posted on: 5/30/2006
revised: 3/10/2010
IRS issued much-needed clarification on
health insurance for S-corporation shareholders on May 15, 2006 at
http://www.irs.gov/businesses/small/article/0,,id=157049,00.html
. It was not that the issues are complicated but rather that
there are so many variables imposed by insurance laws and common
health insurance practices. Many taxpayers and advisers were
confused. Unfortunately, they will still be confused after
reading this.
Part of the confusion is that the
language used to phrase a question is so important in this topic.
This is one of those tax topics that simply changing or adding a
single word will change the tax treatment and the advise given by a
tax professional. Consequently, taxpayers complain about
conflicting advice when, most likely, the real problem issue was in
the wording of the inquiry. (Not that there hasn't been plenty
of bad advice given by the professional community on this topic -
including an errant publication that I wrote a few years ago).
The bottom line is that an
s-corporation, just like any other business, can best provide health
benefits through a tax-qualified plan like an HRA or MERP. The
rest is fairly straightforward - even if not the response a taxpayer
wants to hear.
It is also important that the IRS
guidance does not touch on a number of issues that are
important to many S-corporation owner/employees, including:
-
coverage provided through a
spouse/employee/dependent
-
planning opportunities to provide
health insurance as an "above the line" deduction
-
wage tax planning (IRS guidance
apparently presumes this is not an issue)
-
health savings accounts
-
treatment of uninsured health
expenses
-
LLCs that elect tax treatment as
S-corporations
-
elections of s-corporations
regarding tax treatment
In my opinion, there is not enough
published information on these topics for the average business owner
to make the best decisions and properly report taxes on these
issues. The high number of S-corporations that improperly
report taxes on health insurance is evidence of this problem.
Certainly the IRS clarification is
welcome. (And I did not miss the fact that this official
clarification is great for Freedom Benefits' business because it
emphasizes the importance of using an HRA as an umbrella to provide
health insurance when health insurance may not otherwise receive
favorable tax treatment). But there are more questions left
unanswered than were answered in the latest IRS guidance. Each
of these issues will eventually be covered by myself and other tax
commentators, but for now S-corps are still left to stab in the dark
on the details of this topic.
keywords: HRA,
S-corporation, LLC, health insurance taxation
related topics:
Copyright 2010 by Tony Novak. Originally produced and published for the "AskTony" column syndication prior to 2007. Edited and independently republished by the author in March 2010. All rights reserved. |