S Corporation & Health Insurance Rules-Important!
April 11th, 2022 at 6:41 AM
You and your S corporation continue to enjoy good news in 2018 when it comes to your health insurance.
And that good news also applies to your 2017 taxes.
You first have to thank the 21st Century Cures Act for:
- Reinstating and extending IRS Notice 2015-17 to eliminate the $100-a-day penalty through December 31, 2016—and this gives new life for 2017 and 2018, as we explain.
- Creating the qualified small employer health reimbursement account (QSEHRA) that can work very well if you have employees in your S corporation.
The good news is, the old rules still apply as we write this, and we don’t expect any changes in 2017 or 2018. The S corporation first establishes a health insurance plan for you, the owner, in one of two ways:
- The S corporation makes the premium payments for the accident and health insurance policy covering the owner-employee who has more than 2 percent ownership (and his or her spouse or dependents, if applicable).
- The owner-employee who has more than 2 percent ownership makes the premium payments to the insurance company and furnishes proof of the premium payments to the S corporation, which in turn reimburses the owner-employee for the premium payments.
This is Step 1—getting the cost of the insurance on the S corporation’s books.
In Step 2, the S corporation has to include the health insurance premiums on the owner-employee’s W-2 form. The income is not subject to payroll taxes (Social Security and Medicare). In other words, the S corporation includes the additional compensation in box 1 of the W-2 but not in boxes 3 or 5.
In Step 3, you (the owner-employee with ownership of more than 2 percent of your S corporation) claim the health insurance deduction on page 1 of Form 1040, providing you otherwise qualify for that page 1 deduction.
Small Employer’s Rank-and-File Employees and the New QSEHRA
As a small employer, your S corporation does not have to provide any health insurance benefits to its employees. “Small employer” for this purpose means a business with fewer than 50 full-time employees or full-time equivalents.
But when you do offer medical benefits to employees who are not S corporation owners, you face the $100-a-day penalty for doing things wrong. The big no-no is reimbursing the rank-and-file employees for individually purchased health insurance.
But you can reimburse your employees for at least some of their individually purchased health insurance when you use the QSEHRA.
If you are planning on using the QSEHRA with your employees, we should get your 2018 plan in place now so that it’s ready, set, go on January 1.
Mark S. Fineberg, CPA