S Corp Health and Life Insurance

[Harvey Lucas]

When an S-Corp pays the health insurance premium of it's more than 2% shareholder, we are to treat the amount of such payments as additional wages paid to that shareholder, however, this amount is not subject to social security or medicare tax withholding.

Does the same principle apply when the S-Corp pays the life insurance premiums of that same shareholder?

Harvey Lucas

[BHoffman]

See pg 13-26. I read it to say yes, it is a taxable fringe benefit to the > 2% shareholder.

Some of my SCorp officers have a cross-purchase agreement that involves life insurance on the other officers. This is not a company expense and should be paid by each shareholder personally.

[veritas]

Group term Life insurance

is a fringe benefit taxable to SCorp shareholders.


Harvey are you referring to group term life insurance?

[Harvey Lucas]

No, not group term.

No it is just regular old life insurance on the life of the shareholder. Shareholder owns the policy. S-Corporation has been paying the premiums.

My take is that it is a taxable fringe benefit, ie, I need to add the amount of the premium payments to his W2 box 1, income taxable wages.

The question is, do I also need to add it to his W2 box 3 ss wages, and W2 box 5 mc wages?

Harvey Lucas

[JoshinNC]

If the shareholder owns the policy

No it is just regular old life insurance on the life of the shareholder. Shareholder owns the policy. S-Corporation has been paying the premiums.

My take is that it is a taxable fringe benefit, ie, I need to add the amount of the premium payments to his W2 box 1, income taxable wages.

The question is, do I also need to add it to his W2 box 3 ss wages, and W2 box 5 mc wages?

Harvey Lucas

than I would show it as a distribution to the shareholder and take no deduction on the 1120S. If the company owned the policy that would be a different story.

[Harvey Lucas]

I like that approach too, except

I like the "take it as a shareholder distribution" approach myself, have used it on many occasions, even tho I've been scolded on that issue before, ie, it is not exactly the "correct" way to do it, even if it results in the exact same amount of tax.

However, in this case, the S-corp will already show a loss for 2007. The loss will consume all of the shareholders basis. Thus, if I have a Shareholder distribution, it will be taxable to the shareholder on schedule D anyway, and, then the AAA account and the retained earnings account will not be equal. I like to keep these accounts equal because it just seems to make more sense to do so, ie, it always seems to balance easier, and it "looks" right.

Every time I work on an S-Corp where the AAA and the retained earnings are not equal, it seems to take more time as I run thru the mental gymnastics of why they don't match and why it is OK that they don't.

Anyway, since the amount is going to be taxable to the shareholder anyway, I would just as soon do it "the right way".

So again, I pose the question, if added to W2 box 1 wages, do I also add it to W2 Box3 ss taxable, and W2 Box5 mc taxable?

Harvey Lucas

[veritas]

It's just a personal

expense the corporation is paying for your client.

It's taxable wages subject to all payroll taxes.

[Harvey Lucas]

Thanks Veritas

So then, the Corps payment of the life insurance has a diferent tax consequence than the corps payment for health insurance.

This is because there is a special provision outlined for how to treat an Scorps payments of health insurance for a >2% shareholder, ie, not subject to ss and mc tax, but there is no such special provision in place for the Scorps payment of the life insurance premiums, it is like you say, just a personal expense that the Scorp paid for the shareholder, and as such, it is properly treated as wages, fully taxable, W2, Box 1,3,5.

Correct?

Harvey Lucas

[JoshinNC]

I agree with Veritas

Your only other option would be to show it as a loan to the shareholder, but then you have to accrue the interest.

[Bees Knees]

TTB, page 8-8 says:

Life insurance. Death benefits paid on a life insurance policy
are not taxable if proceeds are paid by reason of the death of the
insured [IRC §101(a)]. No deduction is allowed by a taxpayer for
life insurance premiums if the taxpayer is the beneficiary of the
policy [IRC §265(a)(1)]. If an employer is providing the cost of life
insurance as a fringe benefit for employees, the cost is deductible
if it is reasonable compensation to the employee. See Group
Term Life Insurance, page 13-31, for rules on excluding life insurance
benefits from employee wages.
New Law: In the case of an employer-owned life insurance
contract issued after August 17, 2006, benefits paid to other employees,
directors, and highly compensated employees upon the
death of the insured employee that exceed the sum of the premiums
and other amounts paid for the contract are included in
gross income. Exceptions to this rule apply.

Other than the up to $50,000 of group term life excluded from employee wages, when the employer provides life insurance benefits for an employee, it is taxable as W-2 wages to the employee and deductible by the corporation as compensation paid.

If the employer is paying the premiums on the life of an employee, and the employer is the beneficiary, the cost is not deductible under Section 265(a)(1), nor is it included in employee wages. The same would be true under a cross purchase plan, where one shareholder buys insurance on the life of the other shareholder. However, under the new law, if the employer buys insurance on one employee/shareholder with the other employee/shareholder as beneficiary, then some of th proceeds on that policy may be taxable to the other employee/shareholder.

[les grans]

Remind me again: Why do the AAA and retained earnings account get out of step when an S corp makes a distribution to its shareholder?

[BHoffman]

When I book distributions, they do not cause the AAA and RE to get out of step. Both decrease equity/basis.

[Harvey Lucas]

AAA and Retained Earnings

AAA can have a negative balance from operating losses, in this case AAA and retained earnings stay equal.

However, distributions can not cause AAA to go below zero, or if AAA is already negative (because of operating losses), a distribution can not make the negative amount "more negative"

Lets say your beginning of year bal sheet is AAA -2000 and retained earnings -2000

Lets assume that your profit/loss for the year is exactly zero

If your final transaction of the year is a 3000 distribution....the AAA stays at -2000 and retained earnings becomes 3000 less, ie, -5000....now your AAA and your retained earnings are 3000 apart.

That 3000 diference never seems to go away.

In a later year, lets say you have a 6000 profit and no distributions....AAA becomes 4000....retained earnings becomes 1000...you are still 3000 apart.....and I don't think they can ever be the equal again.

I find it odd and annoying when that happens because I always have to remind myself that AAA and RE can be diferent, it just seems to look better and balance quicker and easier year after year when I don't allow them to "get diferent"

Harvey Lucas

[BHoffman]

Ooops

Harvey is exactly right. So far, none of my SCorps have gone negative. Sorry about that.