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IRS allows two-percent S-corporation shareholders to deduct health insurance premiums
An S corporation's two-percent shareholder/employee can deduct health insurance
premiums that are paid or reimbursed by the S corporation, the IRS recently has
ruled. Now, for the first time, S corporation owner-employees have been given the
green light to purchase their own health insurance and obtain full tax benefits.
Under the new ruling, the S corporation's payments are included in the income of
the employee, who can deduct "above-the-line" the amounts under Code Sec. 162(l),
which provides a deduction for medical insurance to a self-employed individual who
is treated as an employee. Payments by an employer are treated as if the employer
had established the individual employee's plan.
One caveat: The deduction is not allowed during a month in which the
taxpayer is able to participate in a subsidized health plan of the employer or a
spouse's employer.
Medical care plan
A two-percent shareholder/employee can take the Code Sec. 162(l) deduction if the
S corporation establishes the medical care plan for the shareholder. A plan has
been established by an S corporation if: (1) the S corporation pays the premiums
for the accident and health insurance policy in the current year, or (2) the shareholder
pays the premiums, provides proof of payment to the S corporation and the S corporation
reimburses the shareholder in the current year.
An S corporation that pays accident or health insurance premiums for services rendered
by a two-percent shareholder/employee can deduct the premium as an employee fringe
benefit under Code Sec. 162(a). The payments are included in the shareholder's income.
Traditionally, tax-free employer payments could only be made to a plan established
and maintained by the employer - that ruled out direct payments by S shareholder
employee ... until now. Recent cafeteria plan regulations permit employees to purchase
individual insurance policies, which in turn opened the door to convincing the IRS
to issue its ruling. Going forward, any employer has the option of paying
the employee's premiums, tax-free, or reimbursing the employee for the premiums,
again tax-free.
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If and only to the extent that this publication contains contributions from tax
professionals who are subject to the rules of professional conduct set forth in
Circular 230, as promulgated by the United States Department of the Treasury, the
publisher, on behalf of those contributors, hereby states that any U.S. federal
tax advice that is contained in such contributions was not intended or written to
be used by any taxpayer for the purpose of avoiding penalties that may be imposed
on the taxpayer by the Internal Revenue Service, and it cannot be used by any taxpayer
for such purpose.
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