P'ship health insurance-best way

[Margaret]

What is the best way to record health insurance for a partner paid though the p'ship account but reimbursed by the partner? A new client is booking through withdrawals and investments. It seems to me it should be a receivable from the partner and bypass the equity accounts. Or does it matter? Since it is reimbursed, it also doesn't seem to be a guaranteed payment. Agree?

[Bees Knees]

It sounds like they are doing this to get group rates through the partnership, but then the partnership does not actually want to incur the cost, so each partner reimburses the partnership for his or her share.

I don’t see anything wrong with doing this. Employers do this with employees all the time, where the employee is responsible for paying a portion or all of the cost of insurance that the employer is paying. For employees, you treat it as a pre-tax payroll deduction, since health insurance is pre-tax for employees. With partner’s they have to treat it as after tax and take the deduction on the front of the 1040. So I would say that to be consistent with these rules, treat the partnership payment of the health insurance as a guaranteed payment, so that the partner can take the deduction on the front of the 1040. Then treat the reimbursement as a negative partnership guaranteed payment, since the partner is using after tax dollars to reimburse the partnership. That way the partner gets to claim a health insurance deduction without inflating guaranteed payments for the un-realized benefit.

Explained another way, under normal circumstances, the partner gets a guaranteed payment for health insurance that the partnership pays. The partner never received cash. The partner is simply paying tax on the benefit paid by the partnership, and then offsetting that income with a deduction on the front of the 1040. It evens itself out because the partner never received any economic benefit, other than having the partnership pay for something that turns out to be tax deductible in the end (health insurance).

In your case, however, the partner is actually paying for the health insurance out of his or her pocket in the sense that the partner has to reimburse the partnership for the cost. The partner still gets to claim the tax deduction for the health insurance due to the increased guaranteed payment. But the net economic benefit to the partner is negative cash, since the partner pays the cost out of pocket. Guaranteed payments now have to be reduced to reflect this negative cash flow (the reimbursement) so that the partner is not taxed on a guaranteed payment that was never received.

[Unregistered]

The net affect of that approach would be to reduce SE income by the amount of health insurance which I believe is incorrect. I would treat the payment to the partnership as a capital contribution.

[Bees Knees]

The net affect of that approach would be to reduce SE income by the amount of health insurance which I believe is incorrect. I would treat the payment to the partnership as a capital contribution.

I disagree. SE income has already been increased by the fact that the partnership treated the insurance payment as a guaranteed payment to the partner. The partner shouldn't have to pay SE tax if the partner, and not the partnership is the ultimate payer of the insurance (because the partner reimburses the partnership). Treating the reimbursement as a negative guaranteed payment reverses the unfair increase of SE taxable income.