S Corporations have always had unique issues with respect to health insurance for owners.
The Affordable Care Act (ACA) created more complexity for S Corporation owners.
Here are the basic rules:
- Group health insurance non-discriminatory plans that cover all eligible employees are deductible by the corporation as fringe benefits.
The premiums are reported in box 3 or 5 of the W-2 for Social Security or Medicare purposes.
This forces the premiums into taxable income for all employees. The shareholder can then deduct the premiums on page 1 of their 1040 thereby netting the health insurance to zero and not paying taxes on the amount.
- The real impact of ACA on S Corporations comes into play when there is no group plan for the business, but the business wants to pay premiums directly for shareholders (or other employees such as managers) or wants to reimburse shareholders (or other employees such as managers) for premiums.
- Generally, under ACA, arrangements that reimburse employees or directly pay premiums (outside of a non-discriminatory group plan) are not allowed.
- If the employer wants to assist an employee or the owners by covering health insurance premiums, the only option is to increase the employee’s pay with additional taxable compensation on the W-2. The employee or owner will then deduct the amount on his or her 1040 in the appropriate section – either page 1 for owners or Sch A for non-owners.
- Penalties for non-compliance with the above rules are rough $100 per day per individual where a failure to comply exists.
EDIT: Incorrectly stated that health insurance premiums are reported in box 3 or 5 of the W-2.
The correct statement should be: Group premiums paid for employees, other than shareholders, are deductible by the business as fringe benefits, and are not taxable wages to the employee (not included in box 1 of W-2). For shareholders, group premiums are included in box 1 but not included in box 3 or 5 (meaning not subject to Social Security or Medicare tax)