S Corporation Health Insurance Issues

2% S Corporation Shareholders-Claim Deductions for Your Health Insurance

If you own more than 2 percent of an S corporation, you have to do three things to claim a deduction for your health insurance:

1.      You must get the cost of the insurance on the S corporation’s books.

2.     Your S corporation must include the health insurance premiums on your W-2 form.

3.     You must (if eligible) claim the health insurance deduction as an above-the-line deduction on Form 1040.

The three-step procedure also applies (and this could be a surprise) to your spouse, children, grandchildren, and parents if they work for your S corporation and get health insurance coverage, even if they don’t own a single share of S corporation stock directly.

You need to get this right. Without the W-2 treatment, the S corporation does not get a tax deduction.

With the correct W-2 treatment, the more than 2 percent shareholder who finds the health insurance premiums on his or her W-2 can claim the self-employed health insurance deduction on Form 1040, provided he or she is not eligible for employer-subsidized health insurance through another job or a spouse’s job.

Our office is always available to consult with you in more detail on this matter. 

2% S Corporation Shareholders-For Single Employee/Owner S Corporations

The general rule is that an S Corporation that directly pays for or reimburses employees for employee-arranged health insurance premiums (as opposed to paying premiums for company-arranged group coverage) faces the Affordable Care Act Penalty of $100 a day per affected employee ($36,500 per employee per year) penalty. 

However, that rule does not apply to a single-person S Corporation that does not have any employees other than the owner.  A single person can set up only an individual health plan, since one person is not a group. 

Get the Cost of the Insurance on The S Corp Books:

1.       The S Corporation makes the premium payments for the accident and health insurance policy covering the owner-employee who has more than 2% ownership (and his or her spouse or dependents, if applicable).

2.      The owner-employee makes the premium payments to the insurance company and furnishes proof of the premium payments to the S Corporation, which in turn reimburses the owner-employee for the premium payments. 

W-2 Reporting:

The S Corporation has to include the health insurance premiums on the owner-employee’s W2 form.  The income is not subject to payroll taxes (Social Security and Medicare).  Additionally, the amount is health insurance is also reported in Box 14 of Form W2.

Other Limitations:

1.       You cannot take this insurance deduction if you or your spouse is eligible for employer-subsidized health insurance. 

2.      The deduction for the insurance premiums cannot exceed the amount of salary from the S Corporation.

2% S Corporation Shareholders-Providing Health Insurance for Rank & File Employees

As a small employer, your S Corporation does not have to provide any health insurance benefits to its employees.  “Small employer” for this purpose means a business with fewer than 50 full-time employees or full-time equivalents. 

If you decide that you want to provide health care, here are your options:

1. Offer group health insurance whereby the employer pays for some or all of the group health care premiums of your employees.
2. Section 105 medical reimbursement plan.  The employer reimburses the medical expenses of your employees, including insurance premiums.  This plan is also known as a health reimbursement arrangement (HRA). 
3. Flexible Spending Arrangement (FSA).  Employees fund the plan, using pretax dollars.  The employer can also contribute but is not required to do so. 
4. Health Savings Account (HSA ).  A HSA account is owned by the employee and is used for paying medical expenses with pretax dollars.  Both the employer and employees can contribute to the savings accounts. 

Group Health Insurance

If you have multiple employees and want to contribute to health insurance, you must buy group health insurance (i.e., employer-provided insurance).  You cannot reimburse the individual employees for the cost of the insurance premiums they paid personally.

If you obtain group insurance coverage for your employees, you should expect to pay at least 50% of the cost of your employees’ premiums.