By now most S-Corps shareholders have heard that S-Corp shareholders with greater than 2% ownership in the corporation could not take the same deduction to gross income for self-employed health insurance premiums as sole-proprietors or partners unless there was a policy written in the company’s name.  Simons Bitzer & Associates would like to take this opportunity before the end of the year to give you information about this rule.
Health insurance premiums paid by an S Corporation on behalf of a greater than 2% shareholder are considered a taxable fringe benefit.  The shareholder is then entitled to an above-the-line deduction for the health insurance premiums.  In order for a shareholder to claim the above-the-line deduction, the health insurance premiums must be paid by the S corporation and must be included in the shareholder’s W-2.
Health and accident insurance premiums paid on behalf of greater than two percent S corporation shareholder-employees are deductible and reportable by the S corporation as wages for income tax withholding purposes on the shareholder-employee’s Form W-2.
These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes. The additional compensation is included in Box 1 (Wages) of the Form W-2, Wage and Tax Statement, issued to the shareholder-employee, but would not be included in Boxes 3 and 5 of Form W-2.
A 2% shareholder-employee is eligible for an Adjusted Gross Income (AGI) deduction for amounts paid during the year for medical care premiums if the medical care coverage is established by the S corporation and the shareholder meets the other self-employed medical insurance deduction requirements.  If, however, the shareholder or the shareholder’s spouse is eligible to participate in any subsidized health care plan then the shareholder is not entitled to the AGI deduction.
A medical plan can be considered established by the S corporation if the S corporation paid or reimbursed the shareholder-employee for premiums and reported:

• The premium payment
• Reimbursement as wages on the shareholder-employee’s W-2

Please contact your payroll provider to ensure that the health insurance premiums paid by your S Corporation are included in the W-2’s of each greater than two percent shareholder.  If the health insurance premiums are not included in their W-2’s, the shareholder cannot take a deduction for Adjusted Gross Income.  Additionally, if the plan is in the shareholder’s name, the premiums must be reimbursed by the S Corporation and reported as wages on the shareholder’s W-2.
Please contact our office at 317-782-3070  if you have any questions or need assistance in complying with the rules for shareholder health insurance. We would be happy to schedule a tax planning meeting with one of our tax specialists.