2015 Relief for Reimbursing Employees for Health Insurance Information is current as of May 29, 2015

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1 1 Q: I understand there is an exception for one employee/participant. If I'm the employee, can a 105 be used to reimburse for my spouse or dependents as well? A: Yes. Pursuant to 105, a plan can reimburse for the medical expenses of the employee, spouse and dependents. If there is only one employee, then the exception for only one participant plan would apply. 2 Q: What if the husband and wife are both shareholder employees? Do they qualify as one? A: If each are employees and each have their own plan, then they are considered two participants. However, if one has a plan that covers the family, it would only be considered one participant. 3 Q: After June 30, 2015, if the employer is still reimbursing and treating as after tax, they are still in violation. Correct? A: Technically, they have been in violation since January 1, However, Notice provided relief from the penalty through June 30, 2015 (or December 31, 2015, for more than 2% shareholders of an S corporation). Thus, if the reimbursement is dependent on health insurance, they are in violation. 4 Q: I have a client who is a church that has a pastor and two other part-time employees one about 90 hours per month and one about 40 hours per month. Can they write up a document that only full-time employees qualify for health insurance and get by as reimbursing only one participant? A: Presumably, yes, if adequate notice is given that there would only be one participant. Based on the guidance we have now, it would appear that you can, provided adequate notice is given to all employees. The term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean that those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This type of arrangement has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Note: ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those laws. 5 Q: So, it wouldn't work if an employer is directly paying the insurance and we gross it up and treat it as after tax. Correct? A: Yes, that is correct. If the reimbursement is dependent on insurance or is given to only employees who have health insurance, it still would be treated as a reimbursement plan, whether the reimbursement is done on a pre-tax or post-tax basis. 6 Q: What about overseas missionary/employees? The organization is U.S.-based and issues U.S. W-2 forms to the missionaries. A: The penalty for reimbursing applies to overseas employees as well. 7 Q: For a sole proprietor with employees, do I add the insurance premiums to the employees' W-2 forms to avoid the penalty? A: No. Technically the reimbursement is excludable and the employer does not have an option to add it to wages to avoid the penalty. The only way to give the employees a benefit would be to give everyone a raise, regardless of whether they have health insurance. Or, the sole proprietor could sign up for a traditional group health plan. 8 Q: What about fully funding an HSA for only one employee for his entire family? Is this a problem? A: HSAs are not considered group health plans for purposes of the Affordable Care Act provisions. Thus, making employer contributions to an HSA would not subject the employer to a penalty for reimbursing for health insurance. 9 Q: My client has a group plan and pays 100 0/o of the premium. Is it still a benefit to the employees, or does it need to be added to their wages? A: The penalty and notice only applies to reimbursement of individually owned policies. If the employer has a group health plan whereby employees select from various options, it is not subject to the penalty. Regardless, the insurance premium is tax-free and not added to wages pursuant to Rev. Rul Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 1

2 ecw National Association Q: Regarding health insurance being "excludable" from wages, do you mean gross wages as well as FICA wages? A: Yes. Pursuant to Rev. Rul , the reimbursement for health insurance premiums is excludable from wages for federal, FICA and FUTA. Q: My client has a traditional group health care plan. There are 15 employees. The employer pays 60% and employees contribute 40% pre-tax. All employees participate in the group health plan except for one. This one employee buys his own health insurance and turns in his insurance bill for reimbursement. The employer is currently reimbursing this one employee for 60% of his premium. This reimbursement is tax-free. Can this be done? A: Potentially, yes. It ultimately comes down to whether there is one participant in the reimbursement plan. If there is deemed to be more than one participant in the reimbursement plan, the employer would be subject to the penalty starting on July 1, Based on the guidance we have now, it would appear that you can reimburse the one employee as long as the employer provides adequate notice to all employees. The term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean that those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Note: ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those laws. Q: Are you saying that if they offer this option to all employees, then it would be okay? Or are you saying that they could give notice to other employees that this is going on, and that's okay? A: No, what we're saying is that there is ambiguity. The penalty does not apply to plans that have less than one participant. Since participant is not defined, it could be determined that there is more than one employee if the reimbursement option is given to all employees. Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean those who could participate, are participants because they are taking part in the choice of being able to choose a benefit. Thus, if they offer the reimbursement option to all employees, it could be interpreted that there is more than one participant in the plan and the employer would be subject to the penalty. Q: Can an S corporation reimburse the sole shareholder for Medicare premiums? A: Through December 31, 2015, yes. However, further guidance is needed to see if this can continue past December 31, 2015, for plans with more than one participant. If the sole shareholder is the only employee of the corporation, the reimbursement can continue past December 31, 2015, because the penalty does not apply to reimbursement plans that have one participant. Q: Please define the June 30, 2015, and December 31, 2015, dates you mentioned. A: If an employer is reimbursing an employee who is not a more than 2% shareholder of an S corporation, the reimbursement must stop by June 30, 2015, in order to avoid the penalty. However, an S corporation has until December 31, 2015, to stop reimbursing more than 2% shareholders in order to avoid the penalty. Q: I have an S corporation with only one shareholder/employee who is on Medicare. There is no employer group plan for this employee/corp. Can I reimburse his Medicare and his personal Medigap policy? A: Yes, as long there is only one participant. If the shareholder is the only employee of the corporation, then the S corporation can continue to reimburse the shareholder. In order to meet the Medicare reimbursement exception of Notice , the employer must have a group health plan offered. Thus, if the S corporation has another employee who is being reimbursed for an individual policy, the S corporation will be subject to the penalty beginning on July 1, 2015, for the employee and January 1, 2016, for the S corporation shareholder. Live VVebinats 01-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 2

3 eqv National Association 16 Q: The employer has a group plan, fewer than 50 employees, and previously reimbursed one employee for Medicare premiums. Can it continue to do that? A: This can only be done if the employer offers a group health plan (that does not only offer excepted benefits), the employee is enrolled in Medicare, the employer limits this benefit only to employees enrolled in Medicare and the plan limits reimbursement only to the premiums. 17 Q: An S corporation shareholder is the only employee. The corporation does not have a group plan. Can I reimburse for Medicare and Medigap? A: Yes, as long there is only one participant. If the shareholder is the only employee of the corporation, then the S corporation can continue to reimburse the shareholder. In order to meet the Medicare reimbursement exception of Notice , the employer must have a group health plan offered. Thus, if the S corporation has another employee who is being reimbursed for an individual policy, the S corporation will be subject to the penalty beginning on July 1, 2015, for the employee and January 1, 2016, for the S corporation shareholder. 18 Q: Are you saying that any health care plan provided by an employer violates ACA, or just those that reimburse an employee for insurance? A: No. The penalty applies to those who reimburse individually for employee-owned policies. If the employer offers a group health plan where the employees select from various options, then the penalty will not apply unless the plan is not compliant with other provisions of the Public Health and Safety Act. 19 Q: Is there any indication that health insurance benefits paid by an employer will become taxable as compensation or in any other way to taxpayers in the future? A: No, there has not been an indication of that. Pursuant to Notice and 105 and 106, amounts paid for health insurance are a tax-free benefit. 20 Q: An employer has a group plan and some employees opt out because they are covered by spouse. If the employer reimburses the employee for costs paid by the spouse, is this reimbursement taxable? A: If the employer is reimbursing the spouse's health insurance premiums that were paid with pre-tax wages, then the reimbursement should be taxable, otherwise there would be a double benefit (i.e., wages were excluded when the premium was withheld from the spouse's paycheck and a tax-free reimbursement was given to the employee for half of the pre- tax health insurance premiums). Even if the reimbursement is for health insurance premiums that were paid with after-tax wages, the reimbursement will be taxable because the spouse is not an employee of the employer who is reimbursing. If the employer is reimbursing for the spouse's medical costs, it could be possible that the health reimbursement arrangement (HRA) would not violate the ACA if the HRA is considered integrated with the group health plan. The HRA is integrated with a group health plan if the employee receiving the HRA is actually enrolled in a group health plan (other than the HRA) that does not consist solely of excepted benefits. The group health plan does not have to be offered by the employer (i.e., the employee could be enrolled in a group health plan offered by a spouse's employer). 21 Q: We have a couple of ministers who have been receiving nontaxed income as a part of their payment. They are both employed at the same church, which has fewer than 25 employees. Are these payments allowed, and if they continue, will the church be subject to the penalty? A: A church is subject to the same rules as any other employer. Thus, if the employees/ministers have been receiving a tax-free reimbursement of health insurance, the church will be subject to the penalty if this practice is continued past June 30, Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 3

4 22 Q: An S corporation pays a reasonable wage to the principal income earner, who hires his wife using a 105 plan to get deductible health insurance. Does paying the principal income earner a wage or 1099 payments eliminate the allowability of the 105 plan? A: No, paying the principal shareholder his or her reasonable wage is not going to eliminate the 105 plan. 23 Q: I have an S corporation with one shareholder. He and his wife both work in the company, and they each have their own health insurance on the exchange. Can we add back to W-2's and deduct as S corporation health on front of the 1040? A: You cannot do it for both the shareholder and wife. If both the shareholder and spouse are reimbursed, the penalty would apply. In order to avoid the penalty, the wife's reimbursements must stop by June 30, 2015, and the shareholder's reimbursements must stop by December 31, Q: If an employee who is eligible for insurance declines coverage, can the owner still reimburse his insurance (i.e., only one person)? A: Potentially. The key is that there is only one participant in the plan. There is concern that if the employer offers reimbursement for multiple employees, it could be subject to the penalty. Based on the guidance we have now, it would appear that you can, provided adequate notice is given to all employees. The term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean that those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. 25 Q: Are you saying that it doesn't matter if a small company grossed up wages after the fact, because there is relief until June 30, 2015, for small employers? A: Correct. Therefore, this practice must stop after June 30, Q: What if a company with leased employees offers a lower rate of pay to an individual plus pays for their health insurance premiums, which is offered through the leasing company? A: Leased employees are generally not employees and generally would not be eligible to participate in the employer's plan. Thus, the employer should not be subject to a penalty for this type of arrangement. 27 Q: What if you give those who have a spousal plan a stipend for not taking your health insurance? A: It would be considered taxable income, subject to payroll taxes, and should not be considered a reimbursement of health insurance. 28 Q: What if an employer has an employee who is covered by the VA because of past military service? A: If the employee is reimbursed for health insurance and there is more than one participant in the reimbursement plan, the employer would be subject to a penalty. There is an exception for having group health insurance and reimbursing an employee who has Medicare or TRICARE; however, that exception applies to Medicare/TRICARE. Thus if the VA insurance is not Medicare or TRICARE, the penalty will apply. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 4

5 29 Q: One of my clients has a group health insurance plan for four employees. One additional employee has Medicare, which he pays personally, and also has a gap insurance policy, which he pays personally. The employer reimburses him for those two policies when he provides the notices. Does that comply with the ACA rules so there would be no penalty? A: Yes, if the Medicare reimbursement is coordinated with the group health plan. It is considered coordinated with a group health plan if the employer offers a group health plan (which does not only offer excepted benefits), the employee is enrolled in Medicare, the employer limits this benefit only to employees enrolled in Medicare and the plan limits reimbursement only to the premiums. However, the reimbursement for the gap insurance policy could result in a penalty if the insurance is not Medigap or other supplemental insurance that is considered an excepted benefit per 9832(c)(4). 30 Q: A number of my clients have only one employee who needs insurance, so they can't get a group plan (two or more). As I understand it, the only way to avoid the penalty is to increase the employee's salary so that the employee can pay the premiums personally. Is that still correct now that Notice has come out? A: Yes. The way to apply this is to give all employees a raise or bonus and not make it dependent on having insurance. If you give a raise only to the employee who would be reimbursed for health insurance, the employer could have a reimbursement plan and thus be subject to the penalty. 31 Q: My client has 20 employees. All but one either have health insurance from other sources or are part -time so don't qualify for health insurance. The employer can't afford to give an $8,000 raise to all 20 employees in addition to the one employee who needs insurance. What can the employer do? A: The employer can reimburse health insurance premiums for that one employee only if the other employees are notified that they cannot participate in the reimbursement of premiums. However, there may be an issue with discrimination if the plan is not offered to other employees. Pursuant to Notice , discrimination has been delayed until guidance is issued. Once guidance is issued, you will have to make sure the plan is not discriminatory. Furthermore, ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those laws. 32 Q: It seems like the only reasonable alternative for an employer with one employee who needs insurance is to have the employee sign up for insurance on the exchange in order to avoid the penalty. Would that be your understanding? I'm assuming that's the goal of the ACA. A: The employee should sign up on the exchange to avoid the individual shared responsibility penalty. The employer will not be subject to a penalty if the employer does not reimburse for health insurance or has a reimbursement plan with only one participant. 33 Q: If an employer has many employees but only one employee needs insurance, and the employer increases the salary of that one person to cover insurance but does not require any documentation about the insurance, will it avoid the penalty? Or does the after-tax plan fail in all cases except for increasing all employees' wages by the same amount? A: It is tough to say whether this is going to create a problem because each case is based on facts and circumstances. Without any further guidance, it appears that this could create a problem. 34 Q: It sounds like the employer can't increase the salary to cover the one employee's insurance premiums, even if purchased on the exchange, without increasing all employees' salaries. Would that be your understanding? A: That is the general understanding, yes. 35 Q: This seems to be such a burden for a small employer that has only one person without insurance. Any idea why this came about? It seems so unfair. A: This has been a part of the ACA since it first came out in We're not sure if Congress failed to think about the full impact of the law or not. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 5

6 ecti ffi? National Association 36 Q: Are the husband and wife of a company considered one or two participants? A: If each are employees and each are being reimbursed for their separate policies, then they are considered two participants. However, if one is being reimbursed for a plan that covers the family, it would only be considered one participant. 37 Q: Are stand-alone dental and vision insurance policies (without medical insurance being offered to employees) included in the definition of a group health plan? A: Plans that provide excepted benefits are not subject to the market reforms of the ACA. Thus for ACA purposes, they are not considered a group health plan that is subject to penalties. 38 Q: I plan on contacting my business clients in the next two weeks to notify them of compliance issues. Do you have any suggestions for us if the taxpayer won't comply (i.e., the taxpayer will take the risk based on a court case that doesn't exist yet and won't agree to the filing of the excise tax)? A: Based on guidance now, there is no court case or PLR allowing this practice to continue. Keep in mind, that if the client refuses to comply, you should consider whether ethically you can continue working with the client. If the client refuses to file Form 8928, he/she is refusing to comply with tax law. 39 Q: Are there any pending court cases challenging this? Maybe a small business association? A: We are not aware of any pending court cases. 40 Q: If a company has five employees, can they reimburse for health insurance and avoid the penalty since they meet the small employer exception? A: No. The small employer relief under Notice is for relief from the penalty until June 30, After June 30, 2015, no employer can reimburse for more health insurance unless there is only one participant in the plan. 41 Q: A husband and wife own an S corporation 50/50. They have only one employee aside from themselves. Currently they reimburse the employee $500 per month. The $500 is subject to federal withholding and FICA taxes. Is this legal? If not, would a work-around be to give the employee a $6,000 raise? A: This is a Band-Aid approach. It doesn't seem to fix the problem entirely and could subject the employer to penalties. Even if that equals the amount of individual premiums, it could still be a problem. The best thing to do is to give the employee a percentage increase in wage. 42 Q: My client files a Schedule C as a disregarded entity. He has ten employees and doesn't offer health insurance to any of them. His LLC does pay for his insurance and his wife's insurance. Can he still take the deduction on Line 29 of the 1040? A: If the husband and wife have separate plans and the LLC is paying for each premium separately, it is in violation and subject to the penalty. However, this does not prevent the deduction on Line 29 assuming the rules are met for the selfemployed health insurance deduction for the sole proprietor's health insurance. Payment of the wife's separate plan would not qualify for the self-employed health insurance deduction. Also the spouse's health insruance would not be deductible on Schedule C, unless she is an employee. 43 Q: If an S corporation shareholder was reimbursed for 2014 health insurance and treated it as "after-tax," can a refund of the FICA be claimed on an amended Form 941? A: Yes, it can be. However, the reimbursement must stop after December 31, 2015, if the S corporation has multiple employees and wants to avoid the penalty. Otherwise, if the shareholder is the sole employee, the reimbursement can continue because it is clearly considered a one-participant plan. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 6

7 44 Q: An officer of a C corporation personally purchases health insurance in the marketplace. The corporation pays it directly. Is this arrangement subject to the penalty? A: If the officer is the sole shareholder and sole employee, this arrangement would not be subject to the penalty because the reimbursement plan has only one participant. Keep in mind that the shareholder, then, would not qualify for the PTC because the reimbursement plan is considered employer-provided health insurance. If there are other employees, this arrangement could cause the C corporation to be subject to a penalty. 45 Q: Is the penalty for reimbursement of health insurance for the 50+ employees correct (not fewer than 50 employees)? A: The penalty for reimbursement applies to all employers unless there is less than one participant in the plan. The relief from the penalty through June 30, 2015, applies to employers with fewer than 50 full-time and FTE employees. 46 Q: Is the relief for small employers for everyone, except the sole shareholder and single-employee companies? A: The relief is for small employers. A smaller employer is one that is not an Applicable Large Employer (ALE). Thus, the relief only applies to those with fewer than 50 FTE and full-time employees. 47 Q: What if a corporation hires part-time employees and doesn't offer health insurance to part-time employees, but pays health insurance for the shareholder only? Does this arrangement still qualify for the exception to penalty and relief? A: As long as the other employees are notified, this appears to be okay. However, there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Note: ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those laws. 48 Q: You mentioned that other employees should be notified. Notified of what? That health insurance is not offered to part-time employees? A: Yes, that the other employees are not eligible to participate in being reimbursed for health insurance. However, ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those laws. 49 Q: Should notice be given to everyone, even children age who are on the parents' group plans? A: The biggest issue is the fact that only one participant can be reimbursed for health insurance. The employer must be able to show that there is only one participant and no one can even have the option of participating. Therefore, if you don't notify them, there could be a possibility that they could participate. It is not clear as to whether the reimbursement policy can just state that only the one employee can participate. 50 Q: I'm confused on the after-tax fix. When would this apply? A: Notice reiterated that you cannot fix the problem by treating the insurance reimbursement as after-tax wages. Thus, the after-tax fix will not help an employer avoid penalties. If the employer treats the reimbursement as an after-tax reimbursement, the employer is still subject to the penalty. The "fix" doesn't mean there is a fix for avoiding the penalty. 51 Q: Can I go back and amend the 2014 S corporation return for health insurance reimbursement that wasn't deducted on the return? A: Presumably, yes, assuming the S corporation did reimburse the shareholder for health insurance. 52 Q: As an employer, I can still reimburse for dental and vision as a more than 2 0/0 shareholder for I do not have to include vision and dental in Box 1 of my W-2 and can still take a deduction on my 1120S. Correct? A: Yes. The penalty does not apply to plans that only provide excepted benefits. Vision and dental are considered an excepted benefit. However, in order to take the deduction on Line 29 of Form 1040 as self-employed health insurance for a more than 2% shareholder of an S corporation, the S corporation must include the vision and dental as wages on the W-2. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 7

8 53 Q: Do you know if NESP (non-employer sponsored premium plans), which the company TASC (Total Administrative Services Corporation) is offering, are okay for employers to offer? Are they in compliance? A: NATP believes these plans are not in compliance with Notice Q: Once you amend payroll taxes, don't you have to amend the 1120, etc.? A: It depends on the corporation's method of accounting. If the corporation is accrual, then, yes. However, if it is cash method, the refund of FICA would be income in the year received. 55 Q: An employer has a group policy and three employees. Two of them get insurance through the policy and one is covered through Medicare. Does this qualify as one participant for exemption? A: Yes, if the Medicare reimbursement is coordinated with the group health plan. It is considered coordinated with a group health plan if the employer offers a group health plan (which does not only offer excepted benefits), the employee is enrolled in Medicare, the employer limits this benefit only to employees enrolled in Medicare and the plan limits reimbursement only to the premiums. However, the reimbursement for the gap insurance policy could result in a penalty if the insurance is not Medigap or other supplemental insurance that is considered an excepted benefit per 9832(c)(4). 56 Q: If you don't amend the unemployment taxes, won't that trigger a problem when the total wages don't match the W-2? A: The W-2 forms are typically matched to the 941, not Form 940. This is indicated by the instructions for Line 3, Form Both taxable and nontaxable wages and fringe benefits are included in Line 3 of Form 940. Thus, whether the reimbursement was taxable or nontaxable, the amount on Line 3 would not change. However, Line 4 or 5 would change if the reimbursement is nontaxable. If this changes the amount of taxable unemployment wages, Form 940 should be amended. 57 Q: An S corporation has five employees, including the sole shareholder. No health insurance is provided or reimbursed to the non-shareholder employees. The corporation reimburses the S corporation shareholder for Medicare Part B, Medicare Part D and individually purchased Medigap policies. Can this reimbursement arrangement continue through December 31, 2015, without penalty or must it cease on June 30, 2015? A: This can continue through December 31, Q: An S corporation has one shareholder and one part-time employee. The part-time employee already has insurance through another employer. Can the part-time employee be "disregarded" in determining the number of participants? A: Technically speaking (and until further guidance is issued) to avoid the penalty, the employer should notify the part-time employee that he or she cannot participate. Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean those who could participate, are participants because they are taking part in the choice of being able to choose a benefit. 59 Q: A C corporation has three employees. Two employees are covered under their spouse's plan. Can the one employee be considered one participant and, thus, the employer can give her money towards her plan? A: It depends. This comes down to the definition of participant. Based on the guidance we have now, it would appear that you can, provided adequate notice is given to all employees. The term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean that those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Live VVeb naf, On-Demand Webinair, Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 8

9 60 Q: How do you handle the one employee who does not opt out for other options? You can't get a group plan for one person. A: Really the only option is to give everyone a raise. Unfortunately, this scenario is one of the ways the ACA "hurts" small employers. These are the rules, and the taxpayer must abide by them, which means the taxpayer could potentially lose a good employee because of the limitation provided by ACA. That said, If the employer has under 50 FTE, they are not required to offer insurance to their employees. 61 Q: If an employer does not have 50 FTE and is not required to offer insurance, can the employer reimburse the employee's insurance? A: The penalty for reimbursing for health insurance premiums applies to all employers and can only continue if there is one employee/participant. If there is more than one employee and the employer is reimbursing all employees, then the employer will be subject to the penalty. 62 Q: I have a self-employed person whose wife is an employee. He has one other hired person. Does this arrangement disallow: (1) the 105 plan for the spouse; (2) the one employee as being one participant; and (3) the reimbursement for health insurance? A: This is an issue with discrimination, which can cause plan failure. Without further information, we cannot say whether this is a problem. See Section 105 and the regulations. 63 Q: Regarding 105 plans that permit exclusions: If all employees except one are excluded, does this plan have only one participant? A: Potentially. Based on the guidance we have now, it would appear that you can, provided adequate notice is given to all employees. The problem is that the term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean that those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Note: ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those laws. 64 Q: For determining the number of hours for non-hourly employees, can you have a different method for different employees as long as you use the same method per employee? A: You can have different methods as long as they are reasonably and consistently applied. For example, you could use the same method for commission-based employees and then use a different method for salary-based employees. The key is that the method must be reasonably and consistently applied. 65 Q: Are we exempt from penalty if reimbursing marketplace insurance premium by and employer for employees as long as it occurred before June 30, 2015? A: Yes, the penalty is waived through June 30, 2015, if the employer is a small employer. 66 Q: If a less than 2 0/o shareholder is excluded from definition of FTE employee, does that mean they can have a plan that covers the shareholder employee + one other non-related employee? A: They are excluded from the definition of an FTE employee for determining Applicable Large Employer (ALE) status. However, they are not excluded from the definition of employee for reimbursement purposes. Under Notice , the S corporation can reimburse the shareholder through December 31, 2015, and not be subject to the penalty. However, for the employee, they can only reimburse through June 30, 2015, and not be subject to the penalty. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 9

10 67 Q: Does a 105 plan that just reimburses out-of-pocket medical expenses (not insurance just copays, etc.) still apply for penalties? A: This still applies. In order to not be subject to the penalty, the 105 can only reimburse for excepted benefits (i.e., dental, vision, long-term care). 68 Q: This relief is for everyone outside of one employee. It doesn't matter that the employer is under the 50 FTE, correct? A: That is correct. In order to qualify for the relief, the employer must be a small employer. A small employer is one that is not an Applicable Large Employer (ALE). An ALE is an employer with 50 or more full-time and FTE employees. 69 Q: Does the penalty start with the first employee? I thought there once was a "minimum number"? A: No, for this penalty, there is no minimum. Thus, the penalty applies for every participant in the plan. 70 Q: For 2015, Notice offers an example of when "Medicare premium reimbursements" to employees will be allowed (see Question 3, page 4: Integration of Medicare premium reimbursement arrangement) with a group health plan. This section may provide a potential arrangement for your Medicare enrolled employees, however, clarification is needed as to whether or not the employee with Medicare must take the employer's group health coverage as their primary carrier, with Medicare becoming the secondary insurance. The ambiguity of the wording in the first paragraph on page 5 related to the word "offers" makes it unclear if the employee must be on the group health plan, or merely have been offered the plan, but declined coverage. A: This is a good point and it's one of the many things that the IRS still needs to clarify. 71 Q: If the only employees of a C corporation are a husband and wife, are they considered one employee or two? A: If each is an employee and each is being reimbursed for their own plan, then they are considered two participants. However, if one has a plan that covers the family, collectively they would be considered one participant. 72 Q: An S corporation employs his wife as an assistant. Under the attribution rules, ERISA would treat the husband and wife as one participant, correct? A: ERISA is separate from the Internal Revenue Code. If both husband and wife have separate plans that are reimbursed, the S corporation has two participants and would be subject to the penalty. However, if one has a family plan and is reimbursed, there is only one participant (assuming the S corporation does not have any other employees). 73 Q: Can you give employees a weekly/monthly bonus rather than increase their hourly wage to help them pay for their own health insurance premiums? A: It depends. To fully avoid the penalty, the best thing to do would be to give all employees a raise and not make it contingent on obtaining health insurance. 74 Q: A sole shareholder has a health insurance policy that is reimbursed. He then has one full-time employee, besides himself, and does not offer him any insurance. He may be discriminating, but he isn't in violation of any ACA laws, correct? A: Presumably, no. I say presumably because I don't know all of the facts and circumstances of the client. However, the employer would not be subject to the penalty for reimbursing for health insurance because there is only one participant. Once guidance is given on the discrimination rules, it could be in violation. Note: ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those laws. 75 Q: Are churches (tax exempt organization) exempt from the penalties if they have a reimbursement plan for employees that have individual health insurance? A: No. Churches are subject to the penalty just as any other employer. Thus, if they reimburse for more than one employee, they will be subject to the penalty. Live Webinars On-Demand Webinars Self-Study with Facilitator ',elf Study phone: , ext. 3 web: natp@natptax.com 10

11 76 Q: So what is the best way to reimburse employees for health care costs? A: The only option is to give all employees an increase in their wages. 77 Q: If the employer has an employer health plan, the penalty for reimbursement does not apply, correct? A: That is correct. 78 Q: Is there an exemption for small employers, such as those with four or fewer employees, that would allow reimbursement arrangements? A: No. The penalty applies to all employers, regardless of size, that are reimbursing more than one participant for health insurance. 79 Q: Does the health plan/medical care reimbursement arrangements include the dental and vision insurance reimbursement for the purposes of the penalty? A: You can still reimburse for excepted benefits. Therefore, if the employer is only reimbursing for dental and vision, it's okay. 80 Q: Do commonly controlled businesses have to be consolidated to compute full-time employees and FTEs? A: Yes, businesses that are commonly controlled are aggregated to determine the number of full-time employees and FTEs. 81 Q: May an employer who insures five employees cancel insurance and reimburse employees for individual insurance accounts? A: No. Since the employer is reimbursing more than one participant, they would be subject to the penalty. 82 Q: Can you address the discrimination issue? I'm specifically concerned with S corporation employers that do not provide any form of health insurance benefit to non-shareholder employees but pay health insurance premiums for all S corporation shareholder(s). A: As of now, the discrimination law has been postponed pursuant to Notice Therefore, discrimination is allowed until the IRS issues guidance and stops the postponement. 83 Q: Can a shareholder who employs his spouse have a 105 out-of-pocket reimbursement plan? A: Yes, as long as the spouse is the only participant in the plan. 84 Q: What if an employee is on Medicare and the partnership pays her premium for supplemental insurance from the partnership, or if the partnership just reimburses her? A: If the reimbursement plan has more than one participant and does not have a group health plan, the partnership will be subject to the penalty. There is an exception for reimbursing for Medicare, but this exception requires the employer to have a "traditional" group health plan. 85 Q: An employer has a high deductible plan of $2,500 and reimburses employees for half of the deductible if the insurance is used. Is this subject to the penalty? A: As long as the employer has a group health plan and integrates the reimbursement (HRA) with the group health plan, it is possible to have an HRA to reimburse for other expenses and not be subject to the penalty. However, if the employer reimburses for expenses, the employees could potentially be disqualified from making contributions to an HSA because of the HRA. However, who does or does not qualify to make HSA contributions is beyond the scope of this webinar. 86 Q: What if an S corporation only reimburses a more than 2 0/0 shareholder for health insurance and does not offer the reimbursement to any other employee? A: This is fine for now. The discrimination requirement has been postponed. However, the S corporation should still give notice to the other employees that they are not eligible to participate in the reimbursement plan. Live Wehinars On-Demand Webinars Self-Study with Facilitator phone: , ext. 3 web: natp@natptax.com 11

12 87 Q: If the employer does not have 50 full-time employees and FTEs, a reimbursement to one employee only is okay? A: This FTE calculation is used in determining who is a small employer and eligible for the relief provided in Notice That said, the penalty applies to all employers that reimburse for individual policies for more than one participant. Therefore, reimbursing only one employee is okay. 88 Q: A partnership has a Blue Cross plan. However, each participant has a $2,500 deductible and the employer reimburses each employee one half of the $2,500 if they have out-of-pocket costs. Is that okay? A: As long as the employer has a group health plan and integrates the reimbursement (HRA) with the group health plan, it is possible to have an HRA to reimburse for other expenses and not be subject to the penalty. However, if the employer reimburses for expenses and the plan is a HDHP, the employee could be disqualified from making contributions to an HSA because of the HRA. However, who does or does not qualify to make HSA contributions is beyond the scope of this webinar. 89 Q: What if you have one full-time employee greater than or equal to 35 hours and a part-time employee working seasonal or fewer than 30 hours. Can you have a 105 plan for the full-time employee? A: Yes, as long as there is only one participant. Therefore, the part-time employee would have to be notified that he or she is not eligible to participate in the plan. 90 Q: A C corporation has two employees. One is on Medicare. Can the C corporation reimburse the other employee's premium? A: Yes, as long as the plan only has one participant. Based on the guidance we have now, it would appear that you can, provided adequate notice is given to all employees. The problem is that the term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. 91 Q: The employer qualified for a premium tax credit for a group policy in In 2014, the policy was not purchased from SHOP. Was the employer excluded from claiming the premium tax credit in 2014 per form instructions? A: The Premium Tax Credit (PTC) is only for individuals and not for employers. I assume you are referring to the small employer health insurance credit. Yes, employers were required to purchase insurance through the SHOP for 2014 to get the credit. However; there are some exceptions from having to purchase insurance through the SHOP. The small employer health insurance credit is outside the scope of this webinar. If you have questions about the exceptions, please contact NATP's research department (Note: Research questions are considered a billable a service.) 92 Q: What if a minister was receiving a package from the church and part of the package was allocated to insurance so that the pastor could pay his health insurance. The church issued the W-2 for two ministers showing their salary as federal wages and a separate note for the housing allowance, but the insurance was not included anywhere. Are ministers subject to this? I think so, but for tax purposes, they are self-employed. A: Yes, the church would be subject to the penalty if it is reimbursing and the plan has more than one participant. There is not a blanket exemption for churches. Live Webinars On-Demand Webinars Self Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 12

13 em9 National Association 93 Q: So, since the church was doing this with two ministers, we could stop by June 30, 2015, and treat that amount as salary for them. By changing the arrangement by June 30, 2015, we could avoid any penalty going forward and Notice will protect them from a penalty for 2014 and half of 2015? A: Yes, that is correct (assuming the church is a small employer). However, be careful with treating the amount as salary. Technically, an increase in pay should be given to all employees instead of just adding the health insurance amount to the salary amount. Furthermore, according to Rev. Rul , the reimbursement is excludable and there is not a choice to include it in income. Regardless of whether the reimbursement is taxable, if the ministers are reimbursed after June 30, 2015, the church is subject to the penalty. 94 Q: If partners are considered participants, then must they participate in the group health plan, or can the partnership pay for individual policies because the payments are reclassified to guaranteed payments anyway? A: Normally partners and sole proprietors are not employees by statute. However, for purposes of group health plans, Reg (d) includes them as employees. Therefore, reimbursement issues for partners still appear to be a problem. Notice did not provide any relief specifically for partnerships. However, the partner does not have to participate in a group health plan. Therefore, if the partnership makes a guaranteed payment and the partners purchase their own health insurance, then there does not appear to be a problem with this arrangement. 95 Q: Can a Schedule C self-employed taxpayer reimburse his one and only employee for the employee's health insurance? A: As long as the self-employed individual cannot participate. 96 Q: A shareholder of an S corporation has Medicare and Medigap. The shareholder's son works for the S corporation and is reimbursed for medical insurance. Is this a problem? A: Yes. Since the shareholder and employee are being reimbursed and the S corporation does not offer a group health plan, the Medicare exception will not apply. Thus, the S corporation should stop reimbursing the son by June 30, 2015, and the shareholder by December 31, 2015, to obtain relief from the penalty. 97 Q: What if the partner listed in the partnership is an S corporation? How does that deduction/reimbursement work? A: As Genaro stated, an S corporation is not an insurable person, so this would not apply. The S corporation shareholder should receive a wage and, depending on the number of employees and shareholders, the S corporation may or may not be subject to the penalty. 98 Q: If there is more than one employee of an S corporation, can a 2% shareholder be reimbursed for his policy? A: Yes. However this is discriminatory. As of now, the nondiscrimination requirements have been postponed. Furthermore, the employees not eligible to participate must be notified; otherwise, it could be determined that there is more than one participant in the plan. 99 Q: If there is a husband and wife that work for a C corporation, can they both get reimbursed for there Medicare and longterm care? A: Yes, but the corporation will be subject to a penalty because there are more than two participants (husband and wife are each counted separately). They could avoid the penalty if the corporation had a group health plan offered to other employees. See Notice , Q&A 3 for more information on the Medicare exception. Since the Medicare exception would not apply, the reimbursement must stop by June 30, Note: Long-term care is an excepted benefit and the reimbursement of long-term care policies would not subject the corporation to the penalty if it is considered a separate plan. Live Webinars On -Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 13

14 100 Q: If Form 8928 must be filed for a nonqualifying HRA, what are the reasons that will apply to demonstrate reasonable cause verses willful neglect? A: That depends on the facts and circumstances. The IRS does not provide a list of reasonable causes verses willful neglect. 101 Q: How forgiving will the service be when the penalty with Form 8928 is filed with the tax return? A: We cannot speculate on that. 102 Q: If the only employees of a C corporation are a husband and wife, can they get reimbursed for their Medicare? A: Yes, but the corporation will be subject to a penalty because there are more than two participants (husband and wife are each counted separately). They could avoid the penalty if the corporation had a group health plan offered to other employees. See Notice , Q&A 3 for more information on the Medicare exception. Since the Medicare exception would not apply, the reimbursement must stop by June 30, Q: If the only employees of an S corporation are a husband and wife, can they reimburse for their Medicare and Medigap (there are no other employees of the company)? A: Yes, through December 31, However, beginning in 2016, the S corporation will be subject to the penalty because a husband and wife are each considered separate participants; thus, the plan will have two participants. 104 Q: A client has a partnership consisting of himself and a retired silent partner. The partnership pays the insurance premium for the general partner only. The general partner is 98% owner. Is it okay to continue this arrangement? A: For purposes of ACA, a partner is considered an employee (participant). Normally partners and sole proprietors are not employees by statute. However, for purposes of group health plans, Reg (d) includes them as employees. Therefore, reimbursement issues for partners still appear to be a problem. Thus, the reimbursement of the partner's health insurance can continue as long as there is only one participant in the plan. In the future, the partnership could have a discrimination issue. Notice delayed the nondiscrimination requirement until further guidance is issued. 105 Q: I have a few clients who pay $200 per month for health insurance, but it is not tied to any requirements and it is after tax. Is this okay? A: Is the additional $200 dependent on receiving health insurance? If yes, then the employer would be subject to the penalty. If the $200 is not contingent on purchasing insurance or is not paid to only employees who had health insurance in the past then it's okay. 106 Q: If we have the employees reimburse the employer for the payments, does this eliminate the risk? We have asked our two employees to pay the employer back; then we give the employees an unrestricted raise. A: No, the employer is still at risk for the penalty. I think you would still be at risk because ultimately the raise was given in place of an insurance reimbursement. This would be the same as converting the reimbursement into taxable money. Thus, there is still a risk. If the employer qualifies for relief, they will not be subject to the penalty through June 30, However, this practice should be stopped. 107 Q: If the employer doesn't take a deduction for health care premiums, how will the IRS even know about it? A: The employer is supposed to self-assess the penalty on Form I cannot speculate on how the IRS will know about the reimbursement. However, the tax professional should notify the client about filing Form 8928 reporting the penalty. If the client chooses not to file the form, the tax professional should consider ethical considerations because the client is choosing not to comply with tax law. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Stud\ phone: , ext. 3 web: natp@natptax.com 14

15 108 Q: A sole shareholder is in an S corporation with three employees, including the 100% shareholder. The S corporation is paying for the shareholder's individual health premium, which covers the shareholder and his child. The S corporation is also paying for the office manager's premium, which covers her and her child. Is this okay? A: In order to avoid the penalty, the reimbursement should stop by June 30, 2015, for the office manager and by December 31, 2015, for the shareholder. 109 Q: Can an employer with 25 or fewer employees continue the employer payment plan since they are not subject to ACA? A: For the purposes of this penalty, all employers could be subject to the excise tax no matter the number of employees. This excise tax applies if more than one participant is reimbursed for premiums. An employer payment plan is in violation when there is more than one participant. 110 Q: What if you have two employees: one has insurance through the spouse, and the other is partially reimbursed for his insurance? Does that qualify as a one-person plan? A: As long as that other employee is not eligible to participate in getting reimbursed, this would qualify as a one-participant plan. 111 Q: Can you reimburse just for out-of-pocket medical expenses and not for health insurance or does the penalty still apply? A: The penalty would still apply. Furthermore, the small employer exception only applies to reimbursements for health insurance premiums only. 112 Q: If you are still reimbursing employees, would you make sure the checks are written by June 30, 2015, for June policies? Or since it is for a June expense, would it be okay to make the payments a few weeks later? A: Based on the plain language of the Notice, you should stop any reimbursements as of June 30, If the check is made out on July 1, 2015, or later, it appears the employer would be subject to the penalty. 113 Q: Does there have to be group insurance provided for employees for the 2% owners to take the deduction for the S corporation medical? A: No, the deduction is allowed if Notice is followed. The notice allows a shareholder to be reimbursed for health insurance in the shareholder's individual name. Hopefully, the IRS issues additional guidance for how Notice coordinates with the penalty for reimbursing health insurance. 114 Q: I have heard from different "experts" with different answers. Is it okay to have employees with no health insurance but to still have medical for the more than 2% S corporation shareholder? Can the S corporation and shareholder still qualify for the deduction? A: It's okay to reimburse the shareholder for health insurance premiums as long as he/she is the only one that can participate. By S corporation medical deduction, I'm assuming you mean the self-employed health insurance deduction. A sole shareholder can be reimbursed by the S corporation if the shareholder is the only participant and take the self-employed health insurance deduction. The other two employees must be notified that they cannot participate in the reimbursement plan; otherwise, it could be interpreted that there is more than one participant. Furthermore, the rules for nondiscrimination have been delayed until additional guidance is issued (Notice ). In the future, providing insurance only to the shareholder could cause a problem. 115 Q: So if I notify two employees that they are not eligible to participate in a health insurance reimbursement plan, the shareholder can take the self-employed health insurance deduction. A: Yes, that is correct. Live Webinars On-Demand Webinars mill Facilitator Lolf Study phone: , ext. 3 web: e -mail: natp@natptax.com 15

16 116 Q: What if there are three shareholders? Do we now need to worry about discrimination? A: Yes, there could be a discrimination issue once guidance is issued. At this point, the discrimination rules have been delayed pursuant to Notice Q: A church has two employees, a husband and wife. Is the church exempt from the new rules because the couple counts as one employee and not eligible for a group plan? A: No, you are not exempt if the husband and wife each have separate insurance and are both being reimbursed. However, if one spouse has family coverage that covers the other spouse and is being reimbursed, then it is treated as one participant. If there is only one participant in the reimbursement plan, then the plan is not subject to the penalty. 118 Q: My understanding is that a sole proprietor (with no other employees) can deduct his/her health care premiums on Schedule C. Can the sole proprietor also deduct premiums for his/her nonworking spouse and dependent child? A: A sole proprietor cannot deduct his/her health insurance premiums on Schedule C. The premiums of the spouse and child could be deducted on Schedule C if the spouse and child were employees. The self-employed health insurance deduction on Line 29, Form 1040 could include the spouse and child if they were covered under the sole proprietor's policy. However, they cannot have separate policies because this would not meet the definition of self-employed health insurance. 119 Q: When you are referring to "reimbursement,"does that include any amount of the premium? We have clients who receive a flat "health stipend" (as compensation) that may or may not cover the actual premium. Is it safe to assume that this is still considered reimbursing for health insurance even if a bill is not submitted? Could it be considered part of a compensation package that may vary by employee category? A: It depends. Are all employees given the extra cash, and can they do what they want with it? If so, it would appear the "stipend" is simply a part of wages and not contingent on insurance. Unfortunately, it's a facts-and-circumstances case and I cannot say whether it would be considered a reimbursement for health insurance. The easiest way would be to give all employees a stipend. 120 Q: What if you paid both parts of the FICA when grossing up the wages? A: The employee's portion would be refunded to the employee because the gross up was included in compensation and is deemed to be paid by the employee. 121 Q: Is giving a "bonus" an acceptable way for small businesses to continue to try and do the right thing by their employees? Is it okay to pay if the employee's spouse has coverage and he/she is not purchasing an individual plan in the marketplace? A: A bonus could work if done properly. It's okay to reimburse if the reimbursement plan only has one participant in the plan. If there is more than one participant, then a reimbursement more than likely would not work. 122 Q: Do I have to file Form 8928 for an employer with only one employee who is getting reimbursed for having his own plan? A: If there is only one participant in the reimbursement plan, then the employer is not subject to the penalty because the penalty does not apply to plans with one employee. The problem is that the term "participant" is not defined. Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean that those who could participate are participants because they are taking part in the choice of being able to choose a benefit. If it's determined that there is only one participant, then, no, there would not be a penalty. If there isn't a penalty, then Form 8928 would not be necessary. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 16

17 123 Q: If the shareholder's insurance is not paid through the business, can a reimbursement be made after tax for one employee? A: The reimbursement is tax-free pursuant to Rev. Rul ; there isn't a "choice" to make it post-tax. The employer would be subject to the penalty if it reimburses for health insurance for more than one participant, regardless of whether the reimbursement is done pre-tax or post-tax. The S corporation could still reimburse for the one employee if the shareholder cannot participate in the reimbursement. 124 Q: I've been reimbursing all health insurance on an after-tax basis. Is the penalty avoided? A: Pursuant to Notice , this still creates a group health plan and the employer is subject to the penalty. Furthermore, pursuant to Rev. Rul , the reimbursement is excludable from wages. 125 Q: Doesn't there have to be a third-party administrator (TPA) involved in order for a reimbursement to be done on a pre-tax basis? A: No. However, a TPA is usually involved because there are regulations outside the tax code, such as ERISA and DOL regulations. Thus, a TPA is usually used to make sure all laws across all departments are being followed. 126 Q: A shareholder had to repay all of the subsidy, so I took the self-employed above-the-line deduction on the Was this wrong? A: Pursuant to Notice , a more than 2% shareholder calculates the self-employed health insurance (SEHI) deduction based upon Rev. Proc Based upon Rev. Proc , the repaid PTC is included in the calculation for SEHI. However, this is contrary to Notice because the repaid PTC was not included in wages of the shareholder. Since an S corporation shareholder follows Rev. Proc , an argument could be made that the SEHI deduction would include the PTC that was repaid, even though it wasn't included in wages. 127 Q: What if an employer doesn't require substantiation of coverage? A: Is the reimbursement only for employees who had health insurance? As long as a bonus or raise is given consistently and was or is not contingent on having health insurance (either in the past or currently), it should be okay. However, you will want to verify that this practice does not violate DOL rules and regulations. 128 Q: What about an employer with employees who are on the group plan, but a few employees opt out of the group health plan? Is it okay to give a bonus to those who opt out as long as there is no explicit respect to obtaining coverage? A: If the bonus is limited only to the employees who did not take insurance, this could pose an issue because it appears to be contingent on not taking insurance. The IRS could argue that the bonus is deemed a reimbursement for health insurance. Instead it would be better to give all employees a bonus. This is not specifically addressed by the notice. NATP's recommendation is to comply with the examples given in Notices and Q: How can a C corporation have a plan for one employee? Insurers say a "group plan" must include two or more. A: If a C corporation does not have more than one employee, generally they cannot set up a group plan. Thus, they cannot provide an insurance reimbursement. However, you should consult with an insurance provider for specific information, because this is an insurance question, not a tax question. 130 Q: So, one participant is not a group plan. Therefore, none of the penalties would apply to a one-participant plan. Then you can reimburse your employee for premiums, not have consequences, and you don't have to add to wages, correct? A: That is correct. If there is only one participant in the plan, then the market reforms of the ACA do not apply to the plan. The reimbursement arrangement would not be subject to the penalty, and pursuant to Rev. Rul , the reimbursement is tax-free. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 17

18 131 Q: An S corporation has a husband and spouse as the only employees. The husband is on Medicare. Can Medicare and supplemental be reimbursed? Can the spouse's premiums be paid by the S corporation and included on a W-2 as well? A: Yes, for now. However, absent any further guidance, the S corporation will be subject to the penalty because there are two participants. There is a Medicare exception, but the S corporation must have a group health plan and the insurance cannot be in the shareholder's name individually. If the spouse is not a shareholder, the reimbursement for the spouse must stop by June 30, 2015, in order to avoid penalties. The reimbursement for the shareholder(s) should stop by December 31, 2015, in order to avoid penalties. 132 Q: Do health insurance premiums already paid by the employer for the individual health plans need to be paid back? Or can we just move forward handling the situation correctly? A: No, the premiums should not be paid back as the "damage" is done. Move forward and correct the situation before June 30, Paying it back would not remove the risk of the penalty and also could create issues with the DOL. 133 Q: A church had their insurance provider point them towards a company who would directly take the employer's money for the insurance and put it into the employee's account, then have the individual insurance policies come directly out of the employee's bank account. The insurance provider claimed this was in compliance with 106 and is definitely pre-tax and compliant with ERISA. I think this practice is still incorrect. A: You are correct that this practice is not okay. While the money would be excludable from income, the church would be subject to the penalty because it is considered a reimbursement plan. 134 Q: Do nondiscrimination rules apply to small S corporations? An S corporation pays for the shareholder's health insurance and provides health insurance to other employees, but the employees pay for the full cost of the policy with pre-tax money. Is this allowed? A: There was a discrimination provision in the ACA for all health insurance plans; however, the application has been delayed until further guidance is issued. So for now, employers with non self-insured plans can discriminate. Once guidance is issued, presumably, no, but it depends on how the rules and determination of discrimination is made. 135 Q: A sole S corporation shareholder has a policy in her name and the corporation pays the bill. She is not the sole employee but the business is seasonal and most employees only work, at most, seven months of the year. From what I see, they are not eligible for a group plan. Is this still in compliance? A: Yes, but only if the employees are notified that they cannot participate in the reimbursement of premiums. However, in the future, there could be an issue with discrimination. The application of the nondiscrimination rules have been postponed pursuant to Notice Q: How does this apply to a minister treated as an employee of a church [501(c)(3)] and the church pays for his personal health insurance procured from the exchange? Is the church subject to the $100/day penalty? If so, what are the alternative options for church-funded health insurance? He is the only full-time employee. One other employee serves as administrative support (part-time, 12 hours per week) and is not provided church-funded health insurance. A: As long as the part-time employee is notified that he or she cannot participate in getting reimbursed for the health insurance premiums, then this arrangement is not subject to the penalty at this time. However, in the future, there could be an issue with discrimination. The application of the nondiscrimination rules have been postponed pursuant to Notice Q: If you have a one-person plan, can you still reimburse after June 30, 2015? A: Yes. A one-person participant plan is not considered a group health plan for purposes of the ACA and is not subject to penalties. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 18

19 138 Q: Can a church reimburse a pastor who gets his insurance through his wife for the out-of-pocket insurance premium that are incurred for him to be on her plan? A: Generally, no, because the health insurance is not in the minister's name and the wife is not an employee of the church. The reimbursement would be taxable wages to the minister. 139 Q: What if a husband and wife shareholder have a family plan? Should you reimburse just one? A: The reimbursement would be made only to the employee who is named in the plan. The one shareholder would be counted as one participant, even though the other spouse is covered under the plan. 140 Q: A small government entity has one full-time employee. Can he get insurance through the exchange and be reimbursed? Is that the one-employee exception? A: The exception is for one participant. Thus, it depends on the definition of participant If there's only one participant, the penalty does not apply to the plan. Based on the guidance we have now, it would appear that you can, provided adequate notice is given to all employees. The term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean that those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Note: ERISA and DOL laws should be consulted to ensure that the taxpayer is not in violation of those rules. 141 Q: I have a controlled group consisting of three companies that are restaurants who do not offer insurance; however the management company a fourth company offers insurance to the owner and his family and pays for it. The owner and his son are the only employees of the management company. Since it's the management company and only pays for the owner and family, will there be an issue regarding penalties? A: A controlled group is aggregated to determine if the group is an Applicable Large Employer (ALE). There could be an issue with the employer mandate (which is a separate topic covered in another webinar). If the controlled group has a reimbursement plan that covers more than one participant, the penalty would be assessed. Furthermore, when the discrimination guidance is issued, they could have a discrimination issue. 142 Q: I thought it was 1 20 for the month? A: Yes, the 120 is for the month. 143 Q: In the example, is the 2.58 rounded up or down? A: Round to the fractional value for each month to the nearest one-hundredth (e.g., is rounded to 49.49). In the example, = Since the third number is less than 5, 2.58 is the nearest one-hundredth. 144 Q: If you have multiple employees and only reimburse one of them, is there any penalty? A: Yes, if there is considered to be more than one participant in the plan. To avoid more than one participant in the plan, the other employees should be given notice that they are not eligible to participate in the reimbursement plan. This has limited use, however, as there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Note: ERISA and DOL laws should be consulted to ensure that the taxpayer is not in violation of those rules. 145 Q: In your example, can they reimburse the employee for the spouse's insurance premium if they gross it up and add it to wages? A: Generally, no, because the spouse is not the employee of the employer and the insurance is not in the employee's name. The amount paid to the employee would be taxable. Live Webinars On-Demand Webinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 19

20 146 Q: What would be the best option for employers reimbursing health insurance? When they stop, the employee will receive less compensation/benefits and will be expecting this money. A: The only option is to give everyone a raise. The raise must not be contingent on having health insurance and cannot be in reference to the type of insurance they previously had. 147 Q: What if a partnership offers employees health insurance with some participation but reimburses only one employee's health insurance for his cost under a spouse's plan? A: Since the employee does not have health insurance in his name and instead is in the spouse's name, the reimbursement is taxable. First, the spouse is not an employee of a partnership. Second, more than likely the spouse's premium was paid on a pre-tax basis; as such, excluding the reimbursement from income would create a double benefit. 148 Q: An S corporation has a spouse/50% owner working full-time, a spouse/50% owner working part-time, plus two part-time employees each working about 100 hours per year. The corporation has been reimbursing for full-time spouse/50%-shareholder for a family policy. What happens in this situation? A: If there is only one participant in the plan, it's okay. Thus, if only one shareholder has the family plan and is reimbursed, it is treated as only one participant. To avoid more than one participant in the plan, the other employees should be given notice that they are not eligible to participate in the reimbursement plan. This has limited use, however, as there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. Note: ERISA and DOL laws should be consulted to ensure that the employer is not in violation of those rules. 149 Q: Most companies regard these calculations as minefields designed to trap employers into fines. Can you please weigh in on an example? A law firm with six people has a UHC group plan with four employees on plan. One employee is exempt and on her husband's plan. One is reimbursed because she refuses to change. What is the attorney's excise tax risk? A: It depends on whether there is more than one participant. Based on the guidance we have now, it would appear that you can, provided adequate notice is given to all employees. The problem is that the term "participant" is not defined in Participant, by pure definition, is one who shares, participates or takes part in something. It is possible to interpret this to mean those who could participate are participants because they are taking part in the choice of being able to choose a benefit. Because of this, notice must be given to all other employees stating that they are not eligible for this benefit. This has limited use, however, because there is also a law that you cannot discriminate against other employees. This has been postponed, however, by Notice until further notice. 150 Q: When does the $100 penalty take effect? A: It took effect on January 1, Notice does provide relief from the penalty for certain employers until either June 30, 2015, or December 31, Q: What about the employer providing for an HSA? A: HSAs are not subject to the ACA rules and, thus, would not subject the employer to a penalty. However, if the employer reimburses employees for individually owned HDHP, the employer would be subject to a penalty. 152 Q: So, the employer can continue to provide an HDHP HSA without regard to penalties? A: Yes, as long as the employer does not reimburse an employee for an HDHP that is in the individual employee's name. 153 Q: If you can do only one, what about one minister for a church? A: If there is only one participant in the plan, then there is no penalty. 154 Q: If we amend payroll reports, would Form 943 be amended as well? A: Yes. Live Webinars On-Demand VVehinars Self-Study with Facilitator Self-Study phone: , ext. 3 web: natp@natptax.com 20