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.