There is great news for S corporations in 2023 in regard to health insurance premiums for a greater than 2 percent shareholder-employee in that premiums continue to be allowed as a deduction under §162(l). The deduction is an amount equal to the amount paid during the taxable year for health insurance premiums, which constitutes medical care for the taxpayer, the taxpayer’s spouse, and the taxpayer’s dependents who have not attained age 27 as of the end of the taxable year.
IRS Notice 2008-1 defines a 2 percent S corporation shareholder as “any person who owns on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.”
The S corporation can make the premium payments in one of two ways:
- Directly to the insurance company, or
- Through reimbursement to the shareholder-employee.
When an S corporation pays premiums on behalf of a shareholder-employee, the S corporation must include the premium payments in the employee’s Form W-2 for the tax year in which it is paid, and the shareholder must report those wages as gross income on Form 1040. However, these additional wages are not subject to Social Security, Medicare (FICA), or Unemployment (FUTA) taxes.
In order for the shareholder-employee to deduct the amount of health insurance premiums, the shareholder-employee and their spouse must not qualify to participate in any subsidized health plan maintained by an employer of the shareholder or the shareholder’s spouse. Also, the earned income from the S corporation must exceed the amount of the premiums for the accident and health insurance policies covering the shareholder, his or her spouse, and any dependents.
Avoid Costly ACA Penalties
Under the Affordable Care Act (ACA), employers are required to report employer-paid health care costs on an employee’s Form W-2. The ACA imposes penalties if the S corporation offers a health plan that fails to comply with certain market reform provisions. Employers should check with their health insurance broker regarding the entity’s compliance with market reform provisions, and appropriate reporting of the premiums in order to claim the deduction.
Learn more about S Corporation Compensation and Medical Insurance Issues.
Author, Brian Landes
Senior Tax Associate
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.