S Corp Shareholder Health Benefits
Q. A 2% shareholder of an s corporation is also an emploeye. The corporation offers health insurance under a premium only 125 cafeteria plan. Is the shareholder/employee eligible to participate? If so should the corporation’s contribution be reported as wages?
A. There are lots of good articles already on the web about 2% shareholders of S corporations. These would of course be secondary resources on the topic but they can provide coverage from the perspective of those who work in this field every day.
The key is that the IRS considers an S corp to be a partnership when dealing with employee fringe benefits. If the company pays for the health insurance of a 2% shareholder, it is allowed to take a deduction for that benefit. The full amount of that premium would be considered taxable income to the shareholder/employee. So…yes, a shareholder can participate in the plan, but cannot get pre-tax treatment like the rest of the employees would under a section 125 or “cafeteria plan”.
Some states do not allow single person health plans to be purchased as a business. If the 2% shareholder is the only shareholder in the S corp, then perhaps he should consider hiring his spouse to enable them to purchase a business plan. Otherwise, health insurance must be purchased as an individual and can only be deducted once it passes 7.5% of AGI on the tax return if the individual itemizes.
The IRS published a bulletin about this topic that goes into much more detail. It is IRB 2008-2 and can be found here.
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