Discussion:S Corp Health Insurance No FICA on 'Wages'?

So what if a > 2% s/h has sufficient stock basis, is not an active participant in the business and just wants what is being paid for health insurance on his behalf treated as a distribution and thus a reduction of his previously taxes earnings/s/h basis?

Aside from maybe pension benefits based on an 2% S Corp employee's gross wage, why does the above not accomplish the same thing as putting the premium on the W-2 and deducting the premium on the front of the 1040? I don't think an auditor would give one hoot one way or the other.

Isn't the bottom line the same either way? Remember, no FICA or FUTA.

What does the "W-2 way" do that the "draw way" doesn't do?

What limitations are placed on identifying a "class of employees"? Would "all employees who are also greater than 2% shareholders" qualify as a 'class of employees'?

In effect, can the plan discriminate and only offer health insurance coverage to the shareholders and still exlude these "wages" from FICA?

In response to taxpayer questions, this Internal Revenue Service announcement is intended to clarify the social security and Medicare tax treatment of accident and health insurance premiums paid by an S corporation on behalf of 2%-shareholder-employees.

On April 15, 1991, the Service published Revenue Ruling 91-26, 1991-1 C.B. 184, regarding employer-provided accident and health insurance for S corporations and 2%-shareholder-employees. Revenue Ruling 91-26 indicates that amounts paid by an S corporation for accident and health insurance covering a 2%-shareholder-employee must be reported as wages on his or her Form W-2, Wage and Tax Statement.

Revenue Ruling 91-26 does not directly address the treatment of the amounts for such purposes. The Service has been asked whether these amounts are wages for purposes of social security and Medicare taxes. The facts presented in the ruling are insufficient to ascertain whether tax would be imposed in these circumstances. A basic analysis is provided below to assist taxpayers.

Like other employees of an S corporation, 2%-shareholder employees are subject to social security and Medicare taxes on “wages” paid to them by the corporation. The term “wages” generally includes fringe benefits provided in cash or in kind to an employee. However, under section 3121(a) of the Code certain payments are expressly excluded from “wages” for purposes of social security and Medicare taxes.

Section 3121(a)(2)(8) excludes from wages certain amounts paid by an employer to or on behalf of an employee (including amounts paid by an employer for insurance, annuities, or into a fund) for medical and hospitalization expenses in connection with sickness or accident disability. For this exclusion to apply, the payments must be made under a plan or system for employees and their dependents generally or for a class (or classes) of employees and their dependents. Thus, whether amounts of this type are actually subject to social security or Medicare tax depends on whether in the particular case the taxpayer satisfies the requirements for the exclusion.

If the requirements for the exclusion under section 3121(a)(2)(8) are satisfied, amounts paid by an S corporation for accident and health insurance covering a 2%-shareholder-employee are not wages for social security and Medicare tax purposes, even though the amounts must be included in wages for income tax withholding purposes on the 2%-shareholder-employee's Form W-2. On the other hand, if the requirements for an exclusion are not satisfied, amounts paid by an S corporation for accident and health insurance covering a 2%-shareholder-employee must be included in wages for social security and Medicare tax purposes, as well as for income tax withholding purposes, and reported in the appropriate boxes on the 2%- shareholder-employee's Form W-2.

I have read all the threads but it seems odd still.

To properly handle the W2 scenario , it seems we have 2 different approaches based on postings on this site.

1) a W2 with No Fica wages and only wages of $12,000 in box 1 and S Corp health Ins disclosure in box 14?

2) I have read all the threads and still it seems odd that he has NO FICA wages as a literal reading would lead you to believe he must have FICA wages of $12,000 to deduct the insurance. If that is the case, his w2 would show $24,000 of wages, $12,000 FICA wages and $12,000 in box 14.

The primary difference being he will be subject to FICA tax on 12K. he is fine with that.

Any insight would be very appreciative.

The question is, based on other threads, it appears you MUST also have SS earnings so my gut is telling me his W2 should be 24K, with only 12K of this subject to FICA tax. This is the only client I have in this scenario.

Womdering what others think.

Section. 162. Trade or business expenses

(l) Special rules for health insurance costs of self-employed individuals

  (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.

     (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.

And as noted above, the shareholder's wages is considered his earned income from the S corp.

I apologize for the clunky format; it is what it is. You may find it easier to read the quoted material in the "edit this page" mode.

Several months later a letter was received from the IRS. I answered it for the client. The IRS accepted the response.

Your response 1 is correct.

The reason I "brought to life" this issue is that after researching the threads, I saw 2 different responses from 2 well respected posters. BLRGCPA and Boscoe, also Riley2 seems to agree with Boscoe. This conclusion I drew from a search of at least 3 different threads.

My gut is that BLRG, while getting the IRS to accept her position , while a victory , may have been an oversight on the IRS part. I will read 162 but as defined under 401 (c), that leads me to believe that the earnings must be FICA earnings and thus in my example, 2 is correct.

Thank god we don't work in an ambiguous profession.....

First, is the W-2 income for the insurance premiums FICA wages? 3121(a)(2)

And second, is the deduction for the SEHI premiums on page one of the shareholder limited to the amount of FICA wages on the shareholder/employee's W-2? 162(l)(5)

Blrg: What did the IRS letter say, and how did you respond?