Self-employed health insurance deduction requirement

[NotEasy]

I have always thought, in order for the deduction, the insurance premiums have to be added on the shareholder's W-2.

But when I read more carefully about the rule today, it actually says:

"If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2."

So what about if the policy is in your name (shareholder's name), but the S-corp pays the premiums. In that case, does the premiums still have to be added on the shareholder's W-2?

[JohnH]

Yes.......

[JON]

2014

The better question is in 2014 is all S stockholders' insurance added to compensation , but will it be subject to FICA??

[appelman]

Heretofore not.

Is something special happening in 2014?

The better question is in 2014 is all S stockholders' insurance added to compensation , but will it be subject to FICA??

[DaveinTexas]

Notice 2008-1

I have always thought, in order for the deduction, the insurance premiums have to be added on the shareholder's W-2.

But when I read more carefully about the rule today, it actually says:

"If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2."

So what about if the policy is in your name (shareholder's name), but the S-corp pays the premiums. In that case, does the premiums still have to be added on the shareholder's W-2?

From Notice 2008-1:
"Accident and health insurance premiums "paid or furnished" by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered are treated for income tax purposes like partnership guaranteed payments under § 707(c) of the Code. Rev. Rul. 91-26, 1991-1 C.B. 184. An S corporation is entitled to deduct the cost of such employee fringe benefits under § 162(a) if the requirements of that section are satisfied (taking into account the rules of § 263). The premium payments are included in wages....."

One example in this above mentioned notice provides the following example (similar to your question):
"Example 3. (i) For 2008, shareholder C obtains an accident and health insurance policy in the name of shareholder C. The S corporation makes all the premium payments to the insurance company. The S corporation reports the amount of the premiums as wages on shareholder C’s Form W-2 for 2008 and shareholder C reports that amount as gross income on Form 1040 for 2008.
(ii) A plan providing medical care for shareholder C has been established by the S corporation and shareholder C is allowed the deduction under § 162(l) for 2008."

The short answer is yes, as JohnH stated confidently, because otherwise the S Corp would report the payments as Distributions and the shareholder is stuck with the 10% AGI haircut for medical expenses on the Schedule A (beginning in 2014). Following the notice, it only costs the shareholder the FIT on the phantom wages.

My question is, would the IRS throw a fit if you chose not to withhold FIT? No pun intended....but if you think about it, as long as the premiums qualify as an established plan and it washes out on the shareholder's 1040, who would gripe if there is no FIT withheld?

[Wiles]

2014?

Is something special happening in 2014?

If the plan is discriminatory in 2013 and back, then the add-on to wages is subject to FICA.

If the plan is discriminatory in 2014, then it is my understanding that this is no longer allowable, i.e. it is pure wages & no SSEHI deduction. However, there is some notice delaying the effect of this.

[JON]

2014 right now - may change

S Corps (probably all) it has to be a group policy covering the employees including the greater than 2% to be exempt from payroll, if individual policies are reimbursed by the corporation this is compensation subject to payroll taxes, including the > greater than 2% shareholder. The greater than 2% can take the insurance above the line, but his compensation will taxed as payroll - is what is new.

The one exception to the above is the one employee S Corp. If their is only one emplyee you can continue to put insurance in taxable wages, but not subject to FICA/MEDI(> than 2%). I think they realize one employee means a group plan may not work.

Greater than 2% means if your reimbursing Medicare and gap premiums you better be a one emplyee shop or pay all payroll taqxes on it.

On another site it was mentioned that the IRS has said it will come out with what maybe will allow reimbursements on individual polices for employees if it is contolled by a "proper" medical plan. They will define what a "proper plan" is..