Qualifying insurance for self employed health insurance deduction

[KathyJo]

Client is retired public safety officer who pays 100% of their health insurance premiums out of their pension check monthly.  Client has a profitable schedule C.  The health insurance plan is not subsidized.  Are these premiums eligible for the Self employed health adjustment/

[qbteachmt]

An amount excluded under the "pso" provision is not also deductible as a medical expense for itemized deductions and is not includible as health insurance for the self-employed heath insurance deduction.

[BobKamman]

Yes, but I think the question is about the excess above $3,000.  I don't think it qualifies, but I also doubt that it is not subsidized.  Would help to know what state (or local government) this involves.  

[KathyJo]

The client is a retired sheriff and gets his health insurance through the county of San Luis Obispo.  Basically it is a group health plan for retirees that the client is eligible to participate if he wants.  He pays 100% of the premium which come out of his monthly pension.  The first $3000 is eligible for the PSO adjustment.  I am trying to determine if the remaining amount is eligible for the SE Health Insurance adjustment to the extent of his Schedule C profits.  Substantial discount in clients taxes if eligible – just don’t want to push something that is not eligible.  All I have found disallows employer plans but client is no longer an  employee.  And this is not Cobra continuation.  Any thoughts would be appreciated.  My thinking is that if Medicare is allowed why would this not be.

[BobKamman]

Looks to me like the county contributes to the cost.  $151 monthly isn't much, but it's something. 

"IMPORTANT: Medical premiums displayed are before the County's contribution of $151.00. You must be enrolled in a County medical plan to receive the County contribution."

https://www.slocounty.ca.gov/Departments/Human-Resources/Employee-Benefits/Retiree-Benefits/Retiree-... 

[qbteachmt]

"Yes, but I think the question is about the excess above $3,000. I don't think it qualifies,"

It's the opposite.

The $3k isn't reportable as taxable under the pso provision; it already got a tax benefit by exclusion. You cannot also use that for another deduction or take another credit for something that already got excluded from being reported and from being taxed.

Or, as a long-time and long-gone member of this group put it: You cannot write off what you never wrote on.

The rest should qualify up to the taxable business income. Any subsidy would reduce what the taxpayer had to pay, and that reduces what they can deduct, the same as ACA.

[BobKamman]

What's the opposite?  There's no doubt that the first $3,000 doesn't qualify.  The question is about the excess above that.  For the reasons I posted earlier, I don't think that qualifies either, because it's a subsidized plan.  

[KathyJo]

Thank you for your resources and your comments.  I do believe that it does not qualify because it is a subsidized plan.  I am disappointed but relieved that the community came to my assistance.  VERY much appreciated.

[TaxGuyBill]

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@KathyJo wrote:

 I do believe that it does not qualify because it is a subsidized plan. 

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A subsidized plan does not disqualify it.  The restriction is if it is subsidized by an employer.  In my opinion, there is no employer, so that is not an issue.

I think the issue is if the "plan" is "established" under the self employed business.  It is definitely a "gray area", but based on the Medicare rulings, I lean towards it qualifying.

[qbteachmt]

Certainly for 2023, the amount can be paid to the pso directly and no longer has the requirement to be paid directly to the health coverage provider, which would give it parity to any self-employed plan. It's a self-certification, now.

[BobKamman]

Eligibility for a subsidized plan does disqualify it.  "Paragraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of, or any dependent, or individual described in subparagraph (D) of paragraph (1) with respect to, the taxpayer."  

So the issue is whether "employer" means the pension payer.  That's an interesting question.  

[rbynaker]

IMO this remains unclear. To try to create a timeline, I'd start with this article by Ed Zollars:

https://www.edzollars.com/SelfEmployedHealthInsurance.pdf

It cites a CCM also issued in 2005, which doesn't help us too much but does clearly open the door to individual policies and not just policies established in the name of the business. But Ed does a great job of identifying the "problems" starting at the bottom of page 3. We have nothing new from Congress and not much from the IRS to help us with these problems.

The next "get off the bus and look around" stop on our historical tour of SEHI takes us to a CCM written in 2012:

https://www.irs.gov/pub/irs-wd/1228037.pdf

If you thought the rules at least made some sense prior to 2010, this about-face was a real head-scratcher. As indicated in the last substantive paragraph of the document, the change to allow Medicare premiums as SEHI came about quietly when someone at the IRS decided to rewrite the instructions to the 1040, beginning with tax year 2010.

I've seen arguments online that take the position that the Sch C business have a "plan" to pay for the owner's (and spouse's and dependents') health insurance costs. "Look, now we have established a health care plan!" Ed points out that this plan need not be in writing. It's unclear to me whether this approach will fly when it comes to retiree coverage (or union coverage, which I've also seen). Prior to the change to the 2010 instructions I would have fairly confidently said "No, that's not SEHI." But then when they said that Medicare is allowed, who knows what else might be?

This thread started out with a focus on the word "subsidized" but I think the real crux of the problem is the undefined term "by any employer". Current? Former? <shrug> The lack of Tax Court guidance suggests that maybe the IRS is choosing not to litigate these cases.  Ed makes good arguments in both directions that I think are just as good today as they were nearly 20 years ago.

IMO, this comes down to what position is your client comfortable taking, what position are you comfortable taking, and what disclosures may be required based on your analysis of the probability of success if challenged.

Are we having fun yet?  I just finished a 3-day IRS Nationwide Tax Forum so I know I am!

Rick

[qbteachmt]

"IMO, this comes down to what position is your client comfortable taking"

The self-employed plan doesn't have to be in the name of the business; the IRS clarified this one long ago. To give parity to self-employed sole proprietor, it can be in the name of the individual, or even their 27 year-old child's or spouse's coverage, as long as they are not eligible for an employer's coverage.

Another detail to consider is that the $3,000 exclusion is an election. I would consider whether you don't want to elect into the exclusion. Also, multiple Sched C cannot be aggregated, nor can the insurance premium be split across them. Lots of details to consider.

[KathyJo]

I am on that path as well. Will discuss with the client and let them in on the decision.  Really appreciate your input.  More beneficial to take the PSO because of net profit limits so I will run with it that way.

Have a great weekend.