Discussion:S-E health insurance deduction for S corp SH

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Discussion Forum Index --> Tax Questions --> S-E health insurance deduction for S corp SH


MAJOR EDIT: SEE Notice 2008-1.


Before reviewing this thread, please read Notice 2008-1 or any of the several discussions about it, since it changes much of what was discussed here. Those other discussions would be more appropriate than this one for any follow-up questions.


LJACPA (talk|edits) said:

11 November 2005
This is often handled in different ways and, though very conservative, I do not take this deduction on page one unless the policy is in the corporation's name. I have read several different places that this is the correct way to handle it, yet just about everyone I have questioned either doesn't ask the SH or deducts it regardless. It's so confusing because for the policy to be 'in the corporation's name', I believe would necessitate a group policy, which is not always available for a sole shareholder and usually not viable. I'd love to get some feedback on how others are handling this. The tough part is, I formed my own S corp in 2004, have an individual policy, didn't need the deduction in 2004 due to first year loss, but sure hate to lose a $3,000 to $4,000 deduction by taking it on Schedule A.

Lsmith32935 (talk|edits) said:

15 November 2005
Disregarding policy ownership, health insurance premiums paid for by the corporation (S) is reported as payroll and the total of these are included W2 at year end. (2% or greater stockholder).

LJACPA (talk|edits) said:

16 November 2005
Your comment "disregarding policy ownership" is the main question and concern I have. If the policy is 'owned' by the S corp, there is little question as to the proper handling of this by both the business and the shareholder. Therefore, policy ownership is the question. The following is from Pub 525:

You may be able to deduct 100% of the amount paid for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents if you are one of the following: A shareholder owning more than 2% of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2. The insurance plan must be established under your business.

*** You may be allowed this deduction whether you paid the premiums yourself or your partnership or S corporation paid them and you included the premium amounts in your gross income. Take the deduction on line 31 of Form 1040.

The sentence "The insurance plan must be established under your business" is the catch-phrase; however, the *** comment then makes it confusing. Here’s what I think this is saying (and what I’ve told my clients):

1. The plan must be established under the business. 2. The S corp can pay the premiums but must include them in your income (wages or, as I've also seen done, as Other Income on Line 21 of the 1040). 3. You can pay them yourself, but will still not be able to take a SEHI deduction UNLESS the plan is established under the business.

The more I write the more confused I get. Until someone can cite that the plan does NOT have to be 'established under the business' then I'm not taking the SEHI deduction on Page 1.

Cpasupport (talk|edits) said:

16 November 2005
My question/response is a twist. If you do treat it as includable on your wages and then write-off the SEHI deduction on page one of your personal tax return, does the 15.3% FICA/MC apply to the increased wages? Sincerely, Ed

LJACPA (talk|edits) said:

18 November 2005
I still think there is a question whether there is a SEHI deduction even if you include it in wages. The FICA question is a good one. If this is a company-owned policy and the premiums for the 2%+ shareholder are reported correctly as wages on his/her W-2, the amount is subject to FICA only if (basically) the plan does not cover all employees. So, if the policy is an individual one and therefore not part of a plan that covers other employees, I guess it would be subject to FICA. The main question remains however, does the policy have to be company-owned to get the deduction?

DianeOffutt (talk|edits) said:

22 November 2005
The paid premiums are to be included in the 2% shareholder's wages, in the TOTAL WAGES box on the W2. The amount attributed to the paid premiums will NOT be included in the FICA WAGES box on the W2. Bottom line, the premiums are NOT subject to Social Security or Medicare taxes. Federal and State income taxes should be withheld. The premiums are to be deducted on the shareholders personal tax return. The subject of SE tax is addressed in Circular E, Employer's Tax Guide, Page 31.

LJACPA (talk|edits) said:

23 November 2005
From the instructions for Form W-2:

Also include in box 3: • Cost of accident and health insurance premiums for 2% or more shareholder-employees paid by an S corporation, but only if not excludable under section 3121(a)(2)(B). The relevant part of this Code section states, ..."under a plan or system established by an employer which makes provision for his employees generally".... This means that if the premiums are not part of a plan that generally covers all employees then those premiums, in the form of wages for the 2%+ S corp shareholder are not excluded from FICA. Therefore, the premiums ARE subject to Social Security and Medicare taxes in this situation. Again, this still does not answer the question that I originally asked, does the insurance have to be established under the business for the SEHI deduction to apply. I apologize for being so adamant about this, I just want someone to tell me I can take the deduction even though I have an individual policy, not in my S corp. And, of course, for my clients as well!

Sheldon (talk|edits) said:

28 November 2005
I won't be helpful either, because I usually wouldn't ask and take it. Another solution that could be just as good or even better, would be for the company to adopt a section 105 Health reimbursement arrangement. This may help you accomplish what you want even though the health insurance is in your own name.

James S. (talk|edits) said:

13 December 2005
Publication 15-B seems to imply that s-corp 2% shareholders would not pay social security, medicare, and FUTA taxes on health insurance premiums (they would be subject to income tax withholding however).

From Pub. 15-B Page 5:

Accident or health plan. This is an arrangement that provides benefits for your employees, their spouses, and dependents in the event of personal injury or sick-ness. The plan may be insured or noninsured and does not need to be in writing.

........

S corporation shareholders. Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee’s wages subject to federal income tax withhold-ing. However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from wages subject to social security, Medicare, and FUTA taxes.


I realize that this does not address the original issue, but it does seem to imply that exclusion from SS taxes is OK taxes is OK from the corporations perspective.

LJACPA (talk|edits) said:

15 December 2005
I still disagree on the FICA issue. If the benefits are not provided under a plan that covers all employees, then they are subject (for 2%+ sh) to FICA. To Sheldon, I know that this is exactly how it is handled most all the time and was handled all the time in the firm I just left. I know that question never came up, that is to confirm that the plan was in the business name, and was therefore never asked of the client. I am just so concerned, especially now with the new Circular 230 requirements, that now that I have read and know that the "established under your business" language is in the IRS pubs, etc., how can I ignore it?

RLMCPA (talk|edits) said:

16 December 2005
It is definitely preferable to have the S Corp purchase the policy in its name, but from a practical standpoint, some insurance companies may not issue them that way. The S Corp should pay the premiums from its checking account and treat it as health insurance for a 2%+ shareholder. Even if the name on the policy is the shareholder's, I think you have a valid non-tax reason, i.e. the insurance company would only issue policy in shareholder name, and as long as it is clearly a meant to be a benefit from the S Corp, I think you'll be okay if challenged. Follow all the formalities so you can later argue "substance over form", S Corp pays, it is included in the shareholder's wages, it is a benefit of employment offered to everyone (even if only one employee, the shareholder) vs. the form, the name the policy is in. The Pub 525 you cited does make it confusing, but it also provides “wiggle room” in its “***” comment that the deduction would be allowed.

The opposite approach to your comment is to try to find a cite other than the IRS Pub that clearly shows a requirement that the policy must be in the company's name. The Pub is not authoritative either. Many valid business expenses have been allowed that were not "in the name of the business", but were paid directly or reimbursed by the business.

As to the FICA issue, I recently attended a CPE by Surgent in which the presenter made a comment that as long as the health insurance benefit is non-discriminatory, similar to retirement plan rules, then it should be excludable for SS and Medicare. His comment was that there is no clear authority for shareholder health insurance specifically, but guessed the IRS would follow the non-discriminatory safe harbor rules found under the retirement plan laws. Just an interesting thought...

James S. (talk|edits) said:

16 December 2005
From Circular E, p.31 (table), it describes the insurance premiums for employees (including 2% shareholders) as exempt from ss and medicare if it is "under a plan or system for empolyees and their dependents generally or for a class or classes of employees and their dependents." This is the only place I saw mention of a "class" of employees. Any thoughts about the meaning of this?

Regarding the "established under your business" language. In my case, I am the sole full-time employee, and a s-corp majority owner. Our local HMO specifically will not permit a policy under the corp name unless there is a "group" of at least 2 employees. So, I am force to have an individual plan in my own name. I would assume that this is not the only insurance company with this type of policy. An s-corp with a single employee may have no other option. It is clear that other employees are not being discriminated against (there are none). Do you really think this it is a problem to exclude the wages used to reimburse premiums from social security and medicare in such a case? I think that it is important to note that the language says that the plan is "established under your business". It does not say that "the policy is a group policy held in the name of the corporation."

Sferreracpa (talk|edits) said:

18 December 2005
In regards to health insurnace can you not take the deduction on the S Corp Return and then deduct it on the 1040 tax return as self employment helath insurance deduction. Therefore you do not have to include it as income.

Cherylle (talk|edits) said:

18 December 2005
I apologize for the previous blank reply. I'm new to this group and just learning my way around. I am interested in this discussion and have an additional wrinkle. In Hawaii, any employee (including 2% shareholder) who works 20 or more hours per week must be covered by an employer plan under the Hawaii Prepaid Healthcare Act.

LJACPA (talk|edits) said:

19 December 2005
Wow, I'm glad to see more input on this question. I think the FICA question is really irrelevant if you have a sole or husband/wife shareholder and no employees. In this situation I agree with RLMCPA, it is most tempting, for lack of a better word, to either have the corporation pay the premiums or reimburse the shareholder, include the amount as wages (Box 1 only) and take the SEHI deduction. That's almost clean. But the FICA question is the real stumbling block when you've got employees. If you have an individual policy (and many times this is not available to a business due to the group policy requirements and cost prohibitions when a one-person group policy is available) and the plan is obviously 'discriminatory' in that it will exclude all other employees. I realize that the IRS Pubs are not authoritative, but I cannot find anything else that even addresses this 'established under the business' issue or the FICA question as it pertains to this. The question from Sferreracpa, regardless of how these other issues are answered, it is quite clear that health insurance premiums for a 2%+ shareholder are not deductible as such but must be considered wages and reported on the W-2. And I would most definitely not take it as a SEHI deduction if it is also deducted on the corporate return. Talk about double deduction! Bottom line for me here on 12/19/05 is, I may have the corporation reimburse the sole shareholder with an individual or business policy, report it on W-2, Box 1 only and take the SEHI dedution. I believe that this is the only legitimate way to get the deduction off Schedule A, yet still would love to have the IRS tell me that it's okay to do it this way. I still don't know what to do in the case of a corporation with other employees who are not covered. Schedule A or subject to FICA?? Hawaii, it's hard enough to keep up with NC and Fed laws, good luck!

RLMCPA (talk|edits) said:

20 December 2005
LJACPA, sorry to beat this topic to death, but your question has really bothered me because I feel your concern may be valid (if somewhat arcane :) ) so I continue to search for an answer. Here's what the PPC Payroll Tax Deskbook says: "For purposes of defining a plan, it is immaterial who makes payment of the benefits provided by the plan {which means that payment may be made through insurance, through a self-insured fund, or out of the employer's general assets}" (Key Issue 12A, by Thomson/RIA). Then, PPC cites TReg. 1.105-5 based on the fact that this is only reg which deals with the definition of a health plan. May this TReg is helpful for building your case.

SALTHEHIT (talk|edits) said:

20 December 2005
Sferreracpa, wants to clarify the question about the deductibility of Health Insurance. What I stated is that the S-Corp does not take the deduction on the 1120 but have it as K1 non deductible item and then the shareholder deducts the insurance premiums as a self employed health insurance deduction on the 1040. In effect the S Corp is not taking deduction (no double dipping). I guess I have been doing it wrong along.

LJACPA (talk|edits) said:

21 December 2005
This will probably be my last comment on this subject that really seems to have no definitive solution. Some of us remember the days when the premiums were treasted as either non-deductible or as distributions (and no doubt still done in some situations today), but I believe it was TRA 86 that changed that and made it a requirement to reclass as wages, etc. Thank you for all the feedback. My final answer, so to speak, for an individual policy - have the S corp pay/reimburse and include on W-2 and take as a SEHI deduction. However, I think it would cost more in FICA than you would save in income taxes, if you could not exclude from FICA.

Futurecpa (talk|edits) said:

21 December 2005
I have a similar question.

How do I make the entry to add the insurance premiums into my accounting software? do i debit wage exp and credit insurance exp?

James S. (talk|edits) said:

23 December 2005
LJACPA,

Would you be willing to explain a couple of your comments above in a bit more detail?

You wrote:

"However, I think it would cost more in FICA than you would save in income taxes, if you could not exclude from FICA."

So long as your personal marginal income tax rate is above ~15%, wouldn't it be clearly better to go with the SEHI deduction and have the income reported as wages?

You also wrote:

"I think the FICA question is really irrelevant if you have a sole or husband/wife shareholder and no employees"

Why is this? Isn't an S-corp obligated to pay wages to the sole shareholder / employee? Wouldn't these wages be subject to FICA?

Thanks very much for any clarification you could provide!

LJACPA (talk|edits) said:

26 December 2005
James, I worked out an example with different scenarios (e.g. policy in the business name and covering all employees, policy in individual name with only shareholder(s) as employees and each reimbursed if paid out of pocket individually, policy in individual name and other non-covered employees (therefore, subject to FICA)). If you pay/reimburse $5,000 for s/h premiums and this is subject to FICA, you'd have to gross this up to $5,414 and pay $828 in FICA. The $5,414 and $414 would be deducted on corp return and $5,414 included on 1040 with a $5,000 deduction for SEHI. At 15%, this deduction would save $750 but would cost $890 (FICA, matching, and 15% of $414). To answer the second part of your question, of course wages should be paid and would be subject to FICA, I was only talking about the premiums that would be reclassified as wages. If there are only shareholders as employees and they all receive the same treatment for their HI premiums then I would surmise that there would be no FICA requirement. All of this is so subjective since there seems to be no definite answer or guidance to go by. I sure hope this makes some sense!LJACPA 13:40, 26 December 2005 (CST)

Dyeomans (talk|edits) said:

29 December 2005
I have a S corp. The HDI is in my name, may wife and I are insured. We are both employed (w-2). We have two other employees. One has insurance (married) the other a bookkeeper does not have insurance. I have paid the last 6 months from company funds directly to Insurance company.

What can I do?

QuicktoListen (talk|edits) said:

29 December 2005
For S-corp shareholders health insurance, including LTCI is not subject to fica/medicare/futa taxes. (check your state!) Add to income, subtact as adjustment.

Tilkova81 (talk|edits) said:

30 December 2005
This is what I found from an IRS publication in 2003. So what I gather is that there is no requirement the plan to be under the business it can be individual plan reimbursed by the S corp. However, then it has to be reported in wages as additional compensation and have FICA, medicare, state and fed taxes deducted. If all eligible employees are covered under a group plan, then it is subject only to income taxes.

"Headliner Volume 41 February 12, 2003

This TEC “Headliner Package” describes the Correct IRS Forms for Reporting Health & Accident Insurance Premiums for greater than 2% S Corp Shareholder-Employees. The recommendation for this Headliner came from the SB/SE subgroup of IRPAC (Information Reporting Program Advisory Committee).

The IRS would like to clarify the proper reporting of S corporation payments of health and accident insurance premiums made on behalf of its greater than 2% shareholder-employees continues in the manner reflected in Revenue Ruling 91-26, 1991-1 CB 184, as clarified in IRS Announcement 92-16, 1992-5 IRB 53.

The cost of these health and accident insurance premiums paid on behalf of the greater than 2% S corporation shareholder-employee (hereafter referred to as “shareholder”) is deductible by the S corporation and reportable as additional compensation to the shareholder.

This additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement issued to the shareholder. If these payments are made under a “plan” for the S corporation employees and their dependents, the amount would only be subject to income tax withholding, and would not be included in Boxes 3 or 5 of Form W-2 wages for Social Security or Medicare, nor would it be subject to the FUTA tax. Form K-1 (1120S) and Form 1099 should not be used as an alternative to the Form W-2 to report this additional compensation.

The payments of the health and accident insurance premiums on behalf of the shareholder may be further identified in Box 14 (Other) of the Form W-2."

LJACPA (talk|edits) said:

30 December 2005
Thank you Tilkova81 for restating once again what I have been saying throughout this discussion and QuicktoListen is the latest to dispute this. Read the subject to FICA rules shown in Tilkova81's note. It cannot be more straightforward. Dyeomans, I will give you my two-cents worth and hope that someone else will respond also. In your situation, you have employees other than your spouse and appear to be subject to the FICA rules shown above. As I keep saying, so much of this is opinion and hoping for the best. You will just have to look at your own situation and see what is most beneficial within the guidelines that are available.LJACPA 11:40, 30 December 2005 (CST)

Riley (talk|edits) said:

31 December 2005
There is no FICA or FUTA requirement that all employees be covered under the plan. In fact, 3121 and 3306 say quite the opposite in allowing the employer to cover specfic classes of employees.

Also, the insurance policy does not need to be in the name of the employer. However, 162(l) is quite specific in stating that a "plan" must be established for a specific business of the taxpayer. The statute does distingish between a "plan" and a "contract or policy". The Service has long approved Sec. 106 plans that call for reimbursement of individual policy premiums.

David13z (talk|edits) said:

31 December 2005
A simpler approach would be to treat the health insurance premiums as a shareholder drawing. You can still claim the SEHI deduction on page 1 and save the FICA and Medicare. The only good reason to add to pay is to increase the base for a retirement plan contribution.

Riley (talk|edits) said:

1 January 2006
Treating the health insurance premiums would certainly be simpler and would save taxes; however, this is prohibited under Revenue Ruling 91-26.

LJACPA (talk|edits) said:

2 January 2006
Riley,way back in this discussion someone asked about classes of employees and got no response from me or anyone else. Do you really think that Sec. 3121 allows shareholders to be considered a separate class of employee and therefore exclude the premiums from FICA? I looked at this section again and, depending on the definition of 'class of employees', I would have to agree with you. You wouldn't know where to find a definition of 'class of employees', would you? I'm still concerned about the owner of the policy, so to speak, issue.LJACPA 12:18, 2 January 2006 (CST)

Batista (talk|edits) said:

4 January 2006
I just concluded an IRS audit with my largest client, who owns 100% of an s-Corp. I treated the health insurance premiums as a "profit distribution" on the 1120S and then took 100% of the premiums on page 1 of the 1040. The IRS auditor allowed this without question. Anyone have similar experiences??

Bean (talk|edits) said:

17 January 2006
I had a recent correspondence with IRS and was told that in order for a shareholder's health insurance premiums to be deducted on page 1 of 1040 it had to be included in the W-2 as wages, which will affect withholding but NOT FICA. Of course, if the sharedholder does not have wages, then deduction on page 1 is NOT allowed; he/she would have to itemize.

BrianPensacola (talk|edits) said:

24 January 2006
After reviewing this discussion and referring to IRS code Section 3121, 1040 instructions, W-2 instructions, Pub 535 - Business Expenses, and the IRS Headliner Volume 41, and other sources, I conclude that the IRS does not require an insurance policy to be issued in the name of the S Corp.

The IRS uses the word ‘plan’ consistently in the references below to refer to the establishment of a plan or system by an employer, as in a shareholder meeting. The terms 'insurance policy' and 'insurance plan' are not interchangeable.

US Code Title 26, Subtitle C, Chapter 21, Subchapter C, Section 3121(a)(2)(B), Definitions: While defining wages, refers to a ‘plan’ in the following manner: “the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally...… or for a class or classes of his employees…”.

Publication 535, Business Expenses states, “The insurance plan must be established under your business.”, and adds, “You may be allowed this deduction whether you paid the premiums yourself or your partnership or S corporation paid them and you included the premium amounts in your gross income. Take the deduction on line 31 of Form 1040.”

IRS Headliner Volume 41, 2/12/03 "This additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement issued to the shareholder. If these payments are made under a “plan” for the S corporation employees and their dependents, the amount would only be subject to income tax withholding, and would not be included in Boxes 3 or 5 of Form W-2."

In the case of an S Corp, the 'plan' is derived by the shareholders and documented in the corporate minutes, where specifics are discussed, such as: Are all employees covered or only certain classes? Are only full times employees covered? When is coverage effective?

Many accountants are interpreting the IRS statement, "The insurance plan must be established under your business" to mean "The insurance policy must be purchased by your business", yet in the references I've found, the IRS has repeatedly used "plan" to mean an employers plan, created by the company, not an insurance policy.

BrianPensacola (talk|edits) said:

26 January 2006
A DEFINITIVE ANSWER! The IRS e-mailed this morning with an official response to the question. Impressive, because I phoned in the question to their Tax Law Assistance line only yesterday. The important sentence follows:

"Congress was unclear by what they meant by 'established under your trade or business' but it has been IRS's position that the policy could be taken out under either the business or the owner's name."

Bobbyd (talk|edits) said:

26 January 2006
This is very interesting but nonetheless...subjective! Bottom line: take the deduction per Brian....We've had similiar experience with the IRS

Posts from non-taxpros, and any related responses, have been moved to this related discussion in the consumer forum: Discussion:S Corp s/h health insurance, paid by s/h.

Karen258 (talk|edits) said:

16 March 2006
I'm glad to see that I am not the only one confused by this subject. Here is my thinking on the net tax effects. S corp pays the premiums and they are added to sh wages. The S corp gets the deduction either way its recorded whether in wages or insurance. The sh technically is getting the deduction because it is a flow thru entity and his K1 is reduced by the premium amount. Then from the sh point of view his wages are increased which gets reported on 1040 line 7 and also as a reduction on 1040 line 31. The net effect is it's not taxable to the sh. I don't understand why we need to take this added step. Why can't the S corp just take the deduction and be done with it. I think the IRS likes to make things more difficult than they need to be.

Piglet (talk|edits) said:

22 March 2006
Ok, I messed up. I didn't claim the HI premiums in Box 1. I've already filed the W2's. So here's the best I think I can do at this point. I put the premiums on line 16 of the K1 as non-deductible, so the SCorp didn't deduct them. Then I deducted them on the 1040. Here's my question, which Karen258 implied, isn't the net result the same? I have adequate wages from the SCorp to offset the deduction. I don't have to pay FICA on the premiums bc I follow the rules for this. The only problem is that I'm a major shareholder, so I *should* have done it a different way. So if I were to get audited, would there even be a difference in tax liability given the correct method and what I did?

Dennis (talk|edits) said:

22 March 2006
If the corp has only one shareholder, the net result is the same.

If the corp has multiple shareholders and all have the same health insurance cost, the net result is the same. However if premiums are different...

Piglet (talk|edits) said:

22 March 2006
Thanks for the clarification. Since there is only one shareholder, I hope I'm safe. I will do it correctly next year, assuming they don't change the rules again.

Natalie (talk|edits) said:

23 March 2006
Another factor to consider, Piglet, is whether earned income credit was taken. If the shareholder received the credit on the 1040, then the credit would be too high because it would not have been correctly phased out.

BrianPensacola (talk|edits) said:

23 March 2006
Piglet - You're right, the tax liability is generally the same, but not always. If you follow IRS procedures and deduct the health insur. on the S Corp return, then include it on the shareholder's 1040 as wages (line 7) and SEHI (line 31), AGI is unchanged. However, the qualifications for the 2005 EIC are that, for a MFJ couple with 2 children, both their earned income and AGI must EACH be less than $37,263.

Example. A married couple has combined wages of $30,000. In addition, the S-Corp they own pays their annual health insurance premiums of $8,000. If health insurance premiums aren't accurately reported on the W2, they appear to qualify for the EIC because their wages are below $37,263. When added to the W2 and also deducted on the 1040 as a SEHI deduction, they now fail to qualify for EIC because their wages now exceed $37,263, even though AGI is the same in both cases.

I think one reason the IRS uses this complicated way of reporting health insurance premiums is to prevent shareholders without wages from taking the SEHI deduction. Most tax software won't allow an entry on line 31 if line 7 is zero.


Solomon (talk|edits) said:

20 August 2006
IRS

Yellowman98 (talk|edits) said:

3 November 2006
The IRS on May 15, 2006 addressed this issue in detail in IRS Headliner 163. Read it your self (Google it), but I read it to say that S-corp sole shareholder/employees aren't elegible for above the line deduction of health insurance premiums if they purchase the policy in their own name and not the corporation's. (This is contrary to and overrides prior guidance the IRS gave)

Luckily, there appears to be a loophole which people have found:

http://www.105concepts.com/scorp_hra.htm

Basically, these people interpret the code to say that an S corp can establish a Medical Reimbusement Plan, and through that pay for the employee's health insurance, even if he is a 2% shareholder/employee. The deduction is as State and Fed income tax on W2, but exempt from Medicare/SocSec. BTW, you can set up your own medical reimbrusement plan and don't have to go through this company...just including their site for its's analysis of the ruling.

Pretty interesting, but shows how tricky tax code can be!

CPAFSU (talk|edits) said:

6 November 2006
I have asked this question and kept getting negatives on the S corp and the medical reimbursement (105) plan and a >2% shareholder. I have clients that fit this and use BASE or NASE to administer the plans. BASE gives some really basic, hard to understand scenario, but my clients have had these in place for years. Other discussions cover medical reimbursement plans as well.


Natalie (talk|edits) said:

November 27, 2006
The reference to 105 concepts is interesting. According to Beneflex, a company that administers HRAs and flexible spending accounts, >= 2% owners of S-corps who are employees are not allowed to even participate in an HRA. If this were the case, it sounds like an owner/employee would be able bypass the disallowance of participation in Sec. 125 plans and benefit from an HRA.


Bushmaster (talk|edits) said:

28 November 2006
Addint HI premiums to wages stems from old law when HI premiums were not 100% deductible on page 1 of 1040.

It doesn't affect AGI either way though, but may affect some other calculations.

Yellowman98 (talk|edits) said:

30 December 2006
I found some good links:

http://www.treas.gov/press/releases/po3204.htm this treasury link has good info on Sec 105 and also Procedure, and Administrative requirents

Also: http://www.bls.gov/opub/cwc/cm20031022ar01p1.htm

Basically, create an HRA, above the line deduction. Then you are allowed to reimburse employees for health insurance premiums and medical/dental expenses not covered by insurance.

Will have to offer COBRA continuance and ensure HIPAA medical record confidentiality. My opinion, if you have more than one employee, that's why you have to hire one of these other outside services (you can't maintain employees' medical confidentiality if you're looking at their remibursement claims). Otherwise, in my opinion, don't see problem with administering your own HRA if you're a sole shareholder employee. Probably some sample HRAs typed up for your S-corp to adopt.

Seems legit to me, what you guys think? Only catch, not sure if HRA would be considered fringe benefit....But in IRS's May 15th, 2006 Headliner 163 they say "assuming no other subsidized health plans...", which gives us an out.

Here's another companies interpretation (not meant to be endorsement, I gave another company reference earlier):

http://www.coredocuments.com/irsheadliner163.php

Whatya think?

Lhhesscpa (talk|edits) said:

2 January 2007
The AICPA has requested a revenue ruling by the IRS to clarify their controversial and confusing advice about the SE health insurance deduction for S corp. shareholders in Headliner 163 according to this article dated 12/29/06 in WebCPA

Smokeytax (talk|edits) said:

2 January 2007
In calling in the HI adjustment to clients' payroll services, I've experienced so many problems that in the case of one shareholder S corporations, I'm often tempted to simply deduct the health insurance expense on the corporate books and be done with it.

I do agree that a "plan" can consist of the S corporation reimbursing the owner/employee for insurance they purchased with their own funds. (Rev. Rul. 61-146)

I think the circuitous inclusion in wages and offsetting deduction on page 1 of form 1040 is a reference back to the days when only a percentage of the health insurance was deductible, and is now somewhat anachronistic (did I really use that word?).

I hadn't thought of the EIC issue mentioned above, and this would definitely have to be taken into consideration.

In addition, there's a net income limit on health insurance deductions that has to be considered.

At any rate, if the IRS disputes the issue at audit, I might not be happy.


Neilcpa (talk|edits) said:

5 January 2007
I do not think I have ever seen an issue which has so many opinions as to the correct way of handling. One can only wonder why there is so much ambiguity in the regulations, much of which seems to center around the definition of the word "plan" as used in describing an insurance policy.

Obviously, not all these persons, many of whom are experts, can be correct. And people wonder why compliance is so low.


Lhhesscpa (talk|edits) said:

11 January 2007
This was posted by ROBCPA to MY TALK and thought it would useful to post it here as well:

"I saw where you mentioned the AICPA had requested clarification on this issue. Any recommendations on what one might do in the interim as far as health insurance premiums of an S corporation where the policy is in the individual name."

My answer is that no one seems to know the best thing to do for clients right now. Personally, I have written the AICPA and told them that their proposed ruling doesn't solve the problem of giving S corp. shareholder/employees with private health isnurance policies equal rights. -- Larry Hess, CPA, Albuquerque, NM - Talk to me

Suvi (talk|edits) said:

11 January 2007
Since this is high deductible plan, he can even consider a HRA/HSA combination for expenses that exceed the out of pocket reimbursement.

Suvi (talk|edits) said:

11 January 2007
Husband / wife owner-employees buy Health insurance in their name: Premium $ 2000 with a $ 10k deductible. Out of pocket exp $ 5000.

Scorp establishes a HRA plan and reimbureses then for $ 7000, deducts it on 1120S and includes it in W2 box 1, 941 subject to FIT and not FICA per Publ 15B pages 4 and 5. On 1040, owner-employee deducts SEHD because he is treated as partner/ owner. He can deduct out of pocket expenses over the amount reimbursed on Sch. A.

My question to you all is, if the Scorp reimburses only in Jan 07, can it still deduct in 06 tax return since it's a cash basis business?

Thanks

Suvi (talk|edits) said:

11 January 2007
Sorry for the wrong order of posting!

Blrgcpa (talk|edits) said:

11 January 2007
There are NO fed tax for se health ins. It is reported in the gross wages of the W-2. It is NOT subject to FICA, Medicare tax or fit. It is 100% deductible on pg 1 thus subtracting it from gross income to arrive at agi.

Suvi (talk|edits) said:

11 January 2007
True.


Kevinh5 (talk|edits) said:

10 February 2007
LJA, I am adding another post or two for your benefit in the count. Obviously this is a topic of interest, even if no one has any more news on the subject.

Death&Taxes (talk|edits) said:

10 February 2007
Hey, Kevin, maybe your friend will come over and push this one up on the charts.

Kevinh5 (talk|edits) said:

11 February 2007
JR, the 105 plan doesn't work well with >2% shareholders and those deemed to be shareholders by family attribution rules.

JR1 (talk|edits) said:

February 11, 2007
Sure it does, Kevin. It's been approved, since it is a plan, and therefore meets the requirements. It's the conservative approach right now until that Headliner is dismissed.

Actionbsns (talk|edits) said:

12 February 2007
I have two s corp clients, husband and wife teams, paying for health insurance on an individual basis because they are unable to get a group plan. I'm a little confused on the issue of a "Headliner" and how it impacts us. From the above discussion, it seems like we are required to act as though it is the final decision and in this case we need to put the health insurance on the Sched A. But what happens if the Headliner is dismissed as JR suggests? Would it be better to put it on the front of the 1040 and hope that it is dismiised, or to be more conservative and have it on the Sched A?

LJACPA (talk|edits) said:

12 February 2007
According to the research I've done (extensively!) on how an HRA/Section 105 plan works in an s corp (including >2% s/h), once the plan is established the health insurance plan becomes a business plan that qualifies and no question remains as to how it is treated. That is, it is treated as a plan in the business name.

Kevinh5 (talk|edits) said:

12 February 2007
LJA that is for the insurance part, which is usually only a SMALL part of the 105. The larger part is often the co-pays and out of pocket, which is a fringe benefit, which is NOT ALLOWED for the >2% SH.

Actionbsns (talk|edits) said:

12 February 2007
Both of my clients handls the co-pays and out of pocket expenses personally. The only thing going through the corp is the premium amount. So it sounds like I'm good to go putting the premiums on the 1040 and the out of pocket on the Sched A until or unless there is a different and more definitive decision. Right?

JR1 (talk|edits) said:

February 12, 2007
We're only talking about doing this for the insurance portion, Kevin. None of the other stuff for S corps...sorry if that wasn't clear.

Kevinh5 (talk|edits) said:

12 February 2007
I just don't want someone thinking they can do the whole §105 thing for the S corp when all they get to do is the health insurance part for the shareholders.

LAEsquire (talk|edits) said:

12 March 2007
A little confused on one point. The prior discussion indicates S corp SH health insurance premiums are reported W-2, then deducted page one 1040 as SE HI deduction, no problem. But it was also stated a couple of times that the SH had to have wages to take the SE HI deduction. With the HI amount reported as W-2 and then an identical amount deducted, how could the SH help but have wages?

Do you mean wages OTHER than the HI? What if the S corp is new, has a loss, and only comp. to SH is the health insurance at this point?

Chase (talk|edits) said:

13 March 2007
I have 2 S/H with health insurance paid through the company .... it is offered to the other employees as well. It's not on th W-2 as wages, so I'm not giving them the deduction, right?

Riley2 (talk|edits) said:

13 March 2007
If the shareholders would have been eligible for the SE health insurance deduction (limited to FICA wages from the corp), I see no reason to go back and amend the W-2 forms to correct this oversight.

LJACPA (talk|edits) said:

13 March 2007
I think what Riley2 is saying is that you haven't included the HI in the W-2 (though you should have), so you have a 'wash' so to speak. No HI to report as wages and no deduction for HI on page one. You're at the same place you would have been had the HI been included and then deducted. This is clearly an issue that will remain an issue in so many ways. I go back, however, to my very first question, nearly a year and half ago. I still believe that there is doubt as to the treatment if the policy is not in the business name. I continue to take the conservative approach and if it's an individual policy, even if paid for by the S corp., I don't include it in wages and I don't deduct it on page one. Until there is a truly, truly definitive ruling, maybe I'm doing my clients (and myself) an injustice to do it this way. I just don't know what the answer is.

Death&Taxes (talk|edits) said:

13 March 2007
A 7% owner of a big architect firm that files as an S had the insurance in the W2 for 2005 and did not for 2006. He asked abut this and they said basically the same thing, it would be a wash so they deducted it on the 1120S and that is that.....as JR has noted so many times, the W-2s were done. I think we will see more and more of this.


Hello-cpa (talk|edits) said:

11 September 2007
This thread is so old it is overripe. I moved your question here: Discussion:Hello-CPA's_Question [jdugancpa]

Jdugancpa (talk|edits) said:

11 September 2007
PEOPLE, THIS THREAD IS OLD AND WAY TOO LONG. DON'T ADD ANYTHING TO IT, IF YOUR QUESTION IS NOT ANSWERED HERE: 1)REREAD THE THREAD. IF STILL NOT ANSWERED 2)START A NEW THREAD.

Natalie (talk|edits) said:

September 12, 2007
Oh, but it's so fun to see those high-numbered threads pop back to the front page! I guess there's a reason for "closing discussions." Perhaps this is something Tim can look into, although I personally don't like not being able to add onto discussions from other forums.

Veritas (talk|edits) said:

12 September 2007
Here is what Code Sec 162 says,

l) SPECIAL RULES FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS

    (1) ALLOWANCE OF DEDUCTION 
 
         (A) IN GENERAL 
 
         In the case of an individual who is an employee within the 
         meaning of section 401(c)(1), there shall be allowed as a 
         deduction under this section an amount equal to the applicable 
         percentage of the amount paid during the taxable year for 
         insurance which constitutes medical care for the taxpayer, his 
         spouse, and dependents. 
 
         (B) APPLICABLE PERCENTAGE 
 
         For purposes of subparagraph (A), the applicable percentage 
         shall be determined under the following table: 
 
 
     For taxable years beginning   The applicable 
     in calendar year--            percentage is-- 
     ---------------------------   --------------- 
         1999 and 2001                60 percent 
         2002                         70 percent 
         2003 and thereafter         100 percent 
 
 
    (2) LIMITATIONS 
 
         (A) DOLLAR AMOUNT 
 
         No deduction shall be allowed under paragraph (1) to the extent 
         that the amount of such deduction exceeds the taxpayer's earned 
         income (within the meaning of section 401(c)) derived by the 
         taxpayer from the trade or business with respect to which the 
         plan providing the medical care coverage is established. 
 
         (B) OTHER COVERAGE 
 
         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 the taxpayer. The preceding 
         sentence shall be applied separately with respect to-- 
 
              (i) plans which include coverage for qualified long-term 
              care services (as defined in section 7702B(c)) or are 
              qualified long-term care insurance contracts (as defined in 
              section 7702B(b)), and 
 
              (ii) plans which do not include such coverage and are not 
              such contracts. 
 
         (C) LONG-TERM CARE PREMIUMS 
 
         In the case of a qualified long-term care insurance contract (as 
         defined in section 7702B(b)), only eligible long-term care 
         premiums (as defined in section 213(d)(10)) shall be taken into 
         account under paragraph (1). 
 
    (3) COORDINATION WITH MEDICAL DEDUCTION 
 
    Any amount paid by a taxpayer for insurance to which paragraph (1) 
    applies shall not be taken into account in computing the amount 
    allowable to the taxpayer as a deduction under section 213(a). 
 
    (4) DEDUCTION NOT ALLOWED FOR SELF-EMPLOYMENT TAX PURPOSES 
 
    The deduction allowable by reason of this subsection shall not be 
    taken into account in determining an individual's net earnings from 
    self-employment (within the meaning of section 1402(a)) for purposes 
    of chapter 2. 
 
    (5) TREATMENT OF CERTAIN S CORPORATION SHAREHOLDERS 
 
    This subsection shall apply in the case of any individual treated as 
    a partner under section 1372(a), except that-- 
 
         (A) for purposes of this subsection, such individual's wages (as 
         defined in section 3121) from the S corporation shall be treated 
         as such individual's earned income (within the meaning of 
         section 401(c)(1)), and 
 
         (B) there shall be such adjustments in the application of this 
         subsection as the Secretary may by regulations prescribe. 
 

Can you point out where it says the insurance should be in the company's name. Does it talk about discrimination rules?

Larry0434 (talk|edits) said:

12 September 2007
Actually the law does not specify health insurance must be in the corporate name. Last year an impartial tax court ruling stated that S Corporations could only deduct insurance payments to a policy in its name. If the policy is in the name of the owner, it is not deductible. By the way, the owner's could not take it as self-employed insurance unless it is in the name of the the S Corporation and flows thru the W2. As a result, it is only allowed as a personal deduction.

This is simply ignoring the function for the form.

Edcosoft (talk|edits) said:

16 October 2007
This is the first I have heard of a "tax court ruling" on this matter. Do you have an actual cite?

The key to this issue is what a *plan* is. Generally Webster defines it as a course of action, not an insurance policy. So the S-corp must establish a plan to pay premiums, not establish an insurance policy. Nowhere does the law require the policy to be in the corp name, nor the corp to apply for it.

ed

Taxref (talk|edits) said:

16 October 2007
I also am not aware of any court decisions on this matter. There was an IRS headliner which stated the policy must be written in the corporation's name. While that certainly indicates the IRS' position, I do not believe there has been a court test to date.

Edcosoft (talk|edits) said:

18 October 2007
The "headliner" was obviously out of touch with reality and admitted to its not being enforcable. As stated numerous times in this thread, and others, Sec 3121(a)(2)(B) clarifies that a plan to pay premiums is sufficient to include the premiums as W-2 wages and take the deduction on line 29. The author of the headliner, while appearing to be astute actually missed the point, intent, and legal basis for the deduction.

ed

JR1 (talk|edits) said:

October 18, 2007
Had to peek at this elephant thread. Talk about the need to bifurcate! And Larry, get the facts straight. IRS headliner, not any court ruling. This is how the urban legends start. And the red flag brigade.

Death&Taxes (talk|edits) said:

18 October 2007
You mean I can stop holding my breath, JR? Kept waiting for that cite.

Johnhuddleston (talk|edits) said:

30 November 2007
This is listed as an S Corporation audit issue in a CPE presentation by Mark Pierce, S Corporation Technical Advisor for the IRS. Included in the materials is the headliner referred to above, I believe (Headliner Volume 163, May 15, 2006).

John Huddleston

Murrsg07 (talk|edits) said:

2007-12-13
http://www.irs.gov/pub/irs-drop/n-08-01.pdf

sec 162 deductibility of 2% shareholder-employee ruling to appear Jan. 14, 2008

PVVCPA (talk|edits) said:

14 December 2007
No 105 HRA required.

Interesting sentence. "A 2-percent shareholder is not an employee for purposes of Sec 106."

KJean (talk|edits) said:

10 January 2008
If I include the health insurance on the 2% shareholder's W-2, box 1, will this amount be considered earned income for calculating benefits for Social Security. One shareholder is 64 and drawing social security. Will this amount affect his benefits since it is not taxable for Fica and Med? I am basing this question on the fact that the IRS has reversed their position under new guidance found in Notice 2008-1 stated below.

Notice 2008-1. A more than 2% shareholder-employee qualifies for the self-employed health insurance deduction if: 1) The S corporation makes the premium payments for the accident and health insurance policy covering the 2% shareholder-employee (and his or her spouse or dependents, if applicable) in the current taxable year; or 2) The 2% shareholder-employee makes the premium payments and furnishes proof of premium payment to the S corporation and then the S corporation reimburses the 2% shareholder-employee for the premium payments in the current taxable year. If the accident and health insurance premiums are not paid or reimbursed by the S corporation and included in the 2% shareholder-employee’s gross income on Form W-2, it does not qualify for the self-employed health insurance deduction

Murrsg07 (talk|edits) said:

2008-01-10
Kjean, this subject was recently transferred to a new thread "Hot News S corp Health Insurance (Notice 2008-1)." This thread is way too long and should be locked.

KJean (talk|edits) said:

10 January 2008
Thanks. I'll check it out.

KRISEA (talk|edits) said:

12 September 2008
I have a 2% SH of an S Corp that is "winding" down (closing shop)- he took no 2007 payroll. However the S Corp paid $7000 in health insurance for him. He being the only person in the S Corp.

What do I do with the $7000 in health insurance? Where does it go? Is is the same as a guaranteed payment in a partnership? I am not really sure what to do.

And - since he had no payroll - no one created/filed a W2 for him in 2007.

Thanks

Riley2 (talk|edits) said:

12 September 2008
Add to line 7 of the 1040. Deduct on Schedule A. No above-the-line deduction allowed since FICA wages were zero.

KRISEA (talk|edits) said:

13 September 2008
WHAT DO I DO WITH IT ON THE 1120 S ???????? CURRENTLY I HAVE IT AS OFFICER WAGES (THE $7000 PAID FOR HIM IN HEALTH INSURANCE) THEN I HAVE "2% HEALTH INSURANCE" ON THE MISC K-1 ENTRY MARKED AS $7000

INDIVI 1040 I UNDERSTAND NOT SURE ABOUT THE 1120 S

ReadMyLips (talk|edits) said:

13 September 2008
It needs to be included in the SH's W2 to be deductible on the 1120S, so you can't take it as wages, or anything else on the 1120S. It will be a M-1 book-tax return difference.

Riley2 (talk|edits) said:

13 September 2008
Income is income, regardless of whether the required information return was filed. No reason to have the K-1 entry for this if you are going to include it in officer's wages.


Newintaxacctg (talk|edits) said:

11 February 2009
A little bit off the main topic but I would like to know whether Health insurance co-pay paid by S Corp on behalf of the 2%> SH of S Corp is considered insurance premium and should be included in box 1 of W2.

Riley2 (talk|edits) said:

11 February 2009
No, is not a premium, but yes, should be in box 1.

Ijazassociates (talk|edits) said:

23 March 2009
I hope this settles it:

"Owners and officers with greater than 2% share of a Subchapter S corporation cannot make pre-tax contributions to their HSAs through the company by salary reduction. In addition, any contributions made to their HSAs by the corporation are taxable as income. However, they can make their own personal contributions to their HSAs and take the "above-the-line" deduction on their personal income taxes."

Taken from the U.S. Treasury's HSA FAQs.

  • April 20 question has been moved to a new discussion to avoid confusion. Also, the link in the post above has been removed, as what "settled" this discussion was Notice 2008-1, and the March 23 post was from a new user with no profile so the entire thing seemed strange. Seemed safest to take the link away.
  • August 2009 question(s)/related responses have been moved to an existing discussion in the consumer forum: S Corp s/h health insurance (which also holds some other non-pro posts, and related responses, from the 2006-2007 iteration of this discussion).
One of the August 2009 responses not only addresses the new question, but also appears to provide good info for people working on transition to/application of Notice 2008-1, so it is also retained here:

Dblchai (talk|edits) said:

18 August 2009
Look at major edit at top of this thread.

IRS Notice 2008-1: http://www.irs.gov/irb/2008-02_IRB/ar10.html

Good explanation (article from Iowa State University): http://www.calt.iastate.edu/briefs/CALTLegalBrief-DeductingHealthInsurance.pdf


PLEASE NOTE: SEE Notice 2008-1.
Before adding a post to this discussion, please read Notice 2008-1 or any of the several discussions about it, since it changes much of what was discussed here. Those other discussions would be more appropriate than this one for any follow-up questions, so please do not post any more questions on this discussion; thanks.


Spell Czech (talk|edits) said:

27 April 2011
Sixty thousand views and still going strong. This is *not* a question...!


PLEASE NOTE: SEE Notice 2008-1.
Before adding a post to this discussion, please read Notice 2008-1 or any of the several discussions about it, since it changes much of what was discussed here. Those other discussions would be more appropriate than this one for any follow-up questions, so please do not post any more questions on this discussion; thanks.

Maugenbaum (talk|edits) said:

6 October 2011
With regards to Notice 2008-1, I have a question.

Facts are: Wife (100% SH) and husband (employee of business) are employees of SCorp. Husband is NOT a 2% SH. There are no other employees. If SCorp pays the health insurance premiums for family policy in the husbands name (obviously covering 100% SH wife), would the wife still have to recognize the GI on W2 for the premiums paid?

DAJCPA (talk|edits) said:

6 October 2011
Family attribution rules apply and husband is considered >2% shareholder for this purpose. I know this is the case, but I can't remember, off-hand, the cite to back it up.

Maugenbaum (talk|edits) said:

7 October 2011
Thanks! I knew there was a related party issue but just couldn't find it.

Trillium (talk|edits) said:

10 January 2012
spam post (which copied a Sept 2008 post and added an unrelated link) has been deleted.


PLEASE NOTE: SEE Notice 2008-1.
Don't post your question HERE!
Before adding a post to this discussion, please read Notice 2008-1 or any of the several discussions about it, since it changes much of what was discussed here. Those other discussions would be more appropriate than this one for any follow-up questions, so please do not post any more questions on this discussion; thanks.

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