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BK-CPA
BK-CPA, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 933
Experience:  Owner of a CPA firm
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When an S corp pays health insurance the owner, and

Customer Question

When an S corp pays health insurance for just the owner, and does not offer coverage to other employees, can the owner claim an adjustment for health insurance on their 1040?
Submitted: 11 months ago.
Category: Tax
Expert:  BK-CPA replied 11 months ago.
Hello and thank you for your question. Yes, regardless of whether or not health insurance is offered to other employees, health insurance paid by the s-corporation for an owner may potentially be deducted as an adjustment on the owner's Form 1040. This is known as the self-employed health insurance deduction under IRC § 162(l). For this purpose, an "owner" of a s-corporation means a "2-percent shareholder" as defined in IRC § 1372(b), which is generally someone who owns, directly or indirectly via the attribution rules of IRC § 318, more than 2 percent of the stock of the s-corporation. Note that the 2-percent shareholder recognizes the health insurance payments made by the s-corporation as wage income on Form 1040. The s-corporation deducts these payments as officer compensation. I hope his is helpful.
Customer: replied 11 months ago.
Are you sure it does not have to be part of a qualified plan? If a sole proprietor does not cover his/her eligible workers, do you agree there is no above the line adjustment? Why wouldn't it be the same for s corp shareholders?
Customer: replied 11 months ago.
Why wouldn't an s corporation shareholder just pay the insurance premiums and claim the above the line adjustment? Why run it through the s corp?
Expert:  BK-CPA replied 11 months ago.
No, I don't agree, because a self-employed person does not have to cover his/her eligible workers to qualify for the self-employed health insurance deduction. Limitations on one's ability to claim the self-employed health insurance are stated in IRC § 162(l)(2). I'll copy it for you below. I think you are confusing the provisions of the Affordable Care Act regarding group health plans (those covering more than 1 person) with the self-employed health insurance deduction, the later of which has been around a lot longer. Running afoul of the requirements for group health plans still doesn't disqualify a person from claiming the self-employed health insurance though. The s-corporation must make the payments and include them as wages on the shareholder's Form W2, so no, the s-corporation cannot just pay the insurance and claim the deduction. IRC §§ 1372(a); 3401(a) & (c); 162(l)(2)(A) & (l)(5). IRC § 162https://www.law.cornell.edu/uscode/text/26/162 (l) Special rules for health insurance costs of self-employed individuals...(2) Limitations (A) Dollar amountNo deduction shall be allowed under paragraph (1) to the extent that the amount of such deduction exceeds the taxpayer’s earned income (within the meaning of section 401(c)) derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established. (B) Other coverageParagraph (1) shall not apply to any taxpayer for any calendar month for which the taxpayer is eligible to participate in any subsidized health plan maintained by any employer of the taxpayer or of the spouse of, or any dependent, or individual described in subparagraph (D) of paragraph (1) with respect to, the taxpayer. The preceding sentence shall be applied separately with respect to—(i)plans which include coverage for qualified long-term care services (as defined in section 7702B(c)) or are qualified long-term care insurance contracts (as defined in section 7702B(b)), and(ii)plans which do not include such coverage and are not such contracts. (C) Long-term care premiumsIn the case of a qualified long-term care insurance contract (as defined in section 7702B(b)), only eligible long-term care premiums (as defined in section 213(d)(10)) shall be taken into account under paragraph (1)....(5) Treatment of certain S corporation shareholdersThis subsection shall apply in the case of any individual treated as a partner under section 1372(a), except that—(A)for purposes of this subsection, such individual’s wages (as defined in section 3121) from the S corporation shall be treated as such individual’s earned income (within the meaning of section 401(c)(1)), and(B)there shall be such adjustments in the application of this subsection as the Secretary may by regulations prescribe.
Expert:  BK-CPA replied 11 months ago.
Typo/clarification: The s-corporation must make the payments and include them as wages on the shareholder's Form W2, so no, the shareholder cannot just pay the insurance personally and claim the deduction (unless the shareholder is reimbursed by the s-corporation which then includes the reimbursement as wages on the shareholder's Form W2). IRC §§ 1372(a); 3401(a) & (c); 162(l)(2)(A) & (l)(5).
Customer: replied 11 months ago.
But, wouldn't we get the same AGI? S corp income reduced, salary increased, adjustment for health insurance.
vs. shareholder pays for the insurance out of pocket, ad claims the adjustment. Same AGI. There has to be some reason for this requirement to increase salary expense to the shareholder. Why not just deduct as employee benefits? We would get the same AGI. What was the intent of the law? There has to be some reason the cost is included in wages.
What is the reason?
Expert:  BK-CPA replied 11 months ago.
The health insurance payment has to be made or reimbursed by the s-corporation because IRC § 162(l)(2)(A) limits the amount of the deduction to the earned income derived by the taxpayer from the trade or business with respect to which the plan providing coverage is established. Earned income for this purpose is the 2-percent shareholders wages from the s-corporation. IRC § 162(l)(5)(A). Read IRS Notice 2008-1 if you want to pick this apart further:https://www.irs.gov/pub/irs-drop/n-08-01.pdf
Customer: replied 11 months ago.
Now, that makes sense. I did not realize the distributable income from the s corp did not count.
Customer: replied 11 months ago.
Let us go back to some theory...I am seeking equality in the law. A sole proprietor has employees, but does not offer heath insurance, although the employees are full time workers. Can the self employed person claim an adjustment for health insurance on his or her own 1040?
Expert:  BK-CPA replied 11 months ago.
Yes. If the criteria for the self-employed health insurance are met, this would be an "above the line" deduction used to compute adjusted gross income. If not, then perhaps an itemized deduction on Schedule A of Form 1040 may be in order to calculate taxable income, though these deductions are generally lost due income limitations.
Customer: replied 11 months ago.
But inherently the criteria are not met in my example. Therefore if a sole proprietor does not have health insurance through a qualified plan for his workers he cannot take an above the line deduction. Also applies to a partner or LLC member. Why doesn't it also apply to an S shareholder?
Expert:  BK-CPA replied 11 months ago.
A sole proprietor does not need to cover his employees to take a self-employed health insurance deduction. I'm not sure why you think that, but again I think you are confusing this with the requirements of the Affordable Care Act.
Expert:  BK-CPA replied 11 months ago.
Partnerships and s-corporations have to pay the premiums directly or reimburse the partners and shareholders, respectively, if they pay them. If not, the "plan" is not established through the business. The plan must be established through a trade or business to qualify for the self-employed health insurance deduction under IRC § 162(l)(2)(A). Sole proprietors generally don't have this issue because merely paying the premiums is enough for them to assert their trade or business did. Other than that, the sole proprietor cannot have or be qualified to obtain subsidized insurance. IRC § 162(l)(2)(B). The insurance covering the sole proprietor may also cover his spouse, dependents, and children that have not attained 27 years of age. IRC § 162(l)(1). Note - Receiving a premium tax credit does not render the insurance "subsidized."
Customer: replied 11 months ago.
Is it a qualified "plan" to say I am covered, workers, you are not? I know salaried workers can have a different plan than hourly workers, but did not think you could exclude workers who work more than 32 hours and are over a certain age.
Expert:  BK-CPA replied 11 months ago.
For purposes of the self-employed health insurance deduction, yes. For purposes of something else, like say for example IRC § 105(h), maybe not. You are definitely confusing the self-employed health insurance deduction with the Affordable Care Act. Again, you can run afoul of the provisions of the Affordable Care Act but still qualify for the self-employed health insurance deduction.
Expert:  BK-CPA replied 11 months ago.
PS - The requirements of the Affordable Care Act generally apply to group health plans. If your plan only covers one person, you should be fine. That is a can of worms though. You asked about the self-employed health insurance deduction, but if you now have more questions about the Affordable Care Act, please start a new question on JustAnswers.
Expert:  BK-CPA replied 11 months ago.
To recap, the answer to your question is "yes." This assumes the requirements of IRC § 162(l) are met, which I provided for you above. Is there anything else I can do to help you at this point? If you have found this helpful, please take a moment to provide feedback for this question as it's the only way experts at JustAnswers are credited for their work in assisting you. Otherwise, we receive nothing for our time. Thank you!