S-Corps,. medical benefits, & FICA

[dburd52]

S-Corp sets up HSA for 2% shareholder (sole shareholder) and makes maximum contribution to HSA for shareholder/employee. The benefits are added to wages box 1 W-2. Are these benefits subject to FICA and also added to box 3 of W-2?

I am looking for best way for sole owner of S-Corp to pay medical expenses not covered by insurance. S-Corp has high deductible plan in place.

[TAXNJ]

Do an Advanced Search in the TB

Do an Advanced Search in the TB on "S corp health Insurance" (12/10) - it may address this issue

[S T]

Maybe

This will assist you - I found on a CPA website

Contributions to an HSA

In general, contributions made by an S corporation to a shareholder HSA are treated as payments to the shareholder. Because the contributions are includible in income, the contributions are allowed as a deduction for the shareholder. This treatment mirrors the treatment for eligible individuals who make contributions to HSAs directly with after-tax funds.

Contributions by an S corporation to an HSA of a shareholder owning two percent or more of the outstanding shares of stock in consideration for services rendered are deductible for the S corporation. Thus the contributions must be included in the shareholder’s wages. These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA or SUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 and 5 of Form W-2. Eligible individual employee-shareholders may deduct the amount contributed to the HSA as an adjustment to income on their personal tax returns.

I also found IRS Notice 2008-01 http://www.irs.gov/pub/irs-drop/n-08-01.pdf

Sandy

[dburd52]

Thanks Sandy. In my opinion the CPA paragraph about box 3 & 5 may be correct, but I am still not sure what this is based on. When reading all the information out there there seems to be contradictory guidance. For example, in Pub 15-B page 3 IRS says that 2% shareholders are to be treated as a partner in a partnership for fringe benefit purposes. I think partners end up paying FICA tax on their guaranteed payments (including the part of the GP that is for health insurance - except for 2010). In contrast IRS Notice 2008-1(which deals health insurance for 2% shareholders of S-Corps) agrees with the above, but goes on to say that "the premium payments are included in wages for income tax purposes, but are not wages subject to Social Security . . ." The notice references IRC Sect 3121(a)(2)(B) which deals with the definition of wages for FICA taxes. This is where I think the basis for excluding the HSA contribution from Box 3 & 5 is. That section excludes "medical or hospitalization expenses" paid for by an employer, from the definition of wages (for FICA).

The practical results of this is to be able to get tax free (income & FICA) treatment for at least the maximum HSA contribution amounts and health insurance premiums for 2% shareholders.

[dburd52]

If anyone else is interested, TTB, does address this (it took me awhile to find it) issue with HSAs and S-Corps page 13-26 in Deluxe 09 edition. The editors also reference IRS Notice 2005-8 which deals specifically with HSA and partnerships and S-Corps. I am reading and digesting this now; but I can already see I think I erred when I said partners had to pay SE tax on the medical part of guaranteed payments. (I don't prepare any partnership returns.)