Employer Provided Medical Insurance

As you probably know, many things have changed in 2014 as a result of the Affordable Care Act (ACA). Many businesses that provide medical insurance are impacted, so if this applies to you, make sure that you take the necessary action before the end of the year, as it can save a lot of headaches (and taxes/penalties) down the road.

Reimbursement Plans. Because group plans can often be expensive, it has often been common for a business to reimburse its employees for health insurance that the employees sign up for individually. Before 2014, this was perfectly acceptable, and the amount reimbursed could be excluded from the employees’ wages. The IRS has recently clarified that starting in 2014, this is no longer allowed. If your business reimburses its employees for health insurance, those amounts need to be included in the employees’ wages (and therefore need to have payroll taxes taken out). If your business provides insurance to the employees through a group plan, the amounts don’t need to be included in the employees’ wages. Note that the penalty for not complying can be as high as $100 per employee┬áper day.

2% S-Corp Shareholders with a group plan. For anyone who owns at least 2% of an S-Corp, the rules for group plans are similar to last year. The amount paid on behalf of each owner (and family members of the owner) must be included on their W-2.

  1. If we process your payroll, we’ll take care of the W-2. The only thing we need from you is the total amount of medical insurance the company paid for each owner in 2014 (you can estimate the amount of any December payments you haven’t made yet, if applicable).
  2. If we don’t process your payroll, you’ll need to work with your payroll provider to make sure the amount is documented correctly on your W-2. ADP has an option called “Scorp 2% medical plan”, and other providers likely have a similar option. The important thing is that the health insurance amount needs to be included in Box 1 of the W-2. but not boxes 3 or 5. And it should also be in Box 14.

In either case, it’s important that the business actually pays for the owner’s insurance directly. If not, at least have the business reimburse the owner for the amount paid.

Single-employee reimbursement plans. Note that if the business only has one employee, ACA market reforms don’t apply. Consequently, a single-member S-Corp may continue to reimburse a 2% shareholder-employee for health insurance premiums as before.

Do you have the support you need to manage your small business bookkeeping? Contact us to schedule an appointment to speak with a local small business advisor.