Discussion:Hot news on S corp Health Insurance (Notice 2008-1)

Murrsg07 said:

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 said:

14 December 2007

No 105 HRA required. Interesting sentence. "A 2-percent shareholder is not an employee for purposes of Sec 106."

I agree, Paul, no mention made of a required written plan, now, so *poof* to 105Concepts and the like, sorry guys. The difficulty is that it requires addition to the W2, which is a huge pain in the keester, esp. since how am I to even know the correct amounts from some of the clients when I'm jamming the W2's out? Ah, well, at least it's written now.

Now maybe we can blow up that other thread, or if we could somehow edit comment #1 to send people to the IRS new position, we could save a lot of eye strain.

Thanks, DT, never even thought about that, but IRS did yield to the law and intent here. It's the right thing. But they're making me do those W2's correctly now, so a victory for them, too!

I suppose now this justifies my fee for figuring out the W-2 inclusion and communicating it to the payroll services.

I'm still thinking it might not be too crazy to go the simple route & have the S corp deduct the wages, and in the event of audit, amend the W-2 to include the health insurance. The payroll services around here are especially dense about this adjustment.

So Pete, thinking out loud, I book insurance expense all year long on the corp books. Now, do I debit officer salary and credit insurance to shift it? Or credit NP-S/H? Hmmmmmm...have to think of this. I know, I know, I should know how to do this, but my W3's have always matched PR reports and P/L's for perfect audit trail. No add-on's. Crud, this affects 941 reporting, too. . .back to school to see how all this should work.

JR1, If the S-Corp is not covering all employees, but only a "class of employees", then I think it would be best to prove that with a written plan identifying what that class is. The IRS may attempt to argue the coverage is arbitrary, thus subject to FICA.

It refers to reconciling forms W-2 lines 2, 3, 5, 7, and 9 of forms W-2 with the year's forms 941. Therefore, essentially only social security and medicare wages and taxes, plus federal income taxes withheld, will have to match between the W-2's and the forms 941.

In fact, in my experience with matching letters from the IRS, this is what they do in terms of matching.

Therefore, I'm thinking that box 1 of the W-3 doesn't have to match with the forms 941. Therefore if the client has filed the four quarterly forms 941 and are having us prepare only the forms W-2, we can go ahead and increase box 1 wages for 2% shareholder health insurance without danger of a matching problem down the road.

Treatment of Medical Insurance for S Corporation Shareholders

As we approach year end I thought it worthwhile to review the rules pertaining to deduction of medical insurance “above the line” by S corporation shareholders (i.e., as a deduction on Form 1040, page 1 before adjusted gross income, rather than a Schedule A medical expense deduction). Please review these rules and take appropriate action with your payroll company prior to the end of the year so that you can take best advantage of the rules.

Background:

For the purposes of applying the rules for deducting fringe benefits, S Corporation shareholders owning more than 2% of the stock in an S corporation have been treated like partners in a partnership. Accordingly the deductibility of medical insurance by most S corporation shareholders has followed partnership rules rather than the rules that pertain to C corporations. Those rules treat S corporation shareholders and partners as self-employed individuals for the purposes of fringe benefit rules. Since 2003 self-employed individuals have been able to deduct 100% of the amounts paid for medical insurance as an adjustment to gross income (“above the line”) on page 1 of Form 1040.

In mid-2007 the IRS threw a scare into many tax practitioners by announcing that in order to qualify for the deduction the medical insurance had to be “in a plan” and the medical insurance had to be in the name of the S corporation in order to qualify for this treatment. This caused problems for many S corporation shareholders, especially those S corps whose only employee was the shareholder. In those cases in the State of Washington group medical insurance plans are not available and the medical insurance is issued in the name of the employee rather than the name of the corporation. Consequently, deductibility of medical insurance premiums in such cases was put into question.

Resolution:

Last week the IRS issued Notice 2008-1 providing guidance as to how to alleviate that problem. ( http://www.irs.gov/pub/irs-drop/n-08-01.pdf ) In short, medical insurance paid under individual medical insurance plans may be deductible “above the line” if the following conditions are met:

1. The corporation must establish a “plan” for the payment of medical insurance premiums on behalf of the shareholder-employee.

2. The corporation must either pay the premiums for the plan, or reimburse the employee-shareholder for the premiums paid after being provided proof of premium payment to the S corp.

3. Premiums so paid or reimbursed on behalf of the shareholder-employee MUST BE ADDED TO W-2 BOX 1 WAGES. These premiums should be EXCLUDED from Box 3 Social Security Wages and Box 5 Medicare Wages (thus they are exempt from FICA taxes completely).

4. On the 1120S for the S corporation, the corporate tax return will include a deduction for wages/compensation paid which includes the medical insurance paid on behalf of the shareholder employee.

5. On the shareholder-employee’s 1040 an above the line deduction will be taken for the medical insurance paid by the corporation which were added to the W-2. In Notice 2008-1 the IRS states that if this treatment is not followed, the medical insurance deduction “above the line” will be disallowed and the deduction will be moved to Schedule A. If this happens, the value of the deduction is generally severely limited due to the 7.5% threshold that must be exceeded before medical expenses are allowed.

ACTION ITEMS YOU MUST TAKE TO TAKE ADVANTAGE OF THIS DEDUCTION:

1. Document the existence of your corporation’s “plan” by making note of it in your annual minutes.

2. If you have paid the medical insurance individually, gather up all of your medical insurance payments for 2007 and submit a reimbursement to your corporation to reimburse yourself for those amounts. Post the reimbursement check to “Officer Wages” or similar gross pay expense account.

3. Contact your payroll company to provide them with the information necessary to include the medical insurance expense (directly paid by the corporation or reimbursed to the shareholder) in your final paycheck and your W-2 for 2007.

Please call me if you have any questions regarding this memo.

Thanks, good information.