Author Archives: Carol L. Myers

Using your Rollover IRA to Buy Yourself a Job? Think Twice and Carefully!

A common retirement / employment technique that looks enticing is to rollover your substantial 401(k) account after terminating employment to an IRA and then use the IRA to purchase or start up a business for you to run.  What could be better?  A job for you, a profitable investment for your IRA that you control, and the investment funds remain tax deferred in the IRA.  What an excellent idea!  No, not so much!

While this business start-up technique may look like the perfect use of your accumulated retirement funds, there are a lot of technicalities that can cause the arrangement to blow up, triggering huge taxes and penalties.  The 8th Circuit Court of Appeals (in Ellis v. Commissioner) recently confirmed that such an arrangement done through an IRA disqualified the entire IRA (making the entire IRA taxable).  The taxpayer owed taxes and penalties amounting to more than 50% of the IRA’s value.

In the case reviewed by the court, the IRA owner caused the IRA to purchase 98% of a used car sales business and then used his control of the company to have the company pay him compensation for his services running the business. The court held that the IRA owner’s exercise of control over the company causing the company to pay him compensation violated the tax law’s prohibited transaction rules for the IRA.  The holding resulted in the IRA’s loss of tax deferred status as to all funds in the IRA.  The prohibited transaction rules that the court said were violated was direct or indirect use of the plan’s income or assets for the benefit of the IRA owner as well as dealing with the IRA’s income or asses for his own interest.

The 8th Circuit case involved investment in the business start-up by the taxpayer’s IRA.  Similar techniques are offered through C corporation business start-ups.

While it is clear that an IRA investment of this nature is extremely dangerous, often destroying the tax deferred status of the IRA, the same technique can be successful if done in a C corporation using the corporation’s qualified plan instead of the IRA.  But there are significant expenses and dangers involved. Individuals should not consider this technique unless the investment funds involved are large enough to justify the expense and risk, and the individual has a high tolerance for details and complications.

To use the this business start-up technique in a C corporation, the typical approach is first transfer the rollover funds into a qualified plan established by the new start-up business and then have the qualified plan purchase stock in the business that is sponsoring the qualified retirement plan.  The IRS and DOL calls these types of transactions “ROBS” for “rollover business startup”.  While we do not assist clients in creating ROBS arrangements we routinely assist clients in understanding the risks and rewards inherent in the arrangements.

Carol L. Myers

Update – Employer Reimbursements of Individual Health Policy Premiums Temporary Relief Issued for Small Employers – until June 2015 And IRS clarifies reimbursement rules for 2% Sub S shareholders and for Medicare & Medigap premiums & TRICARE uncovered expenses

Small Employer Relief Until June 30, 2015

In November we alerted you that employers that reimburse employees for the cost of purchasing individual health insurance policies risk being subject to ACA penalties of $36,500 per year per person.  Here is a link to our prior alert:

On February 18, 2015, the IRS issued temporary relief for small employers (those that don’t qualify under the ACA as an “applicable large employer”) from these enormous penalties.  The temporary relief ends June 30, 2015.

Under the soon to be published IRS notice (Notice 2015-17), small employers that aren’t classified as “applicable large employers” will not be hit with the ACA $36,500 per person penalty for either 2014 or for the period from January 1, 2015 through June 30, 2015.  Starting July 1, 2015, the penalties will apply, so almost all employers need to stop premium reimbursement policies to avoid penalties.

To be eligible for the temporary relief, an employer is considered a small employer if it does not employ an average of 50 or more full-time employees (including full-time equivalent employees) on business days during the preceding calendar year.  An employer’s small employer status is looked at separately for 2014 and 2015 for purposes of this temporary relief.

An employer that qualifies for the temporary relief does not need to file Form 8928 reporting failure to satisfy the mandates of providing ACA compliant coverage for the period that the employer is eligible for the relief.

Reimbursement of 2% Sub S Shareholders

The new IRS notice also provides relief or clarification for employer health premium reimbursements provided to 2% Sub S shareholders.  Until further guidance is published by the IRS, and in all events through the end of 2015, health insurance premium reimbursements to 2% Sub S shareholders will not trigger the $36,500 ACA penalties.

The exception for 2% Sub S shareholders does NOT apply to reimbursements provided to other employees of the Sub S employer.  As a result, reimbursements to the non-2% Sub S shareholder/employees will trigger the ACA penalties (but may be temporarily suspended until June 30, 2015 if the employer is not an applicable large employer – see above).

Reimbursement of Medicare, Medigap and/or TRICARE Premiums

The IRS notice also addresses employer arrangements that reimburse employees for Medicare, Medigap and TRICARE premiums.  The IRS notes that the reimbursement of Medicare premiums by an employer may violate the Medicare secondary payer rules which are not tax rules but impose severe penalties.  On the tax side, the IRS advises that an employer program that reimburses Medicare, Medigap or TRICARE premiums (or uncovered medical expenses) without the employer offering the employee coverage under an employer sponsored minimum value health plan will trigger the $36,500 per person per year penalty.  The exception that allows an employer to reimburse the Medicare, Medigap or TRICARE premiums (or medical expenses) without triggering the ACA $36,500 penalty requires the employer to offer employer health coverage and comply with a number of other very specific requirements.  For more information, give us a call or email.

Carol L. Myers

Federal Agencies Issue Warning to Employer Clarifying the Dangers of Reimbursing Employees for the Cost of Individual Health Insurance Premiums and of Offering Cash Incentives to Opt Out of Employer Sponsored Coverage

In recently issued FAQs (which stands for “Frequently Asked Questions”), the three agencies in charge of compliance with the Affordable Care Act (the “ACA”) alerted employers to three practices that will cause the employer to be subject to ACA penalties of $36,500 per year per person. Importantly, this $36,500 per year penalty applies to each individual affected by the ACA failure.  As a result, it can be applied and calculated counting both employees and dependents whose coverage has been affected by the practices described in the FAQs.

Notably, the only small employers excepted from these requirements are employers who have only one employee, and governmental employers.  For this purpose, the number of employees are counted looking at all related controlled group companies together.  The annual $36,500 per affected individual penalty must be self reported and paid by the employer (on IRS Form 8928).

First, the FAQs alert employers that reimbursing employees for the cost of premiums to purchase individual health insurance policies violates the requirements of the ACA.  The FAQs emphasize that the practice violates the ACA regardless of whether the reimbursements are made on a pre-tax or post-tax basis.

Second, the FAQs alert employers that offering a cash incentive to high risk / high claim individuals to opt out of the employer health coverage violates the ACA.  The FAQs emphasize that it does not matter whether (i) the cash incentive is offered on a pre-tax or post-tax basis, (ii) the employer is involved or not involved in the employee’s selection of alternate coverage, or (iii) the employee obtains individual health insurance.  If the cash incentive option is offered to ALL eligible employees, the violation of the ACA will not occur.

Lastly, the FAQs alert employers that cancelling group health policies and setting up instead a reimbursement program to coordinate with individual insurance policies that employees purchase with premium tax credits on the Marketplace exchange is not permissible.  The FAQs point out that the employees who are covered by the reimbursement programs will not be eligible for premium tax credits and that the reimbursement arrangement itself will violate the requirements of the ACA triggering the $36,500 per person per year penalties on the employer.

For more information, see

Carol L. Myers