S-Corp does not have a health insurance plan in force for employees. However, the over-65 owner does pay individual Medicare premiums. Would these qualify for deduction as SEHI on his individual return?
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Yes, but. The company has to reimburse the shareholder for the amount of the premiums, an actual check, no journal entry. And then the amount of the premium must be reflected on the shareholder's W-2. -
So there is no net tax advantage to the shareholder. TTB says they are shown in Box 1 and 14 on W-2, so no FICA. Tks.Last edited by Burke; 03-11-2020, 08:03 AM.Comment
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Yes, but.
It's an easy way to get more $$ on Line 7 of Form 1120S, in case salary to the shareholder is low.
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As Maribeth pointed out, that is considered as "compensation". The net effect saves Social Security and Medicare taxes.
So let's say you determine that $50,000 is "Reasonable Compensation", and medical insurance is $10,000.
If corporation does NOT reimburse medical insurance,the taxpayer receives wages of $50,000. The W-2 shows $50,000 in Boxes 1, 3 and 5.
If corporation DOES reimburse medical insurance, the taxpayer can receive wages of $40,000 PLUS $10,000 of reimbursed insurance as "compensation". So the W-2 shows $50,000 in Box 1 ($40,000 of wages plus $10,000 of insurance "compensation"), but Boxes 3 and 5 show $40,000.
So in that example, the taxpayer is only paying Social Security and Medicare taxes on $40,000 rather than $50,000.Comment
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This is not an area I have expertise in but . . .
RE: SS/MC taxes, doesn't the health care plan have to be non-discriminatory to qualify for exclusion from these? Easy to do with one owner/employee but I think things get mucked up when you throw employees into the mix. OP said "S-Corp does not have a health insurance plan in force for employees", which sure sounds like it discriminates in favor of the owner. I could easily be missing something but I think it's worth looking into before you take a tax position.
RickComment
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Correct. Another consideration: Does this extra compensation reported in Box 1 qualify for retirement plan contributions, such as IRA, SEP-IRA, and/or solo 401k?Originally posted by Maribeth View PostYes, but. It's an easy way to get more $$ on Line 7 of Form 1120S, in case salary to the shareholder is low.Comment
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Originally posted by rbynaker View Post
I'm way to tired to try to find the answer, but I have stuck in my head that discriminatory health insurance subjects it to income tax (which is already being done anyways on the W-2 so there would be no effect) but NOT Social Security and Medicare taxes.
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Amen, brother.Originally posted by TaxGuyBill View Post
A quick search led me to IRS Announcement 92-16, an annotated version is here:
but it refers back to IRC 3121(a)(2):
"the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents)"
So it could be kosher if the shareholder/employee is the only one of a particular "class" (i.e s/h is a full-time licensed professional, all other employees are part-time clerical help).
It's possible that there's some updated guidance since 1992, but the infamous Notice 2008-1 still refers back to Ann. 92-16:
RickComment
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Bumping this back up to the top, would retirement contributions to an IRA/SEPP/solo 401K be based on Box 1 of the W-2 since the paid health insurance is treated as compensation? This would be in the case of a 100% shareholder-owned S-Corp.Comment
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From The Tax Book 19-16 - does this help?Originally posted by Burke View Post
“Fringe Benefits for S Corporation Shareholders
For purposes of applying the rules for fringe benefits, an S corporation is treated as a partnership, and any shareholder with 2% or more ownership of the S corporation is treated as a partner. See Employee Benefits, Tab 22.
Self-employed health insurance. Guidance from the IRS allows a more than 2% shareholder-employee of an S corporation to deduct an above-the-line health insurance deduction, even if the policy is purchased in the name of the shareholder. The deduction is allowable if:
• The S corporation makes the premium payments for the policy covering the more than 2% shareholder-employee in the current tax year, or
• The more than 2% shareholder-employee makes the premium payments, furnishes proof of payment to the S corporation, and is reimbursed within the current tax year. (Notice 2008-1)
The premiums will not qualify if they are not paid or reimbursed by the S corporation and included in the shareholder’s gross income on Form W-2.
The deduction is limited to the smaller of eligible health insurance premiums or net profit from the business. For a more than 2% shareholder-employee of an S corporation, net profit means Medicare wages from box 5 of his or her Form W-2. For additional rules, see Self-employed health insurance deduction, page 5-10, 1040 Edition/Deluxe Edition.
The Tax Book Author’s Comment: Since the health insurance premiums are generally exempt from FICA tax, the employee needs to earn additional wages from the S corporation in an amount at least equal to the insurance premiums to ensure a full deduction.”Last edited by TAXNJ; 03-18-2020, 12:03 PM.Always cite your source for support to defend your opinionComment
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My question is NOT whether he can deduct SEHI; he can if it is added to his compensation. My question is: Does he qualify for an increased retirement deduction due to the higher amount of compensation reported in Box 1 of the W-2. In other words, he is claiming extra comp and then deducting SEHI. Can he use the total comp in Box 1 to qualify for retirement contributions? Or does he have to use Box 3, and disregard the health insurance included in Box 1?Comment
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I think it DOES qualify for retirement contributions.
Looking at Notice 2008-1 (which requires it to be added to Box 1), it say it is treated as Guaranteed Payments for a Partnership, which DO qualify as compensation for retirement contributions. When I was answering a question from yesterday about retirement contributions for rental properties (that qualify for QBI), I looked at the legal gibberish for your question, and as far as I could tell, it is not specially excluded for purposes of a 401k (and IRAs point to the same legal gibberish as 401ks). So it seems to me that it qualifies.Comment
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Burke, my client, a sole-owner of an over-50 employees, S-corporation, with a corporate sponsored 401(k) for all employees, does not have his SEHI included in his annual compensation for determining his deferral amount, his match, or his profit-sharing %. I don't know if this trickles down to a solo-401(k)/Simple/Sep. fwiw
This calculations are done annually by a third-party pension administrator.Comment
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That is what I was thinking, too. I can't find any specific reference to it being disallowed.Originally posted by TaxGuyBill View PostComment
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