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This Just In... New Rules for S-Corps Shareholders Deducting Health Premiums

By now most S-Corps shareholders have heard about IRS Headliner 163. This said S-Corp shareholders with >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.

This created a proverbial Catch-22 if you and/or your spouse are the only employees of the corporation. Insurance regulations in many states specifically prevented insurers from writing business policies with just one member. Instead these people were required to get individual health insurance plans.

The IRS has finally cleared this inconsistency with the recent publishing of Notice 2008-01. Catchy title, almost as good as Headliner 163. :)

For those of you how don't want to try to read "taxlish", here's the upshot: Effective 2008, if you are a >2% shareholder of an S-Corporation whether your health insurance policy is in your personal name or the company's you can deduct the value of the premiums as an adjustment to gross income as long as the value is included in your W-2 wages. Either the corporation can pay the premiums directly or you can have them reimbursed. If you don't include the premiums in your wages you can't take the deduction.

While it's nice that the IRS has evened the playing field for the sole-proprietors, partners & S-Corp shareholders in this regard, I still think the HRA has more advantages than simply deducting your health care premiums. I don't know about you're plan, by mine still leaves doctor co-pays, deductibles, labs and other costs I have to pay out of pocket. These kind of expenses don't apply to the deduction to gross income. Unless they are part of a reimbursement plan, like an HRA.

The one good thing Headliner 163 did was bring HRAs and the under utilized tax section 106 out of the medicine closet.

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HRA Deduction on 1040

Linda,

Are you sure that premiums, along with all other medical expenses can be deducted on form 1040 line 29 (Self-Employed Health Insurance Deduction) with an HRA?
The instructions for this line seem to indicate only the cost of the premiums can be deducted here.
How do you interpret other expenses can also be included on this line??

My accountant hasn't found

My accountant hasn't found any IRS info on deducting anything but health insurance premiums. Is there an IRS ruling that all reimbursements with HRA are includable on line 1 and deductible on line 29?

2007 Medical Insurance and Out of Pocket Medical

Linda,

Great site! But, can I say I'm so sick of reading about all these rules. Why does the US govt make it so difficult for VERY small business people???

So I've been reading about the clarification of the S-Corp ruling of Medical Insurance FOR 2008. And the HRA stuff. But, I'm still trying to figure out 2007.

I'm S-Corp.
Insurance Premiums in MY name (due to MN law)
My corp paid/pays them.
My corp reimbursed me for Out of Pocket Medical in 2007.

WHAT do I enter in Box 1,3 & 5 of my W-2 besides my Salary?

If both the insurance premiums and the out of pocket, I "assume" I get to write off the premiums on my personal 104. But, what about out of pocket?

Also, are Heath Club dues paid by the S-Corp considered a "fringe benefit" and thus must be reported in Box 1,3 & 5? And if yes, WHERE is the tax advantage???

Julia

Ditto

Who cn understand all these rules?

When will someone submit a law that requies an IRS agent to set down and read the entire publiction that one doesn't understand and expalin it to the citizen?

Better yet, how about a national sales tax?

--Scott

www.24hourapartments.com
www.roommatesville.com

Special Interests -> Complicated Taxes

One reason the tax laws are so complex it special interests connive to get tax breaks for their constituents.

The other reason it people want to pay tax on just their net income. Which leaves you trying to figure out what that is, hence all the complicated rules.

I don't think a national sales tax would fix anything. Who would determine what is taxable. In most states, items purchased for resale are not subject to the sales tax.

No I think a national sales tax is just trading one set of problems for another. See my earlier post The Real Tax Reform Question.

L:)

Health Club & HRA

Hi Julia,

I know how you feel about all the rules. It gives me a headache sometimes too. :)

First of all, health club dues are never deductible. If the company pays those for you, they are a non-deductible expense.

If you have an HRA, then you report your salary, the premiums and the out of pocket in box 1 only. Box 3 & 5 report your salary only. Report the medical payments in box 14 with the code "SCORP MP". Include that amount on your 1040 as the Self- Employed Health Insurance deduction.

If you didn't have an HRA, then I would report boxes 1 as above, but include the out of pocket in boxes 3 & 5 as well and just the premiums in box 14. The out of pocket expenses you will probably lose unless you can deduct them on your Schedule A. (This is why I like the HRA).

Hope this helps.
L:)

>2% S-Corp shareholder health insurance deduction

Linda,

Thanks for your answers to the questions posed - I have learnt a lot but still have a question as a 100% shareholder of my S-Corp intending to pay for my family's health insurance. Even with Notice 2008-01 and assuming I add the health insurance premiums to my "W-2 Box 1" wages, would I still be liable for the Income tax on those premiums (not FICA and FUTA)? Or would I still be able to subtract/deduct those premiums from my taxable Gross Income when I do my 1040 which is what I thought you meant? Since it was mentioned only in the context of a HRA, I was not sure whether it would also apply to direct payment of premiums.

Example:
Box 1 W-2 Wages = 50,000 (including 10,000 for health insurance premiums)
Box 14 = 10,000 (SCORPMP)

Will I pay Income taxes on 50,000 or 40,000. If it is 40,000 where do I make that adjsutment on the 1040

Where to deduct health insuracne premiums fro S-Corp

In your case, you would the premiums are an adjustment to gross income & reported on line 29 (on the 2007 Form 1040) titled "Self-employed health insurance deduction". The title is a little confusing but that's where it goes.

Because of the adjustment you end up paying tax on $40K.

L:)

Health Insurance Premium Payment

Hi Linda,

Recently I have started a S-Corp and I'm the only shareholder. I have question about health insurance premium payment. The health insurance policy is on my name and and I'm paying the premium through the S-Corp bank account. Is it okay to pay the premium through S-Corp bank account that?

Thanks for your answer.

Anbu.

S-Corp Health Insurance Premium

Hi Anbu,

Starting in 2008, yes, the S-corp can make payment on your behalf. If you arrange it like that, you cannot take the self-employed health insurance deduction on your 1040.

I still prefer setting up an HRA because through that plan, the S Corp can reimburse you for your out-of-pocket medical expenses in addition to the premiums. And since the value of the HRA payments increase your W-2 wages the company can make a larger retirement plan contribution on your behalf.

The way you've set it up, the company can only pay the premiums.

Hope this helps.
L:)

S-Corp Health Insurance Premium

Hi Linda,

Thank you for your answer and I'm very clear now.

Thanks,
Anbu

HRA Eligibility

Linda,

The HRA sounds GREAT, but according to IRS publication 969, "self-employed persons are NOT eligible for an HRA." Would that include me since I am a 100% shareholder/owner of my S-corp??

HRAs for S-Corps

You are not self employed. You are a statutory employee of the S-Corp. You are eligible for the HRA with the caveat that the reimbursements must be included in your W2 wages. Which are then deducted as self-employed health insurance adjustment to gross income.

Yes, the labels do make it confusing. But we have to live with it. :)

L:)

"Statutory" employee

Linda,

If I am considered a "statutory" employee of my S-Corp, wouldn't that require me to check that box on my W-2 and complete a Schedule C?

Corporate Officers must be employees

No. That box has a different context.

Here I just mean that the treatment of corporate officers as employees is codified in law; as opposed to common-law employees that are defined through case law.

If you're an S-Corp officer, do not check the statutory box. Report your wage from the s-corp in box 7 (Wages & Salary) of form 1040.

L:)

HRA's for S-Corps

Linda,

The IRS also says that a greater than 2% shareholder in an S-Corp cannot participate in an HRA. As I said before,
I am a 100% shareholder in my S-Corp, so is there any way I would be able to use an HRA??

Thanks,
Eric

S-Corp Shareholder & HRA

Yes, you can participate. However there are special reporting rules.

For regular employees, their reimbursements are not reported at all to the IRS.

For >2% SCorp shareholder, the reimbursements must be included in Box 1, Wages, of your W2. These payments are not subject to FICA, federal or state unemployment taxes.

In box 14, you report the value of the reimbursements, with the code SCORPMP. This amount is then deducted from your gross income in the "Self-Employed Health Insurance" line of your 1040.

You must have the written HRA plan for this to work as the plans have special language. Just saying, "Hey, lets reimburse medical expenses" is not enough.

L:)

Self-Employed Health Insurance Deduction

When we have both our health insurance premiums and all other medical expenses reimbursed by the corporation under an HRA plan, what figure is put on the 1040 under Self-Employed Health Insurance? Just the insurance premiums or the entire amount that we are reimbursed, including all the other medical expenses?

Amount of Health Insurance Deduction.

If you have the HRA plan and If you reported in the wages of your W-2 and If you identified those in box 14 of your W-2, then you can include the total amount reimbursed.

L:)

SCORP MP

Linda,

What does SCORPMP in W-2 box 14 mean?

SCORP MP

SCORP MP= SCorp Medical Payments

Hi Linda, To add another

Hi Linda,

To add another wrinkle to this question --

I have established an s-corp and will begin using it shortly. I can elect to be covered by my domestic partner's health insurance benefit, where his payroll deduction for my portion will be an after-tax deduction. Does this mean I can reimburse that premium with an HRA?

Thanks!

Domestic Partners

Unfortunately, no. The federal rules don't recognize domestic partners.

L:(

I have a hypothetical

I have a hypothetical question. I'm a sole prop debating about becoming an S corp. I gross about $160k a year and take home 50k. Reasonable salary for my hours and work would be 20k so the scorp would be good for that. My spouse is a professional (let's say a teacher) who has health insurance for us through her work, though she pays some hefty premiums for it. If we formed an S-corp together can the corp reimburse her for those wages and write off the cost of such? Or is it not eligible because it is begotten via another entity?

Also, must she take a salary from the corp as well? What if she does no work?

I already do payroll and the whole nine so stepping up to an Scorp is not a big deal.

Sole Prop vs Corp

No, the S-Corp could not reimburse your family for the premiums paid through another employers plan. The reason is those premiums are already deducted from her check with pre-tax dollars.

If you form an S-Corp 50/50 you might be able to say she does not materially participate and not have to take a salary, but then her share of the company's income/loss is considered passive and special & complicated rules apply. I would not do this. Better just to make you a 100% owner.

Hope this helps.
L:)

1120S Cobra Premium deduction

Hi,
I have started an S-Corp in April 2007 . I am 75% share holder and my wife is 25% share holder . I work for my corporation and the vendor gives check on my company name . My wife is working for another company on w2 .
She used to work as a full time employee and got laid off on 09/30/2008. We have COBRA coverage through my wife's previous employer . We enrolled in COBRA in 11/2008 and sent our first payment in Jan 2009 .

I have 2 questions.
1)If my corporation reimburse the COBRA premium and include it in W2 ,can I deduct it in my 1040 above the line or Schedule A is the only way.

2)I paid premiums for october through december in jan 2009. Should I deduct them in 2008 return or 2009 . I use CASH accounting method.

thanks,
Lee

Deducting Health Premiums

Hi Linda,

I read your comments and have an additional question. We have a small LLC with a total of three members. I am trying to figure out the deductibility of health insurance for one of the members who manages the business (a retail shop) full time.

The "manager" member is currently paying for health insurance through a personal policy. Starting in 2008, the members want the business to pay her health insurance in addition to her salary.

IRS Notice 2008-01 indicates that the health premium cost has to be included in her gross wages so that she can then deduct her premiums on her 1040. What is the deductibility to the LLC, if any? I can't see how the LLC can pay the premium and include in her W2 wages (payroll expense?) and then she deducts again on her 1040.

I have a background in accounting but little experience with payroll, so if I am missing something simple here please let me know. Kind regards, Jean

Health Premiums for Partners

Hi Jean,

First I'm going to assume that your multi-member LLC is being taxed as a partnership. So this member should not be getting a standard paycheck. Instead her "salary" is considered a guaranteed payment.

As such, the health care premiums are deducted by the LLC/partnership as guaranteed payments. These will show up on the member's 1065 Schedule K-1 and will be reported on her 1040 in addition to her share of the partnership's income.

Then she deducts the health care premiums as an adjustment to gross income. The net result is the LLC deducts the premiums. For the partner it's basically a wash. She recognizes the premiums as income and takes a deduction for the same amount. So in essence the LLC pays for the premiums with no tax consequences for the partner, with the exception of the reporting hoops to jump through.

L:)

Health Premiums for Partners

Linda,

Your assumption is correct that the LLC income/loss is passed through to the partners. Your answer was clear and concise, and was exactly what I needed - thank you very much!! Jean

What do I do now?

Linda,

First, thanks for a great site. I've been looking for a site like this for a long time.

I am the sole owner of an S-Corp. I currently get health insurance through my wife's employer, and I must pay 100% of the insurance cost. My wife's employer deducts this cost from her paycheck, and I reimburse my wife.

What should I do now to make my insurance premiums deductible? Do I need to get insurance through my own company, and do I need to setup an HSA or some other plan?

This is so confusing!

Thank you so much for your advice.

Maurice Frank

Premiums only tax-free once :)

Hi Maurice,

I'm glad this site has been helpful. I completely understand about this being confusing & I'm about to add another wrinkle. :)

Usually when an employee has to pay a portion of health care premiums to a company plan, the premiums are deducted from the employee's paycheck with pre-tax dollars. Meaning the employer deducts the health premium and then the employee pays FICA, income tax withholding tax, etc.

If you reimburse your wife and then deduct that from your taxable income you're effectively making that deduction twice for the same dollars. Something that's definitely frowned upon. :)

Assuming you & your wife are still married & filing joint, don't reimburse your wife as the dollars being used to pay for the premium should already be tax free. I'd setup an HRA so the company can reimburse you for your out-of-pocket expenses, like doctor visit co-pays, Rx, etc.

If for some reason your wife's employer isn't using pre-tax dollars to pay for the premiums you have a couple of options. First ask why they aren't making a pre-tax deduction. Then if they don't make the small change to their payroll, then the HRA you set up can also reimburse for the after tax premiums you pay.

I hope this helps rather than just confuse things more!
L:)

Insurnance Premiums and HRA

Linda,

Thanks for your prompt reply. I also spoke with my accountant today and his conclusion (if I understood him correctly) is that I am not eligible to deduct health insurance premiums because the coverage is not in my name, I am covered by my wife's plan. I would need my own plan to make the premium deductible. I've started getting quotes for individual plans, but so far they cost more for less coverage compared to the group plan I am in, so staying with what I have may be my optimal choice.

I will review my other out of pocket expenses for co-pay, non-covered or partialy covered charges, etc to see if it is enough to make an HRA worthwhile.

Thanks again for your advice, and I wish you a happy, healthy and prosperous new year.

Maurice Frank

Insurance Premiums

Actually an HRA is a written health plan in the company's name. The HRA covers the employee and dependents, which would include your wife. If you had an HRA you could use it to have your company reimburse your health care expenses.

However, even with the HRA, if the health care premiums are paid with pre-tax dollars you could not use an HRA to reimburse the funds.

If you don't have an HRA, then I agree with your accountant you would not be eligible to take the self-employed health care premiums deduction.

L:)

HSA to manage the cost

I am a S-Corp owner and the only person in the company. I have a High deductible medical plan so I am planning on setting up a HSA.

Is it beneficial for me to setup a HRA at all ?
> I don't know about you're plan, by mine still leaves doctor co-pays, deductibles, labs and other costs I have to pay out of pocket. These kind of expenses don't apply to the deduction to gross income. Unless they are part of a reimbursement plan, like an HRA.
Since the HSA would be paying for the doctor co-pays etc, what additional benefit would the HRA provide ?

Thanks for all the information in this site.

HRA & HSA working together.

You can have an HRA & an HSA that work together. The HRA would allow the company to pay the the premiums plus dental and vision care. Once the HSA's plan deductible is reached the HRA can be used to pay the co-pays and other out of pocket expenses.

The premium payments are not qualified expenses for the HSA but they are for the HRA.

L:)

HRA & HSA for S-Corp

Linda,
You say that you can have HRA and HSA that work together...So, now the question is..
Say I have 5000 in premium and I have 1000 in medical expenses...

Now, can I contribute 5800 to HSA and simultaneously also pay 6K (5000 + 1000) for HRA (with proper arrangement and documentation)?

Do I put the total amount ($5800+$6000) in Box 1 of W-2? and have the same amount marked in Box 14 as SCORP-MP? Then, the entire amount off on line 29 of 1040?

Mike C

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