Deducting health insurance is a 3 step process for the more than 2% S corporation employee-shareholder. However, before discussing the 3 step process, the health insurance plan for the more than 2% S corporation employee-shareholder must be established by one of the following:ᵃ
- The S corporation makes the premium payments for the health insurance policy covering the more than 2% employee-shareholder (and his/her spouse or dependents, if applicable).
- The more than 2% employee-shareholder makes the premium payments to the insurance company and furnishes proof to the S corporation, which reimburses the more than 2% employee-shareholder .
Now here are the 3 steps:
- The cost of the health insurance premium are on the S corporation books.
- The S corporation must include the health insurance premium on the more than 2% S corporation employee-shareholder’s Form W-2 in Box 1. The income is not subject to Social Security and Medicare.ᵇ
- The more than 2% S corporation employee-shareholder claims the health insurance deduction on page 1 of Form 1040.
However, to claim the self-employed health insurance deduction on page 1 of the Form 1040, the more than 2% employee-shareholder must substantiate the following:
- The more than 2% employee-shareholder cannot take this insurance deduction if s/he or spouse is eligible for employer-subsidized health insurance.ᶜ
- The more than 2% employee-shareholder premiums cannot exceed the amount of S corporation salary.ᵈ
If your S corporation employs less than 50 full-time employees,ᵉ then you do not have to provide health insurance benefits to your employees. However, when you provide medical benefits to non-owner employees, your S corporation will be penalized $100-a-day if your S corporation reimburses employees for individual purchased health insurance policies like you can for more than 2% employee-shareholder.
Currently, the IRS does not enforce any nondiscrimination provisions of the Affordable Care Act.ᶠ Thus, your S corporation can still legally discriminate without the threat of the Affordable Care Act penalties. For example, you can
- have your S corporation buy health insurance for you and nothing for the rank-and-file employees, or
- have the S corporation reimburse the more than 2% employee-shareholder for his/her individual insurance plan and have a separate group plan for the rank-and-file employees.
If the more than 2% employee-shareholder individual insurance is purchased through the government’s Health Insurance Marketplace (federal marketplace or state exchange), you can combine the individual premium tax credit (government subsidy for health insurance) with your self-employed health insurance deduction. Thus, the more than 2% employee-shareholder premium cost must be netted against the tax credit.ᶢ
For year 2017 and further, the IRS will likely change the rules for the following:
- Discrimination under the Affordable Care Act¹
- S corporation owner health insurance deductions²
Keep in mind if your S corporation is providing health insurance to two or more non-owner employees, you need to use group insurance.
If you would like to learn more about this tax strategy, please call Susan at 847.895.9880.
ᵃ Notice 2008-1.
ᵇ See How to Escape Payroll Taxes on S Corporation Health Insurance.
ᶜ IRC Section 162(I)(2)(B).
ᵈ IRC Section 162(I)(5).
ᵉ IRC Section 4980H(c)(2).
ᶠ Notice 2011-1.
ᶢ Rev. Proc. 2014-41.
² Notice 2015-17.