How the ACA affects personal health care coverage for owners and shareholders
May 12, 2016
With the implementation of the Affordable Care Act (ACA), we often receive questions on how the new regulations affect the personal and family coverage of owners and shareholders. Like many aspects of the ACA, the answer is: It depends. You can determine your status by answering the following questions:
1. Are you a C-Corp or an S-Corp?
2. Does your company sponsor group health coverage?
If you are a C-Corp, shareholder-employees are treated the same as all other employees of the corporation. That means if the company sponsors a health plan, the shareholder-employee can participate on a tax-preferred basis, the same as other employees. However, there is currently no acceptable guidance that allows the employee to purchase health care coverage on their own on any tax-preferred basis if the company does not sponsor a plan.
If you are an S-Corp and if you are more than two percent owner, you and your immediate family members are to be treated as partners.
If your company sponsors a health plan: An owner or family member cannot participate in the company’s plan on a tax-preferred basis. They can still participate in the group’s plan, but both the shareholder contributions and the contributions of the employer, if applicable, will be subject to income tax but not Social Security and unemployment tax.
If you receive a stipend or reimbursement: If a shareholder receives health care coverage paid for by the company (outside of a group health plan) or reimbursed by the company, the dollars paid to or reimbursed for premiums are added to the individual’s W-2 wages and subject to income tax but not Social Security and unemployment tax.
Whether or not your company sponsors a health plan: More-than-two percent shareholders can receive some tax-preferred treatment for individual health care policies either purchased by the company or by the shareholder themselves.
IRS rules allow the more-than-two percent shareholders the same above-the-line deduction for health insurance as self-employed individuals. What this means is that the deduction is taken on the first page of the shareholder Form 1040 so it is not subject to limitations applied to itemized deductions. Generally the net effect is that the health insurance deduction offsets the additional income reported on the shareholder W-2 from the S-Corporation.
Understanding where your business falls within ACA regulation will help determine how it affects your personal and family coverage. In some cases you are treated the same as your employees. In others, there may be tax implications or tax-preferred treatment. Knowing the difference is critical to navigating the health care landscape.
Note: Additional guidance is expected from the IRS