2023 Health Insurance for S Corporation Owners: An Update
In this article, we give you the ins and outs of what you need to do with your S corporation to ensure your health insurance deductions and also avoid the $100-a-day penalties for violating the rules of the Affordable Care Act.
The good news is that the old rules still apply.
Step 1. Get the cost of the health insurance on the S corporation’s books. You can do this in one of two ways:
1) Direct payment. The S corporation can make the premium payments directly to the insurance
company for the accident and health insurance policy that covers the owner-employee who has more
than 2 percent ownership (and his or her spouse and dependents, if applicable).
2) Reimbursement. The owner-employee who has more than 2 percent ownership can make the
premium payments to the insurance company and furnish proof of the premium payments to the S
corporation, which in turn reimburses the owner-employee for the premium payments.
Step 2. The S corporation includes the health insurance premiums on the owner-employee’s W-2 form. The income is not subject to payroll taxes (Social Security and Medicare). In other words, the S corporation includes the additional compensation in box 1 of the W-2 but not in boxes 3 or 5.2.
Step 3. You (the owner-employee with ownership of more than 2 percent of your S corporation) claim the health insurance deduction as “self-employed health insurance” on line 17 of schedule 1 of your Form 1040, providing you qualify as we explain below.
Beware—Two Hurdles to the 1040 Deduction
To claim the self-employed health insurance deduction on line 17 of your Form 1040, Schedule 1, you need to meet the following two rules:
1)You and your spouse must not have access to employer-subsidized health insurance. You
cannot take the self-employed insurance deduction if you or your spouse is eligible for employer-subsidized health insurance. Thus, if your spouse can get family health insurance as a tax-advantaged fringe benefit through his or her employer, you lose your eligibility for this deduction—
even if your spouse does not actually accept the employer-sponsored insurance.
2)You must have adequate salary. Your deduction for the insurance premiums cannot exceed the
amount of your salary from the S corporation. (Good news: You cannot have this problem if the S
corporation puts the health insurance on your W-2 as it is supposed to do.)
As a small employer, your S corporation does not have to provide any health insurance benefits to its employees. “Small employer” for this purpose means a business with fewer than 50 full-time employees or full-time equivalents.
But when you do offer medical benefits to employees who are not S corporation owners, you face the $100-a-day penalty for doing things wrong. The big no-no is reimbursing employees for individually purchased health insurance.
But you can reimburse your employees for at least some of their individually purchased health insurance when you use either the qualified small employer health reimbursement arrangement (QSEHRA) or the individual coverage HRA (ICHRA).
If you want to provide health benefits to employees through the S corporation, there are many tax-advantaged ways to do so. Your S corporation treats the benefits to non-owner employees just as any other business would.
Group Insurance and You
Suppose your S corporation provides group health insurance to all employees, including you, a more-than-2-percent shareholder-employee. The S corporation must treat you differently from the way it treats non-owner employees. Here’s how this works:
Non-owner employees. The S corporation deducts its contributions to the insurance plan,
and non-owner employees receive the health benefits tax-free.
More-than-2-percent owner-employees. You and the S corporation follow the three-step
deduction process described above. The S corporation completes step 1 when it purchases the group
insurance. The S corporation treats your group insurance benefit as W-2 compensation to you (step
2), which you then deduct on your personal tax return using the self-employed health insurance
deduction (step 3).
Premium Tax Credit and Your Deduction
If you purchased your individual insurance through the government’s health insurance marketplace (federal marketplace or state exchange), you can combine the individual premium tax credit (government subsidy for health insurance) with your self-employed health insurance deduction. But when you calculate that deduction, you need to consider the tax credit.
Are Changes Coming?
Yes. The government agencies, including the IRS, are slowly providing us with additional rules for implementing the Affordable Care Act.
We don’t yet have the full and final picture of how these rules will work. The IRS has promised future guidance(likely new rules) on both of the following topics:
1)Discrimination under the Affordable Care Act13
2)S corporation owner health insurance deductions
The good news is that your 2023 S corporation health insurance treatments continue as before. Your S corporation’s health insurance plan can cover you and your spouse, dependents, and children under age 27. But remember that you can qualify for the self-employed health insurance deduction only if first you go through all the IRS-required steps. This is easy. You simply make the S corporation pay for your insurance premiums, either directly or through reimbursement to you;have the S corporation include the health insurance as wages on your W-2; and deduct the cost of the premiums using the self-employed health insurance deduction on Schedule 1 of Form 1040.
And then, to qualify for the above deduction, neither you nor your spouse may be eligible for health insurance provided by another employer.
As for the rank-and-file employees, don’t reimburse any individually purchased health insurance. You can use the QSEHRA or ICHRA, which can enable a limited amount of reimbursement for individually purchased insurance and other medical costs. Alternatively, you can use group insurance as a benefit for the non-owner employees.
Article source: Bradford Tax Institute/February 2023