Guidance issued in Notice 2015-17 delayed the application of the Affordable Care Act (ACA) market reforms to individual policies that were held by S-corporation shareholders and for which premiums were reimbursed or paid for by the S corporation. This guidance was issued after W-2s were processed for the 2014 calendar year, and employers might have subjected health insurance premiums paid on behalf of greater-than-2% S corporation shareholders (including family members subject to the ownership attribution rules under Section 318) to payroll taxes and/or the respective shareholders did not deduct the self-employed health insurance premiums on their personal return.
Notice 2015-17 states that the market reform excise tax (i.e., the $100 per day per employee penalty) will not be assessed to an S corporation that is reimbursing or directly paying the premium for an individual policy of 2% S-corporation shareholders [Q&A-2].
This relief applies through at least December 31, 2015, and until additional IRS guidance is issued.
- Absent any future guidance from the IRS, S corporations may continue to rely on IRS Notice 2008-1 during this period (i.e., report the reimbursement as taxable wages in box 1 on the greater-than-2% S-corporation shareholder-employee’s W-2 but not report as FICA wages in boxes 3 and 5).
- Further, the S corporation is not required to file IRS Form 8928, which is used to self-assess the $100 per day per employee penalty, solely because the S corporation has a reimbursement arrangement for the greater-than-2% S-corporation shareholder individual policy health premiums.
As a result, the excise tax will not be assessed to a greater-than-2% S-corporation shareholder whose health insurance premiums are reimbursed for both 2014 and 2015.
The notice clarifies that the one-employee-participant exception to the market reform rules is allowed even if the employee receives family health insurance coverage that includes a spouse or dependent who is also an employee of the S corporation [IRS Notice 2015-17, Q&A-2].
Under the relief of Notice 2015-17, taxpayers are entitled to continue the reimbursement for greater-than-2% S-corporation shareholder premiums and to fully follow the guidance of IRS Notice 2008-1. Accordingly, health insurance premium reimbursements for these individuals are not subject to FICA taxes for both 2014 and 2015.
S corporations that issued 2014 Forms W-2 to greater-than-2% shareholders and incurred the FICA tax as a defensive measure against the market reform penalties are entitled to amend by filing Form 941-X or Form 943-X to recover the excess FICA.
- The IRS compliance procedures for amending the Form 941 or Form 943 require the employer to secure a written statement of consent from the affected employee because the employer is seeking recovery of both the employer and employee portions of FICA.
- The employer also must consider the need to amend FUTA and SUTA reports for 2014 for what are now tax-exempt health insurance reimbursements. In most cases this will not be necessary.
The Form 1040 of the greater-than-2% S-corporation shareholder generally will not change from this amended W-2 (absent an excess FICA computation or other self-employed income) because the premium reimbursement was already reported in box 1 of the W-2 as wages for income tax purposes. However, the employer should issue a corrected Form W-2c to reflect the reduced FICA and/or Medicare taxes in boxes 3 and 5. In addition, shareholders who did not deduct 100% of the self-employed health insurance premiums should file amended federal and, if applicable, state individual tax returns for 2014 to claim the deduction.
Notice 2015-17 provides valuable short-term transition relief from the $100 per day per employee excise, FICA, and/or Medicare taxes and health insurance premium reimbursements of S-corporation shareholders through December 31, 2015. However, it provides no long-term resolution of S-corporation shareholder-employee premium reimbursements.