Clarifying S Corps and Health Insurance Plans

As many realize, the IRS allows owners of S corporations to participate in company sponsored medical insurance plans. For most businesses, the company pays the premiums for the owner and then at the end of the year the total of premiums paid for the owners coverage are added only to box 1 of the owners Form W-2 (not subject to payroll taxes or withholding so not included in box 3 or 5). Owners then deduct the full amount of the premiums on page 1 of their personal tax return.

In light of the new health care legislation many small S corporations are considering dropping their company sponsored medical insurance plans and wonder what will happen to their health insurance deduction. The IRS has an answer, “If you’re an S corporation shareholder, the policy can be in your name or the S corporation’s name and either of you can pay the premiums. If the policy is in your name and you pay the premiums, the S corporation must reimburse you and include the premiums as wage income on your Form W-2” (just as before).

We would recommend that you have the corporation pay the premiums directly.

What this means is that for S corporations that are dropping company sponsored medical insurance plans, the owner is still allowed a full deduction for their medical premiums.

Bret Hodgdon, CPA, CFP®, CFE, CGMA

Audit Partner, Davis & Hodgdon Associates CPAs