The Affordable Care Act has fundamentally changed the way household employees (nannies, senior caregivers, housekeepers, etc.) obtain and pay for health insurance. As a reminder, the individual mandate requires that everyone have a policy or pay a fine. If the employee pays for her own insurance, there’s a good chance she will qualify for the federal health insurance subsidy since most domestic workers earn less than 400% of the federal poverty level (about $47,000 per year). As long as she has documented wages (i.e. Form W-2), she’ll be able to defray a significant portion of her premium cost.
Another option is employer-paid health insurance. For years, many savvy household employers have included health insurance as part of their compensation package in order to capitalize on the tax advantages of employer-paid health insurance. However, recently a ruling from the IRS on the Affordable Care Act triggered a mild panic. The ruling said that effective January 1, 2014, ALL employer-paid health insurance contributions were taxable to both employer and employee unless the employer purchased the policy through SHOP (Small Business Health Options Program). Deeper in the ruling, there was another statement that seemed to indicate that employers with only one employee were exempt from this portion of healthcare reform.
Since the ruling was issued a few weeks ago, many families, caregivers, placement agencies and accountants/advisors have been talking about the SHOP requirement for non-taxability because of the potential 2014 tax liability. However, lost in all the discussion was the apparent exemption for employers with only one employee – obviously a very important distinction for household employers.
Since both of the statements from the ruling were in conflict with the newly-released 2015 IRS Publication 15-B, we worked with the IRS to make sure we had formal clarification. This edition of The Legal Review will share those findings and hopefully clear up all the confusion about the new health insurance law.
Taxable or Not Taxable?
We were able to get confirmation that there is indeed an exemption for employers with one employee and the IRS is now in the process of revising Publication 15-B. Therefore, families with only one employee can continue to contribute to their employee’s health insurance policy and have it be considered non-taxable compensation – even if the policy was not purchased through SHOP.
Families that have 2 or more household employees (i.e. a nanny and a housekeeper) must purchase the policies through SHOP.
It’s important to note that there is another tax break available when policies are purchased through SHOP. The Credit for Small Employer Health Insurance Premiums (Form 8941) provides a tax credit of up to 50% of every dollar contributed – as long as the family pays for at least half of the employee’s premium, the average wage for all employees is less than $50,000 per year and the policy is purchased through SHOP.
The Bottom Line
Therefore, for all new employers who want to make insurance part of the compensation package, we’re advising them to procure the policy(ies) through SHOP, even if they only plan to hire one person. That way, it will be treated as non-taxable compensation AND they can take advantage of the Credit for Small Employer Health Insurance Premiums.
For legacy clients who have been reimbursing an employee for her own health insurance policy, they don’t have to worry about taxability unless they have 2 or more employees. If they’re interested in transitioning to a SHOP policy to take advantage of the tax credit, we’re happy to run the numbers to see if the tax savings are worth their time and effort. There are a couple of variables that determine the amount of savings so we’ll need to have a quick conversation to give an accurate estimate.
If, for whatever reason, the family doesn’t want to get involved with the employee’s health insurance, she, of course, can simply buy a policy through the exchange and file for her federal subsidy.
Most new laws have some kinks in the beginning, but the Affordable Care Act may go down in history as the granddaddy of kink-filled legislation. But that’s why we’re here. When questions arise regarding tax, labor law or HR issues specific to the household employment world, feel free to reach out to us. If the laws or the regs aren’t clear, we’ll dig until we get an answer and then be prepared to guide families safely through all aspects of compliance.
This article was written by HomePay, Provided by Breedlove, a service provided by Breedlove & Associates, LLC.