance rather than group insurance. It seems especially harsh if State insurance law makes it impossible to buy group insurance (for example, if shareholder-employees don't count in defining whether a group exists).

I haven't analyzed how the tax law sorts out because the circumstances in which this problem happens typically don't have enough money at risk that a client would pay me to do the necessary research (and I'm too poor to use the time just to satisfy my curiosity).

[GBurns]

I do not understand your issue. There is no "otherwise available tax treatment " and it dos not matter whether "a corporation buys individual insurance rather than group insurance" if the covered person is a 2% or more shareholder in an S corp.

It has long been, if not always been, that any amounts paid for health insurance for such individuals are treated and reported as income. The individual the takes a deduction on Schedule A of their 1040, if possible.

Also see Masteff's post #5 above.

[Flyboyjohn]

Sorry I've let this thread go in an unintended direction, I'm going to start a new thread focused on the concern I have, thanks