Ask the Taxman by Andy Biebl

QUESTION:

Your January column in Progressive Farmer on Affordable Care Act problems for small employers looks like it affects our situation. My brother and his two sons have an LLC, and the three of them have their health insurance furnished by the LLC. I am the only farm employee not covered by this policy. In the past, I have purchased my own insurance, but had to cancel it when the premium more than tripled for this year. I am presently without insurance; is the farm LLC required to offer or pay for my health insurance?

ANSWER:

The Affordable Care Act did add nondiscrimination rules to the tax law for employer-provided health insurance. However, because of the significance of that change and the complexity in drafting more detailed rules, the IRS announced it will not enforce any nondiscrimination rules with respect to employer-provided or employer-reimbursed health insurance until final IRS regulations are issued (see IRS Notice 2011-1). As a result, the LLC can provide health insurance coverage for three of its employees, but yet choose to not provide coverage for you. That will change in a few years when the IRS regulations are issued and become effective, but in the interim, the tax law has no help for you.

I would suggest checking back with the employer and its insurance representative. In many cases, the insurance company's group coverage rules will have some influence. It may be a contractual aspect of the insurance contract that would require coverage of all full-time employees.

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QUESTION:

If an employer pays the premiums directly for an outside plan and reduces the employee's wages as a result, is this ACA compliant? Also, you mentioned that reimbursements are acceptable if only one employee participates. Is this true indefinitely or does it just eliminate the penalty until they correct the arrangement?

ANSWER:

In your first question, you indicate the employer is paying the premium directly for an outside plan. That would be a reimbursement arrangement for an individually-owned policy, regardless of whether the money first flows to the employee as a reimbursement or is paid by the employer directly to the individual's insurance company. These reimbursement arrangements violate the ACA, and cannot continue in 2014 and after.

As to your second question, the one-employee-participant exception to the ACA market reforms should remain. The market reform rules only impact a group of two or more employees. This definition is in the statute and it would take a congressional law change to remove it.

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QUESTION:

We have a C corporation that rents land from us personally. Our income is in excess of $250,000. Can this income be active income on the tax return or is it subject to the new 3.8% net investment income tax?

ANSWER:

It is nice to see a question that is not a health care question, although this one also derives from the Affordable Care Act. It was the ACA that created this 3.8% tax on various forms of net investment income, in order to pay for the subsidies built into the ACA for those who acquire insurance through the exchanges.

Assuming either the husband or wife materially participates in the active farming business of the C corporation, your rental of land to that C corporation constitutes a self-rental under the passive activity regulations. Accordingly, the income is not considered passive. Technically, it falls into a nonpassive category that is exempt from the Section 1411 net investment income tax. So, we finally have good news: No 3.8% tax on that net rental income.

Editor's Note: Andy Biebl is a CPA and tax principal with the firm of CliftonLarsonAllen LLP in Minneapolis and New Ulm, Minn., former president of the Minnesota Society of CPAs and a national authority on ag taxation. He writes a monthly column for our sister magazine, The Progressive Farmer. To pose questions for future tax columns, e-mail AskAndy@dtn.com.

For past DTN articles on how employers are affected by ACA, go to http://www.dtn.com/…

(MZT/AG/CZ)

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