S/E Health Prem Deduction on Pg1 for 2% S/H

[lowergm]

Does anyone know if there has been a private letter ruling or change allowing 50/50 S-Corp shareholders who are husband and wife to deduct on page one of their individual form 1040 the s/e health premiums paid through and deducted by the s-corp? The policy is NOT in the corporate name. Therefore, per the existing rules they can't deduct on page one, but must deduct as an itemized deduction subject to 7 1/2% on Sch-A. The premiums have properly been included in wages on the W-2.

If anyone knows of anything allowing form 1040 page one deduction please give me your site if possible.

[Bees Knees]

No change.

I guess I am wondering how the S corporation gets to pay for the health insurance and add it to the shareholder's wage, when in fact the policy is in the individual names of the husband and wife and not the corporation. You could have a problem with that on audit. No taxpayer can pay an expense of another and deduct the cost.

[veritas]

Code Sec 162

I have read an re-read code sec 162. I can see nothing whatsoever saying the policy must be in the corporate name.

I am willing to be corrected but it seems the section dealing with says:

" there shall be allowed as a deduction under this section an amount equal to the applicable
percentage of the amount paid during the taxable year for
insurance which constitutes medical care for the taxpayer, his
spouse, and dependents."

And this "(5) TREATMENT OF CERTAIN S CORPORATION SHAREHOLDERS

This subsection shall apply in the case of any individual treated as
a partner under section 1372(a), except that--

(A) for purposes of this subsection, such individual's wages (as
defined in section 3121) from the S corporation shall be treated
as such individual's earned income (within the meaning of
section 401(c)(1)), and

(B) there shall be such adjustments in the application of this
subsection as the Secretary may by regulations prescribe."

I don't see any regulations issued on this topic.

I guess the key is sec 1372 which says that 2% shareholder will be treated the same as partner for fringe benefit purposes.

So then I guess we would look at sec 106 which says:

"Except as otherwise provided in this section, gross income of an employee
does not include employer-provided coverage under an accident or health
plan."

Better adopt a "plan".

[Bees Knees]

Code Section 162(l)(2)(A) says in part..."No deduction shall be allowed...to the extent that the amount of such deduction exceeds the taxpayer's earned income...derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.

The IRS has interpreted this as meaning the plan must be established by the business, not the individual being covered under the plan. If it is individual coverage and not established in the name of the S corporation, the IRS says it is not established by the business, as the code requires it to be.

[veritas]

Bees

I agree with your point. I came to the same conclusion from another angle.

I do not think the results were what was intended. I would be curious to read the committee report dealing with the self employed health insurance issue.

[Bees Knees]

The intent of Congress was to make self employed taxpayers be on the same level playing ground as employees. If you are an employee, you get your health insurance coverage tax free. Self-employed individuals get the same thing by deducting the health insurance on the front of the 1040 rather than Schedule A, subject to the 7.5% AGI limitation.

Since partners of partnerships are self-employed, and the code treats S corporation shareholders as partners for fringe benefit purposes, the same principle would apply to them.

The code, however, has this "must be established by the business" requirement. I suppose Congress felt that an employee who goes out and buys his own health insurance is not really getting that tax free, since he is using after tax dollars to pay for the coverage. Only when the employer establishes the plan and provides the benefit to the employee does the employee receive it as a pre-tax fringe benefit.

The problem with that line of argument is that Code Section 105(b) allows employers to reimburse medical costs incurred by employees with pre-tax dollars, including employee paid health insurance. Maybe Congress didn’t think about this particular thing. Most people do not know that an employer can reimburse employee paid health insurance tax free.

Thus, the IRS making up a bunch of rules to fill in the gaps left by Congress. Had Congress considered the Section 105(b) scenario, I think you would have seen it reflected in Section 162 under the self employed health insurance deduction.

Having said that, many commentators, including myself believe that if you are an S corporation and you establish a Section 105(b) medical reimbursement plan through the S corporation, then that would now make the health insurance in the name of the individual shareholder a reimbursable cost by the corporation, require that the reimbursement be added to the shareholder's W-2, and in turn, allow the shareholder to deduct it on the front of the 1040. The IRS has not said anything about that strategy.

[veritas]

Conference Report H. Report 104-92

A. PERMANENTLY EXTEND DEDUCTION FOR HEALTH INSURANCE COSTS OF
SELF-EMPLOYED INDIVIDUALS

(Sec. 1 of the House bill, sec. 1 of the Senate amendment, sec. 1 of
the conference agreement and sec. 162(l) of the Code)

PRESENT LAW

Under present law, the tax treatment of health insurance expenses
depends on whether the taxpayer is an employee and whether the taxpayer is
covered under a health plan paid for by the employee's employer. An
employer's contribution to a plan providing accident or health coverage for
the employee and the employee's spouse and dependents is excludable from
an employee's income. The exclusion is generally available in the case of
owners of a business who are also employees.

In the case of self-employed individuals (i.e., sole proprietors or
partners in a partnership), no equivalent exclusion applies. However, prior
law provided a deduction for 25 percent of the amount paid for health
insurance for a self-employed individual and the individual's spouse and
dependents. The 25-percent deduction was available with respect to the cost
of self-insurance as well as commercial insurance. In the case of self
insurance, the deduction was not available unless the self-insured plan was
in fact insurance (e.g., there was appropriate risk shifting) and not
merely a reimbursement arrangement. The 25-percent deduction was not
available for any month if the taxpayer was eligible to participate in a
subsidized health plan maintained by the employer of the taxpayer or the
taxpayer's spouse. In addition, no deduction was available to the extent
that the deduction exceeded the taxpayer's earned income. The amount of
expenses paid for health insurance in excess of the deductible amount could
be taken into account in determining whether the individual was entitled
to an itemized deduction for medical expenses. The 25-percent deduction
expired for taxable years beginning after December 31, 1993.

For purposes of these rules, more than 2-percent shareholders of S
corporations are treated the same as self-employed individuals. Thus, they
were entitled to the 25-percent deduction.

Other individuals who purchase their own health insurance (e.g.,
someone whose employer does not provide health insurance) can deduct their
insurance premiums only to the extent that the premiums, when combined with
other unreimbursed medical expenses, exceed 7.5 percent of adjusted gross
income.

HOUSE BILL

The House bill would retroactively reinstate the deduction for 25
percent of health insurance costs of self-employed individuals for 1994 and
would extend the deduction permanently.

Effective date.--The provision would be effective for taxable years
beginning after December 31, 1993.

SENATE AMENDMENT

The Senate amendment is the same as the House bill, except that the
deduction would be increased to 30 percent for years beginning after
December 31, 1994.

Effective date.--The provision generally would be effective for
taxable years beginning after December 31, 1993. The increase in the
deduction to 30 percent of health insurance costs would be effective for
taxable years beginning after December 31, 1994.


CONFERENCE AGREEMENT

The conference agreement follows the Senate amendment.

[oceanlovin'ea]

Ridiculous

I think this whole mess with shareholder/employee and their health insurance is so ridiculous. First some of these people are forced to be s corporations in order to get workers comp exemptions when all they really are is a guy or woman working for themselves and trying to earn a living.

Then they take away their self employed health insurance deduction because they are employees or more than 2% shareholders.

I can see why some people work under the table. I certainly don't condone it. But the little guy can't get a break in the deal.

Ok, off my soapbox now. It's been a long day. Going to sign off and hit the hay.

Linda F