The Affordable Care Act ( Aca ) Marketplace Reforms

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Background The purpose of this report is to clarify how to account for a more than 2% shareholder S Corporation Owners’ Health insurance from a payroll perspective, in light of the Affordable Care Act (ACA) marketplace reforms. Additionally, for the small business S corporation; is it possible to assist employee’s with health insurance premiums without running afoul of marketplace reforms? The internet is rampant with conflicting advice on these seemingly simple questions. The most recent guidance from the IRS (notice 2015-17) is more of a reprieve on penalties, rather than guidance. Additionally, the June 30, 2015 deadline for reprieves has passed; which has accountants and taxpayers waiting for additional “guidance” while sorting out…show more content…
According to IRC § 1372 any person owning more than 2% of the S Corporation, or holding more than 2% of the voting power, is considered a partner of the business. What! The S Corporation shareholders are now a partners? Once it is understood that an S-Corporation is a hybrid between: a sole proprietorship, a partnership and a corporation, it all starts to make more sense. One of the biggest considerations that a S Corporation has in regard to payments to shareholders is that the IRS requires shareholders to be paid reasonable consideration, in the form of wages, for services provided; and thus, are treated as an employee for general payroll purposes. (IRS.com, 2016). However, the same Shareholder is treated as a partner in regard to fringe benefits. The Internal Revenue Service (IRS) classifies health care benefits as fringe benefits. Therefore, they must be taxed as such, unless excluded as per current laws. As a partner, health insurance payments by the corporation on behalf of the shareholder must be, as a fringe benefit, included in wages for the year that the benefit is received as per IRC §1372. Recall from above, that health insurance is not a tax-free fringe benefit. This means that any health insurance premiums paid for by the corporation must be treated as wages subject to income taxes; however the law does allow benefits to be excludable from social security, Medicare (FICA) and federal unemployment taxes (FUTA). There is some
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