Update on Prior Guidance on Health Insurance for More-Than-Two-Percent S Corporation Shareholders Under IRS Notice 2015-17

Update on Prior Guidance on Health Insurance for More-Than-Two-Percent S Corporation Shareholders Under IRS Notice 2015-17

Dec 22, 2015

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.

  1. 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).
  2. 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].

Compliance Remedies

 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.

  1. 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.
  2. 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.