Potential Impact of Affordable Care Act on S-Corporations

The Affordable Care Act (ACA) introduced significant change throughout the United States. One area of change relates to S-corporations and how these corporations provide health insurance to employees. Further, not only did the law change, it also became ambiguous in some areas. Because of the potential impact of the ACA, S-corporation owners should discuss their practices with an attorney as quickly as possible.

Changes Caused by the ACA

Prior to the ACA, it was possible for businesses to reimburse employees for health insurance plans obtained by the employee and, at the same time, receive a deduction for insurance costs. This eliminated the need for the business to provide a group health plan and, as a result, was more cost efficient. IRS Notice 2008-1 provides the requirements for an S-corporation to qualify for the deduction. However, under the ACA, unless a qualified group health plan is established, an S-corporation may not use Notice 2008-1 to qualify for a deduction. A corporation found to be in violation of the ACA may be subject to significant fines.

It is important to note that these changes do not apply to businesses in which only one employee is receiving health insurance. However, as this Iowa State University article describes, if the business had been using the reimbursement arrangement with more than one employee, the business must either “eliminate their health benefits entirely or…establish group health insurance coverage for their employees.” The result appears to be that in order to qualify for a deduction, S-corporations will have to provide a qualified group health plan.

More-than-2% Shareholders

In regards to more-than-2% shareholders in S-corporations, the ACA is largely ambiguous. It is unclear at this point whether all of the above discussion applies to shareholders. The closest answer so far has come from the U.S. Department of Labor in a FAQs section released on November 6, 2014. The Department appeared to establish that the ACA applies if the arrangement meets the definition of a group health plan. As defined in I.R.C. §5000(b)(1), a group health plan is:

a plan (including a self-insured plan) of, or contributed to by, an employer (including a self-employed person) or employee organization to provide health care (directly or otherwise) to the employees, former employees, the employer, others associated or formerly associated with the employer in a business relationship, or their families.

This definition appears to be broad enough to include shareholders within the ACA’s ban on reimbursement arrangements. However, it is important to note that in the Department of Labor’s release, no mention was made of S-corporations or shareholders. Therefore, more clarification is required from the Department of Labor and/or the IRS before any assumptions may be made regarding the applicability of the ACA to more-than-2% shareholders.

Review Your Practices

The impact of the ACA is far-reaching and still evolving. S-corporation owners need to be aware of and understand the new requirements they potentially face in regards to providing employees and shareholders with health insurance plans. If you live in the Palo Alto, San Francisco, or Los Angeles areas, please contact the Royse Law Firm today to discuss your company’s practices.

Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.

Roger Royse

Roger Royse, the founder of the Royse Law Firm, works with companies ranging from newly formed tech startups to publicly traded multinationals in a variety of industries. Roger regularly advises on complex tax structuring, high stakes business negotiations and large international financial transactions. Practicing business and tax law since 1984, Roger’s background includes work with prominent San Francisco Bay area law firms, as well as Milbank, Tweed, Hadley and McCloy in New York City.
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