S Corp Shareholder Health Insurance: Everything You Need to Know
S corp shareholder health insurance premiums can be deducted for those shareholders who own more than 2 percent of the S corp.3 min read
2. Examples Illustrating Deduction Rules
S corp shareholder health insurance premiums can be deducted for those shareholders who own more than 2 percent of the S corp. The IRS rules for employee fringe benefits dictate that an S corp is treated as a partnership and that any shareholder of at least 2 percent qualifies as a partner. This includes anyone who has owned at least 2 percent of the company's stock on at least one single day during the tax year in question.
Health Insurance Premium Deduction Rules
S corporations, partnerships, and limited liability companies (LLCs) with more than one member are subject to the same health insurance premium deduction rules as described above. These deductions are made by the shareholder on his or her Form 1040 if the health plan was established by the business and not purchased by the individual.
For a health plan to be considered as established by the business, the S corporation must either pay the premiums covering the shareholder in the current tax year or reimburse the costs of premiums paid by the shareholder. The business must also include premiums paid in the wages section of the shareholder's Form W-2. If the shareholder is not reimbursed for premiums, the health plan is not established by the business and premium costs cannot be deducted.
Shareholders that own less than 2 percent of the business do not have to report health insurance paid by the corporation as income and cannot deduct the costs of these premiums.
A health insurance or accident plan is treated by the IRS as established by the business only if one of these three cases applies:
- The business purchases a health and accident insurance policy in its own name to cover employees, 2 percent shareholders, partners, and members, as well as their spouses and dependents. The business pays all the premiums and reports these payments as part of gross wages for an S corporation or as guaranteed income on a Schedule K-1 for a partnership and LLC.
- A member, partner, employee, or 2 percent shareholder purchases a health insurance policy in his or her own name, but the business makes the premium payments. These payments are reported by the business in the same way as in the first situation.
- A member, partner, employee, or 2 percent shareholder purchases a health insurance policy for his or her family and pays all the premiums. He or she gives the business proof of payment and the business reimburses the individual for the entire amount. These payments are reported by the business as detailed above.
Examples Illustrating Deduction Rules
These examples show how the shareholder health insurance deduction rules work in practice. For the examples below, assume the shareholder in question owns at least 2 percent of an S corporation and earns income from the corporation exceeding the health insurance policy premium amounts. He or she is not eligible to participate in an employer-managed subsidized health plan.
Bob buys a health insurance and accident policy in his own name and makes the premium payments. His S corporation does not reimburse these payments. This policy was thus not established by the S corporation and Bob cannot deduct the premium costs.
An S corporation purchases a health plan in its own name that covers Bob, his spouse, and his children. The company makes all premium payments and reports these premiums as part of Bob's Form W-2 wages. Bob reports the total amount as gross income on his Form 1040 for that year. This plan was established by the S corporation and Bob can deduct its costs.
Kelly purchases a health insurance policy in her own name, but the S corporation pays all the premiums. These costs are reported by the company on Kelly's W-2 and as part of her gross income for the year. This plan has been established by the company and Kelly can deduct its costs.
Chris buys an insurance policy in his own name and pays the premiums, which are reimbursed in full by the S corporation. These payments are reported by the company on the W-2 and by Chris on his 1040. This plan was established by the corporation and can be deducted.
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