Special Employee Benefit Rules For 2% Shareholders

S Corporation shareholders are treated in some ways like employees and in other ways like partners.

Fringe benefits subject to the 2% shareholder rules include:

The cost of group term life insurance coverage up to $50,000 (Sec. 79);
Amounts received from accident and health plans (Sec. 105);
Contributions by an employer to accident and health plans (Sec. 106);
Meals and lodging furnished for the convenience of the employer (Sec. 119);
Employee achievement awards (Sec. 74(c); IRS Publication 15-B, Employer’s Tax Guide to Fringe Benefits);
Cafeteria plans (Sec. 125; Prop. Regs. Sec. 1.125-1(g)(2));
Qualified transportation fringe benefits (Sec. 132(f));
Adoption assistance programs (Sec. 137(c)(2));
Contributions by the corporation to health savings accounts (Sec. 223); and
Qualified moving expense reimbursements (Sec. 132(g)).

Pre-tax payroll deductions cannot be used by 2% shareholders to reimburse premiums paid by the S Corporation.

Where an S Corporation pays for fringe benefits on behalf of 2% or greater shareholder/employees,

The value of employer paid benefits is included on Form W-2 in Box 1. The income is not subject to payroll taxes (Social Security and Medicare).
The health insurance premium expense needs to be reported on the W-2 as self-employed health insurance in Box 14.
The 2% shareholder/employee will deduct the health insurance deduction on page 1 of form 1040.

[1] IRC 1372(a).