Key Takeaways

  • S Corps can offer group health insurance and deduct premiums for more-than-2% shareholders under specific IRS rules.
  • Virginia allows self-employed S Corp owners to access small group health insurance plans under SB672.
  • S Corps in Virginia with just one eligible employee (even a spouse) may qualify for group coverage.
  • Premiums must be reported on the shareholder's W-2 and meet IRS Notice 2008-1 requirements for tax deductions.
  • Small group plans in Virginia can provide better rates and broader access compared to individual plans.

S Corp health insurance is something that all S Corporations must consider after formation. A lot of small businesses that are incorporated choose to be taxed as an S Corp so that the owners (shareholders) can receive certain tax benefits. If you operate as an S Corp, which is also referred to as a small business corporation, you will need to determine how you want to set up your personal and employee health insurance coverage plan.

Depending on the state in which you operate, your S Corp might not be required to provide health insurance to employees, especially if you have very few employees. You might also be able to draft your own company policies regarding health insurance premiums, and whether or not the employees will be required to pay such premiums and be taxed on them.

S Corp Policy Choices

Specifically, there are two types of policies than an S Corp can follow:

  • S Corp Discrimination, which means that the business doesn’t provide health insurance to all eligible employees. Therefore, the S Corp will pay all health insurance premiums. The business will also be responsible for paying Social Security and Medicare tax.
  • S Corp Non-Discrimination, which means that the company provides health insurance to all employees. Such health insurance premiums are reported on the employee’s W-2 but they aren’t required to pay taxes on it.

What is Notice 2008-1?

This notice identifies rules and guidelines for deducting health insurance premiums for shareholders and employees that own more than 2 percent of the business. It also indicates that, when an S Corp pays for health insurance on behalf of its shareholders and employees that own at least 2 percent in the company, it is treated as a partnership for income tax purposes (Section 707(c) of the Internal Revenue Code).

Health Insurance Deductions

Ordinarily, if you operate as a corporation and offer health insurance to your employees, this is considered a fringe benefit. Therefore, it is deductible as a business expense. This means that you won’t be required to pay taxes on insurance premiums because they are considered tax-free employee fringe benefits.

However, if you elect to be taxed as an S Corp, then other rules will be followed when it comes to health insurance. Simply put, anyone who works for the S Corp and owns at least 2 percent or more of the company’s stock must include in his or her salary the cost of some employee fringe benefits that are provided by the business, including health insurance. Therefore, income taxes have to be paid on the premium amounts of the health insurance plan.

In addition, the employee must pay both Social Security and Medicare taxes. You can’t try getting around this by hiring your spouse even though he or she doesn’t actually own any stock in the company. Once you employ your spouse, he or she is considered a shareholder of the S Corp; this means that you will still need to pay health insurance premium taxes. If the employees of the S Corp pay the premium themselves, then it is reported on Schedule A of their personal tax return, and is submit to a 10 percent limitation before deductions.

This means that, even after adding up all other applicable health insurance expenses, if this number is less than 10 percent of your adjusted gross income, then you can’t deduct any additional health insurance expenses. If that number is greater than 10 percent, then you can deduct amounts that are greater than that percentage.

Alternatively, the S Corp can input the information on its W-2, which is generally a good choice to make for business owners when deducting such healthcare premiums, as it can further reduce tax liability for the owners of the business. If the S Corp chooses to do this, then it will identify the premium amounts that were paid on its W-2 form.

Thereafter, the owner of the business can deduct premium payments made on their personal tax return. This in turn reduces the owner’s tax liability, as it becomes profits earned by the S Corporation.

Virginia Rules for S Corp Medical Insurance

If your S Corporation is based in Virginia, it’s essential to understand how state laws impact access to group medical insurance. Thanks to Virginia Senate Bill 672 (SB672), even S Corps with only one eligible employee—such as a spouse of the owner—can qualify for a small group health insurance plan. This law enables many S Corp owners who are otherwise considered self-employed to access broader networks and more competitive premiums typically reserved for larger groups.

To take advantage of these benefits, the S Corp must:

  • Be legally formed and operating in Virginia.
  • Pay the health insurance premiums directly from the corporate account.
  • Ensure at least one W-2 employee (such as a spouse or partner) is enrolled in the plan.
  • Purchase coverage through a licensed insurer or broker that offers Virginia small group policies.

This setup is particularly advantageous for S Corps seeking better medical coverage than what’s available through individual plans or the healthcare marketplace. It also enables greater tax efficiency when health insurance premiums are included in shareholder-employee wages and deducted in accordance with IRS Notice 2008-1.

How to Set Up Group Health Insurance in Virginia

Setting up S Corp medical insurance in Virginia involves a few strategic steps to ensure compliance and eligibility for tax advantages:

  1. Hire and Pay an Eligible Employee:
    You must have at least one full-time W-2 employee enrolled in the plan. This can be your spouse, as long as they perform legitimate work for the S Corp.
  2. Purchase a Small Group Plan:
    Work with a Virginia-licensed broker or insurer offering small group coverage. Plans are typically available to businesses with 1 to 50 employees and may offer better pricing than individual policies.
  3. Pay Premiums Through the S Corporation:
    Premiums must be paid directly from the business account to qualify as a corporate expense. Do not reimburse the shareholder personally.
  4. Include Premiums on the W-2:
    Premium amounts paid on behalf of a more-than-2% shareholder must be reported in Box 1 of the W-2 (but not Boxes 3 or 5), as required by IRS Notice 2008-1.
  5. Deduct Premiums on the Personal Return:
    The shareholder can take an "above-the-line" deduction for the insurance premiums on their individual tax return, reducing their adjusted gross income.

Following these steps ensures your S Corp medical insurance in Virginia complies with both federal and state requirements while maximizing tax savings and healthcare access.

Frequently Asked Questions

1. Can an S Corp in Virginia buy group health insurance with only one employee? Yes. Under Virginia SB672, an S Corp can qualify for small group health insurance with just one eligible W-2 employee, even if it’s a spouse.

2. Do S Corp owners in Virginia get better rates with small group plans? Often, yes. Group plans may offer more affordable premiums, broader provider networks, and better plan options compared to individual coverage.

3. Is health insurance for an S Corp tax-deductible? For more-than-2% shareholders, premiums must be included in wages and reported on the W-2 to qualify for a deduction on the personal return.

4. Can I reimburse myself for health insurance from my S Corp? Not directly. To qualify for the tax deduction, the S Corp must pay the premiums or reimburse the shareholder under a plan established by the business.

5. How do I report S Corp medical insurance on the W-2? Report the premium in Box 1 (wages) but exclude it from Social Security and Medicare wages (Boxes 3 and 5) for more-than-2% shareholders.

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