S-Corp Health Ins twist

[Gretel]

Have special situation for S-Corp that established group health ins plan but all premiums are paid by employees as payroll deductions from net pay. Rules say that shareholder/employee can deduct premiums only if plan is established by corporation. Normally corporation pays and then adds amount to W-2. Since shareholder paid, but plan was established under corporation, does this qualify as self-employed health insurance deduction?

[Lion]

Pub 15-B Fringe Benefits

Working with my S-corp, I found this:

Exception for S corporation shareholders. Do not treat a 2% shareholder of an S corporation as an employee of the corporation for this purpose. A 2% share-holder is someone who directly or indirectly owns (at any time during the year) more than 2% of the corporation's stock or stock with more than 2% of the voting power. Treat a 2% shareholder as you would a partner in a partnership for fringe benefit purposes, but do not treat the benefit as a reduction in distributions to the 2% shareholder.

Ambiguous enough for you?! I do remember from researching something similar that a 2% shareholder does not qualify to use salary reduction for certain fringe benefits, and I think health care premiums are one of those. If his salary is reduced by the premiums, then he has not really "paid" them with after-tax dollars and won't be able to deduct them on his 1040, no double-dipping. He already received the tax benefit of lower taxed wages. But, I don't think he can use salary reduction like an ordinary employee.

[Burke]

Have special situation for S-Corp that established group health ins plan but all premiums are paid by employees as payroll deductions from net pay. Rules say that shareholder/employee can deduct premiums only if plan is established by corporation. Normally corporation pays and then adds amount to W-2. Since shareholder paid, but plan was established under corporation, does this qualify as self-employed health insurance deduction?

I think it would, if his gross pay on the W-2 reported in Box 1 was not reduced by the premiums. So it has the same result as if the SCorp paid them and added them to Box 1. Except for the fact that in this scenario the TP also paid FICA tax on the amount, the end result is the same. This would only apply to more than 2% shareholders, however, not to the other employees. The concept of adding them to the W-2 is that, if they are included in income, then a more than 2% shareholder can deduct them as SEHI.

[Gretel]

I think it would, if his gross pay on the W-2 reported in Box 1 was not reduced by the premiums. So it has the same result as if the SCorp paid them and added them to Box 1. Except for the fact that in this scenario the TP also paid FICA tax on the amount, the end result is the same. This would only apply to more than 2% shareholders, however, not to the other employees. The concept of adding them to the W-2 is that, if they are included in income, then a more than 2% shareholder can deduct them as SEHI.

Box 1 was not reduced, as said it was deducted from NET pay, hence corporation did not pay anything, employees did including my 50% shareholder. Corporation set up the plan but not company contribution whatsoever. It's actually a little more complicated since shareholder decided after making some payments through his paycheck that he is entitled to this benefit being paid by corporation and stopped deducting from his paycheck. As far as I know he cannot discriminate and just pay his or reimburse his. I was asking only about the period when he actually did pay through his paycheck from his NET. Since corporation did not pay, I don't think he can use as SE health deduction on 1040.

Some years ago I did some research and could swear I ran into something that states that there can be discrimination for health insurance (not for any other health benefits), and if this is the case the amount paid by the corporation was also be added to boxes 3 & 5 of the W-2 not just to box 1. I researched for hours yesterday but could not find anything in regards to this. However, I found something making a remark that the health care reform made changes to this as well, and, if this is true, whatever I found years ago is completely worthless. Now, I am more confused than having found an answer and since no resolution was passed in regards to the health insurance I am inclined to treat as loan to S/H and Schedule A on 1040.