Health Insurance for S Corporation Owners
If you operate your business as an S corporation, you continue to enjoy good news in 2018 when it
comes to your health insurance.
And that good news also applies to your 2017 taxes. You first have to thank the 21st Century Cures
Act for:
Reinstating and extending IRS Notice 2015-17 to eliminate the $100-a-day penalty through December
31, 2016—and this gives new life for 2017 and 2018, as we explain
Creating the QSEHRA that can work very well if you have employees in your S corporation
In this article, we give you the ins and outs of what you need to do in 2017 and 2018 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.
Good News
The good news is, the old rules still apply as we write this, and we don’t expect any changes in
2017 or 2018. The S corporation first establishes a health insurance plan for the owner in one of
two ways:
The S corporation makes the premium payments for the accident and health insurance policy covering
the owner-employee who has more than 2 percent ownership (and his or her spouse or dependents, if
applicable).
The owner-employee who has more than 2 percent ownership makes the premium payments to the
insurance company and furnishes proof of the premium payments to the S corporation, which in turn
reimburses the owner-employee for the premium payments.
This is Step 1—get the cost of the insurance on the S corporation’s books.
In Step 2, the S corporation has to include 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.
In Step 3, you (the owner-employee with ownership of more than 2 percent of your S corporation)
claim the health insurance deduction on page 1 of Form 1040, providing you otherwise qualify for
that page 1 deduction, as we explain below.
Beware—Two Hurdles
To claim the self-employed health insurance deduction on page 1 of Form 1040, you need to watch out
for two things:
1. Second employer insurance for you or your spouse. You cannot take this 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. Salary. Your deduction for the insurance premiums cannot exceed the amount of your salary
from the S corporation.
Examples
Example 1. You are the sole owner of your S corporation, you obtain an accident and health
insurance policy in your name, and you pay the premium payments on the policy. The S corporation
makes no payments or reimbursements with respect to the premiums.
The S corporation did not establish a medical care plan for you; therefore, you are not entitled to
the self-employed health insurance deduction.
Example 2. You are the sole owner of your S corporation. You obtain an accident and health
insurance policy in your name, and you pay the premium payments on the policy. You submit proof of
the premium payments to your S corporation. The S corporation then reimburses you for the premium
payments and reports the amount of the premium reimbursements as wages on your W-2.
The S corporation established the medical plan, and you qualify to deduct the insurance premiums
included on your W-2 as self-employed health insurance on page 1 of Form 1040.
Small Employer’s Rank-and-File Employees and the New QSEHRA
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 the new qualified small employer health reimbursement arrangement (QSEHRA).
For details on how the QSEHRA works, see Announcing NEW Tax-Deductible Penalty-Free Health Plans
for Small Businesses.
Good news. As you will see in the QSEHRA article, you need to give written notice of the plan. The
good news is that the IRS in Notice 2017-20 says that you are not required to furnish the initial
written QSEHRA notice to eligible employees until after further guidance has been issued by the
Treasury and the IRS. That further guidance, when issued, will specify a deadline no earlier than
90 days following issuance of that guidance.
Do it now. If you are planning on using the QSEHRA with your employees, get that 2018 plan in place
now, before the new notice rules come into play.
Note This
You can have the S corporation reimburse the owners for individually purchased insurance, and you
face no penalties. But reimburse rank- and-file employees for individually purchased insurance
without use of the QSEHRA, and you face the $100-a-day penalty for each employee ($36,500 a year
per employee).
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. To get an idea of how your S corporation can offer employee health
benefits under the Affordable Care Act without using the new QSEHRA, see Small Employer Health Care
under Obamacare.
Group Insurance and You
Suppose your S corporation provides group health insurance to all employees, including you, an
employee-owner. 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.
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 using the
self-employed health insurance deduction (step 3).
Discrimination
Currently, the IRS does not enforce any nondiscrimination provisions of the Affordable Care Act.
That means you and your S corporation can still legally discriminate without the threat of
Affordable Care Act penalties. For example, you can
· have your S corporation buy health insurance for you and nothing for the rank-and-file employees,
or
have the S corporation reimburse you for your individual insurance plan and have a separate group
plan for the rank-and-file employees.
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:
· Discrimination under the Affordable Care Act
· S corporation owner health insurance deductions
For now, you can follow the rules as described in this article. The IRS has said that it will give
us time to implement changes, and generally, that means any changes will become effective with your
next tax year.
Takeaways
The good news is that your 2017 and 2018 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 qualify for the self-employed health insurance deduction only if you go
through all the IRS-required steps. This is easy. You simply
1. make the S corporation pay for your insurance premiums, either directly or through
reimbursement to you;
2. have the S corporation include the health insurance as wages on your W-2; and
3. deduct the cost of the premiums using the self-employed health insurance deduction on Form
1040.
As for the rank-and-file employees, don’t reimburse any individually purchased policies. You can
use the QSEHRA, which can enable a limited amount of reimbursements for individually purchased
insurance and other medical costs. Alternatively, you can use group insurance as a benefit for the
non-owner employees.