IRS Notice 2017-17: Guidance on “S” Corporations & Certain Types of Health Coverage Reimbursement Arrangements
PURPOSE AND OVERVIEW:
This IRS Notice reiterates the conclusion in previous guidance addressing employer payment plans, including Notice 2013-54, 2013-40 I.R.B. 287,1 that employer payment plans are group health plans that will fail to comply with the market reforms that apply to group health plans under the Affordable Care Act (ACA).
For this purpose, an employer payment plan as described in Notice 2013-54 refers to a group health plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy or directly pays a premium for an individual health insurance policy covering the employee, such as arrangements described in Revenue Ruling 61-146, 1961-2 C.B. 25. This notice also provides transition relief from the assessment of excise tax under Internal Revenue Code (Code) § 4980D for failure to satisfy market reforms in certain circumstances. The transition relief applies to employer healthcare arrangements that constitute “S” Corporation healthcare arrangements for 2-percent shareholder- employees.
This IRS Notice supplements and clarifies the guidance provided in Notice 2013-54 and other guidance in response to comments and questions from taxpayers and stakeholder groups about certain aspects of that guidance.
The United States Department of Labor (DOL) and the United States Department of Health and Human Services (HHS) (collectively with the Treasury Department and the IRS, the Departments) have reviewed this notice and have advised the Treasury Department and the IRS that they agree with the guidance provided in this IRS Notice.
This IRS Notice is intended to provide further clarification of the guidance provided in Notice 2013-54 and other guidance and is intended to be read in conjunction with that guidance.
Treatment of “S” Corporation healthcare arrangements for 2- percent (2%) Shareholder-Employees: IRS Notice 2008-1, 2008-2 I.R.B. 1, provides that if an “S” Corporation pays for or reimburses premiums for individual health insurance coverage covering a 2-percent Shareholder (as defined in Code § 1372(b)(2)), the payment or reimbursement is included in income but the 2-percent Shareholder- Employee may deduct the amount of the premiums under Internal Revenue Code § 162(l), provided that all other eligibility criteria for deductibility under Internal Revenue Code § 162(l) are satisfied. (This arrangement is referred to in this IRS Notice as a “2-percent shareholder-employee healthcare arrangement”.)
Question: Is a “2-percent shareholder-employee healthcare arrangement” subject to the market reforms?
Answer: The Departments are contemplating publication of additional guidance on the application of the market reforms to a 2-percent shareholder-employee healthcare arrangement. Until such guidance is issued, and in any event through the end of 2015, the excise tax under Code § 4980D will not be asserted for any failure to satisfy the market reforms by a 2-percent shareholder-employee healthcare arrangement.
Further, unless and until additional guidance provides otherwise, an “S” Corporation with a 2-percent shareholder-employee healthcare arrangement will not be required to file IRS Form 8928 (regarding failures to satisfy requirements for group health plans under Chapter 100 of the Internal Revenue Code, including the market reforms) solely as a result of having a 2-percent shareholder-employee healthcare arrangement.
The guidance provided in this Q&A (including the guidance provided in the preceding paragraph) does not apply to reimbursements of individual health insurance coverage with respect to employees of an S corporation who are not 2-percent shareholders (but see Q&A-1).
The Treasury Department and the IRS are also considering whether additional guidance is needed on the federal tax treatment of 2-percent shareholder-employee healthcare arrangements. However, unless and until additional guidance provides otherwise, taxpayers may continue to rely on Notice 2008-1 with regard to the tax treatment of arrangements described therein for all federal income and employment tax purposes. To the extent that a 2-percent shareholder is allowed both the deduction under Internal Revenue Code § 162(l) and the premium tax credit under Internal Revenue Code § 36B, Revenue Procedure 2014-41, 2014-33 I.R.B. 364, provides guidance on computing the deduction and the credit with respect to the 2-percent shareholder.
Internal Revenue Code § 9831(a)(2) provides that the market reforms do not apply to a group health plan that has fewer than two (2) participants who are current employees on the first day of the plan year. Accordingly, an arrangement covering only a single employee (whether or not that employee is a 2-percent shareholder-employee) generally is not subject to the market reforms whether or not such a reimbursement arrangement otherwise constitutes a group health plan.
If an “S” corporation maintains more than one such arrangement for different employees (whether or not 2-percent shareholder- employees), however, all such arrangements are treated as a single arrangement covering more than one employee so that the exception in Internal Revenue Code § 9831(a)(2) does not apply. For this purpose, if both a non-2-percent shareholder employee of the “S” Corporation and a 2-percent shareholder employee of the “S” Corporation are receiving reimbursements for individual premiums, the arrangement would be considered a group health plan for more than one current employee. However, if an employee is covered under a reimbursement arrangement with other-than-self-only coverage (such as family coverage) and another employee is covered by that same coverage as a spouse or dependent of the first employee, the arrangement would be considered to cover only the one employee.