Do you provide health care benefits to a few of your employees and not others? This is an eligibility and richness of benefits issue. You may find yourself at risk for eligibility discrimination if, for example, you offer coverage only to the owner and an employee or two and not to the rest of your team. You also run into problems if you are found to be discriminating in the benefits your company provides. An example could be if you offer your management group 100 percent of premiums paid by the company and only offer your staff 50 percent of premiums paid. This is not related to the 50 full-time equivalent (FTE) large employer status.
While it might be possible to set up a plan to comply with the tax non-discrimination rules where employees throughout the company are offered different benefits, you also have to navigate through federal and state insurance laws and other Department of Labor regulations – the short answer is just don’t do it! The penalty for non-compliance is $100 per failure per day.
Do You Qualify For The Self-Insured Health Deduction?
Are you seeking to claim the self-insured health deduction (SIHD) on your 1040? If so, one of the following statements must be true:
- You were self- employed and had a net profit for the year. (Profits should be reported on Schedule C, C-EZ or F).
- You were a partner with net earnings from self-employment.
- You received wages in 2014 from an S corporation in which you:
- Owned more than 2 percent of shares and
- Health insurance premiums paid or reimbursed by the S corporation are shown as wages on Form W-2.
Easy enough … until it isn’t.
S Corps: Catch 22
If you are basing your self-insured health deduction on only the S Corp eligibility criterion above, you have to be very careful to a.) not violate ACA non-discrimination and, b.) maintain your eligibility for the self-insured health deduction.
In order to get the self-insured health deduction, S Corp either needs to pay directly or reimburse the owner and include the amount on form W-2. Whichever of those two choices the S Corp makes, the S Corp is providing coverage to that owner. And, if you remember in the non-discrimination section above, ALL employees of the S Corp must receive the same benefit in order to comply with the non-discrimination rule. So by doing the actions required to get that owner eligibly for the self-insured health deduction, S Corp is covered by the ACA non-discrimination testing and it had better be sure to offer coverage to everybody.
And if you think you can just get around the rule by simply increasing wages in lieu of paying for or reimbursing shareholder’s premiums, you’re wrong. Doing this will put you at odds of the self-insured health deduction eligibility rules, making it impossible for your shareholders to claim the deduction.
Let this be your guide:
A shareholder of an S corporation (who doesn’t have a schedule C or one of the other SIHD criteria) will not be able to take the self-insured health deduction unless the S corporation is providing similar coverage to ALL other S corporation employees AND is including the amounts paid directly to the insurance provider or in payments reimbursed to the shareholder on Form W-2.
Remember, you do have options. A tax professional can help identify yours. Email Rea & Associates to learn more.
By Joseph Popp, JD, LLM (Dublin office)