HSA SCorp Contributions

[Burke]

More than 2% shareholder -- HSA contributions made by SCorp -- go in Box 1 of W-2 and Box 12, Code W. The box 12 amt flows thru to Form 8889 as employer contributions but does not reflect on Line 13 of form so that it flows thru to 1040, line 25. What am I doing wrong?

[veritas]

Those contributions

should not be included in box 12 coded W. It is taxable compensation since the owner is greater than a 2% owner.

I would use box 14 for informational purposes.

[Burke]

Well, that is what I was thinking, and that is the only way it will work, I believe. However, the Jan 2011 NATP TaxPro Monthly clearly states in a table they printed, that for a more than 2% shareholder, it goes in Box 1, but not Box 3 & 5, and Box 12. I cannot find any instructions in the IRS material that refers to this situation in regard to a more than 2% S-Corp owner/shareholder. I am going to ask them for a cite or clarification.

[NotEasy]

Well, that is what I was thinking, and that is the only way it will work, I believe. However, the Jan 2011 NATP TaxPro Monthly clearly states in a table they printed, that for a more than 2% shareholder, it goes in Box 1, but not Box 3 & 5, and Box 12. I cannot find any instructions in the IRS material that refers to this situation. I am going to ask them for a cite or clarification.

Burke, do you have an update on how this should be done? I also want to know the correct way to do it.

[Burke]

Well, I got a detailed answer from NATP Research confirming the tax treatment of this issue but it did not resolve this situation. The IRS instructions & guidelines clearly state that it goes in Box 12, Code W. They confirm it goes in Box 1 under IRC 106(b)(1) and 223; and that it is deductible on Line 25. The problem is that it goes to 8889 as employer contribution and then does not flow thru to Line 25 as an individual contribution. They suggested contacting the software people for a work-around. I can get it to work by one of several methods on a paper return. That is not the problem. I am not sure how it will efile. But, I am more concerned about the W2 reporting to the IRS and subsequent CP2000 or other flags which might result, as the computers cannot differentiate between a regular corp employee and a more-than-2% SCorp shareholder/employee. Surely this has come up in someone's practice maybe last year? This is my client's first year with an HSA. At an estate tax seminar yesterday, I talked to a CPA who seemed to remember dealing with it last year, but could not remember how it was resolved. IMO, Form 8889 needs to be revised.

[JON]

If more than

a 2% stockholder when doing the S Corp it is a draw to the stockholder. Then it is included into income and recorded as his contribution. If you end up over the limit then I think you have set up the contributions wrong. ?????

[veritas]

After rereading the instructions

Well, I got a detailed answer from NATP Research confirming the tax treatment of this issue but it did not resolve this situation. The IRS instructions & guidelines clearly state that it goes in Box 12, Code W. They confirm it goes in Box 1 under IRC 106(b)(1) and 223; and that it is deductible on Line 25. The problem is that it goes to 8889 as employer contribution and then does not flow thru to Line 25 as an individual contribution. They suggested contacting the software people for a work-around. I can get it to work by one of several methods on a paper return. That is not the problem. I am not sure how it will efile. But, I am more concerned about the W2 reporting to the IRS and subsequent CP2000 or other flags which might result, as the computers cannot differentiate between a regular corp employee and a more-than-2% SCorp shareholder/employee. Surely this has come up in someone's practice maybe last year? This is my client's first year with an HSA. At an estate tax seminar yesterday, I talked to a CPA who seemed to remember dealing with it last year, but could not remember how it was resolved. IMO, Form 8889 needs to be revised.

It does say too put in box 12 code W. I can see your problem. In my case we do the payroll so I did not use code W since I don't like getting those letters.

[veritas]

A thought

if the computer shows the "W" contributions as made by the employer, could you also enter the contributions as made by the employee. If the combined contributions are under the limit it would work.

[equinecpa]

My take on this (and I read it elsewhere too) is that since this is included in Box 1 it is no longer considered an employer contribution therefore nothing entered in Box 12. The 1040 will then work out properly.

[veritas]

After reading some more

contributions made for a shareholder for services provided are treated like guarantee payments to a partner. So in other words the contributions by definition are payments for services and are included in the shareholder's compensation. These are not HSA contributions made by the employer and should not be included in box 12.

Agree with Joan.

[Burke]

contributions made for a shareholder for services provided are treated like guarantee payments to a partner. So in other words the contributions by definition are payments for services and are included in the shareholder's compensation. These are not HSA contributions made by the employer and should not be included in box 12. Agree with Joan.

I read that too. But "included in the shareholder's compensation" to me (like guaranteed payments would be) are subject to FWT, FICA, and SWT. HSA payments made on behalf of a more-than-2% shareholder are not subj to FICA/MC by statute. They are treated as health insurance payments are (since they are only withdrawable if they meet the requirements of deductible medical expenses.) And my source is adamant that they do go in Box 12, Code W, and have published this in their national magazine. They also remarked that the IRS has provided no guidance on this issue. In the meantime, we have to drop back and punt.

[Burke]

My take on this (and I read it elsewhere too) is that since this is included in Box 1 it is no longer considered an employer contribution therefore nothing entered in Box 12. The 1040 will then work out properly.

Unfortunately, I cannot get it to work out properly even then. If the TP takes a deduction on Line 25, Form 1040, for HSA contributions, it says to attach Form 8889. If I show employee contributions on Line 2, Form 8889, it still does not flow to Line 13 unless I am not doing something right.

[Burke]

Well, I got it to work in the software by showing all contributions on Line 2, the max eligible amt on Line 3 (even though it says "if you were under age 55 at the end of 2010...." -- which the TP is NOT -- and the addl contribution on Line 7 for over age 55, and nothing on Line 9 for employer contributions. Whew! This form is driving me crazy.

[AccTaxMan]

contributions made for a shareholder for services provided are treated like guarantee payments to a partner. So in other words the contributions by definition are payments for services and are included in the shareholder's compensation. These are not HSA contributions made by the employer and should not be included in box 12.

Agree with Joan.

So I guess the consensus is that it is not considered contributions by the employer so it doesn't go to box 12 code W.

Is it advisable to report it on box 14, just like how the health insurance premium is reported?