S-Corp 125 plan

[natiro]

S-Corp offers medical insurance under 125 plan. Employer pays 60% of premium, employee pays 40%.

How is the 40% employee portion treated for the >2% shareholders? Does it come out pre-tax as it would for other employees? If not, how do you account for it?

I know what happens with the employer paid 60% portion, so no need to address that part.

Many thanks.

[veritas]

The entire premium paid for the shareholder is included in income for the shareholder as wages not subject to fica,futa. You deduct the premiums on their individual tax returns.

[Bees Knees]

The question was how to treat the 40% employee portion. For a more than 2% shareholder, it comes out as an after tax deduction. You don't need to add it back on the W-2 as wages since it was never subtracted from W-2 wages in the first place.

[natiro]

S-Corp Sec 125

Regarding Bees Knees' answer. . .does that mean that the portion that would normally be pre-tax deduction (employee contribution) IS subject to FICA and Medicare for the > 2% shareholder? Or would you reduce the wages for the employee contribution and then add back that portion and the employer portion as shareholder medical insurance, NOT subject to FICA and Medicare?

Maybe an example would help me see it.

Let's say shareholder receives $3000 per month salary, before any medical plan. Medical insurance is $200 per month. Shareholder pays $75. Employer portion is $125. What would the paycheck look like? What part of the paycheck would be subject to which taxes?

As usual, I appreciate everyone's help and expertise.

[Unregistered]

Why would you have the shareholder pay anything?

[natiro]

S-Corp Sec 125

Why would you have the shareholder pay anything?

Well, I don't know if there is an option to exclude them from having to pay their portion, but there are 15 employees in the plan, including 2 shareholders, and the employees are paying 40% each for their premiums.

[Unregistered]

payroll for >2% s/h

Here's how I handle the payroll/health insurance for >2% shareholders and their children that are employees:

Owner makes $45,000 and $2,000 is paid (by the S-corp) for his health insurance premium. There is no deduction from his paycheck for the health insurance, so paycheck is $45,000 gross, less taxes. At tax time, box 1 on his W-2 says $47,000 and box 14 indicates the health ins premium of $2,000. Boxes 3 and 5 say $45,000, so the $2,000 is not subject to FICA/Med. On his 1040, $47,000 is listed as wages and $2,000 is subtracted as s/e health ins premium. His kid/employee is treated the same way, even though the kid is not an actual shareholder, IRS says constructive ownership.

For his accounting throughout the year, $45,000 is expensed as wages and $2,000 expensed as insurance. Then, at tax time, I make a tax adjusting entry to reduce insurance expense by $2,000 and increase wages by the same. Net effect is that $47,000 is deducted as wages and nothing deducted for his health insurance.

[Bees Knees]

Regarding Bees Knees' answer. . .does that mean that the portion that would normally be pre-tax deduction (employee contribution) IS subject to FICA and Medicare for the > 2% shareholder? Or would you reduce the wages for the employee contribution and then add back that portion and the employer portion as shareholder medical insurance, NOT subject to FICA and Medicare?

I think you have a case to argue that the employee's after tax deduction does in fact reduce FICA. The only reason you are not counting it as a pre-tax deduction is because of Rev. Rul. 91-26 which tells you it is subject to income tax. That same Rev. Rul. tells you not to tax it for FICA purposes. So I would simply put it in the same category as other W-2 wages that are exempt from FICA and FUTA, but are subject to regular income tax.

[veritas]

The question was how to treat the 40% employee portion. For a more than 2% shareholder, it comes out as an after tax deduction. You don't need to add it back on the W-2 as wages since it was never subtracted from W-2 wages in the first place.

I understood the question. I guess what I was trying to say is I would not withold anything for shareholders insurance unless they have some state law that says they must.

A 2% or more shareholder can participate in a 125 plan however all amounts whether for health insurance or medical expense, childcare are subject to federal income tax but are not subject to federal employment taxes. State rules can vary. Oregon follows federal in this case.

[Bees Knees]

I understood the question. I guess what I was trying to say is I would not withold anything for shareholders insurance unless they have some state law that says they must.

Not everything is based on tax law. If you and I are 50/50 shareholders in an S corporation and total health insurance to cover you and your family is $600 per month, but mine only costs $300 per month because I am single, I might not think it fair that our corporation pay 100% of each of our health insurance. I might agree to have the corporation pay 60% of our premiums, while you and I each have to kick in 40% out of our pocket. Our 40% would have to come out of our wages and paid by the corporation, since the insurance company would require 100% of their bill to be paid under an employer group plan.

In that case, the corporation's share of the cost would get added onto our W-2 wages, while the 40% each of us kick in would simply be an after tax payroll deduction.

[veritas]

Well since I do have a scorp with a partner and he has coverage by his spouse's job I understand fairness balanced with tax law. I do not pay any of the cost of my health coverage and my partner draws a higher salary.

[Unregistered]

Does section 125 has a impact to workers compensation? What is the impact?

[Unregistered]

Not in my state. Check with your insurance carrier.

[Unregistered]

how to calculate it if there is a impact?

[veritas]

To calculate the impact you would have to know if it was subject to worker's comp. Which means ask the insurance agent who sold it to you. Or the state agency for your state.