IRS Notice 08-01, recently released, discusses the
treatments of various arrangements of health insurance
in connection with an S Corporation and its 2%
shareholder/employees. This Notice clarifies an issue
from two years ago.
First a review of law involving the health insurance
deductions. Section 162(l) permits a self-employed
person, a partner, and an S corporation
shareholder/employee to claim a deduction (adjustment
to income) for 100% of the health insurance premiums
for the taxpayer, spouse, and dependents, but not more
than the income from the business that has the plan.
This means the business must have a health insurance
plan. There are other restrictions such as not being
eligible to participate in a subsidized plan by an
employer of the spouse’s employer, etc. Notice 91-26
states the health insurance premiums for a 2%
shareholder/employee must be included in the
shareholder’s W2 as income (box 1). Announcement
92-16 states the amount is not subject to FICA as long
as the plan is an employee plan as opposed to an owner
plan.
About two years ago, IRS released a Headliner denying
the deduction for a 2% shareholder/employee when the
policy is in the shareholder/employee’s name and the
premiums are paid by the shareholder/employee. No
mention was made in the Headliner regarding a
reimbursement of the premiums by the S corporation.
Now the current NOTICE:
In brief Notice 08-01 states a shareholder is entitled
to the 100% deduction if the S corporation is paying
the premiums directly or if the S corporation is
reimbursing the 2% shareholder/employee the premiums.
Here are the four examples from the Notice. They do a
pretty good job covering the various arrangements.
They all assume the income from the business that has
the plan is high enough and that the taxpayer is not
eligible to participate in any subsidized plan.
- Example 1. For 2008, shareholder A obtains an
accident and health insurance policy in the name of
shareholder A and makes the premium payments on thepolicy. The S corporation makes no payments or
reimbursements with respect to the premiums.A plan providing medical care for shareholder A is NOT
established by the S corporation and shareholder A is
NOT entitled to the deduction under §162(l). - Example 2. For 2008, the S corporation obtains an
accident and health insurance plan in the name of the
S corporation. The health plan provides coverage for
shareholder B, B’s spouse and dependents. The S
corporation makes all the premium payments to the
insurance company. The S corporation reports the
amount of the premiums as wages on shareholder B’sForm W2 for 2008 and shareholder B reports that amount
as gross income on Form 1040 for 2008.A plan providing medical care for shareholder B HAS
been established by the S corporation and shareholder
B IS allowed the deduction under §162(l) for 2008. - Example 3. For 2008, shareholder C obtains an
accident and health insurance policy in the name of
shareholder C. The S corporation makes all the
premium payments to the insurance company. The S
corporation reports the amount of the premiums as
wages on shareholder C’s Form W2 for 2008 and
shareholder C reports that amount as gross income onForm 1040 for 2008.
A plan providing medical care for shareholder C HAS
been established by the S corporation and shareholder
C IS allowed the deduction under §162(l) for 2008. - Example 4. For 2008, shareholder D obtains an
accident and health insurance policy in the name of
shareholder D. Shareholder D makes the premium
payments to the insurance company and furnishes proof
of premium payment to the S corporation. The S
corporation then reimburses shareholder D for the
premium payments. The S corporation reports theamount of the premium as wages on shareholder D’s Form
W-2 for 2008 and shareholder D reports that amount as
gross income on Form 1040 for 2008.A plan providing medical care for shareholder D has
been established by the S corporation and shareholder
D is allowed the under §162(l) for 2008.A taxpayer who did not claim deductions for these
fringe benefits as described above can amend open year
returns. The statement “Filed Pursuant to Notice
2008-1” should be written at the top of the amendedreturn.
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