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)).

Treatment Of 2% Shareholder Fringe Benefits:

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).  

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