If an S corporation pays for or reimburses premiums for individual health insurance coverage covering a 2% shareholder-employee, the payment or reimbursement is included in income but the 2% shareholder-employee may deduct the amount of the premiums under the self-employed health insurance rules. The IRS is still deciding on publishing additional guidance on the application of the market reforms to a 2% shareholder-employee healthcare arrangement. Until such guidance is issued, and through the end of 2015, the IRS has ruled that the $100 PER DAY PENALTY under IRC section 4980D will not be applied for any failure to satisfy the market reforms by a 2% shareholder-employee healthcare arrangement.
Previously, IRS Notice 2013-54 identified HRAs with two or more participants as being an employer group health plan. The Notice said that a plan under which an employer reimburses an employee for some or all of the premium expenses incurred for an individual health insurance policy, or directly pays a premium for an individual health insurance policy covering the employee is an employer group health plan. As such, Notice 2013-54 stated that unless the HRA is integrated with other coverage that meets the market reform rules, an employer would be subject to the $100 per day per employee penalty for reimbursing employees for the cost of their own individual health insurance policies. (Beginning January 1, 2014, health insurance policies and employer group health plans are no longer allowed to place annual or lifetime limits on medical coverage. These rules are better known as the market reform rules.)