You wrote: the Corp. forwards the payment to Aflac--- but is employees money.
There is no reason for the corporation to pay the premium if it is "employees money".
There are reasons for the corporation NOT to pay the premium if it is "employees money". This is not proper accounting. If it is a corporate expense then the corporation should pay and deduct it. If this is a group plan formed under the corporation the corporation should pay for it.
If it is a personal expense (and personal ploicy) then the person should pay and deduct it. There are possible consequences of paying owner's personal expenses that can rise to invalidating the corporate existence ( aka "piercing the corporate veil").
Again, from Notice 2008-1 (underlining and bolding added) :
Accident and health insurance premiums paid or furnished by an S corporation on behalf of its 2-percent shareholders in consideration for services rendered ...are included in wages for income tax withholding purposes on the shareholder-employee's Form W-2, Wage and Tax Statement, but are not wages subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied.
The proper accounting for >2% shareholders of an S corporation health insurance plan payments (and the code section does read "by or on behalf of employees") is to include the premium as wages taxable to the employee and deductible by the corporation for incoem taxes.
So, the taxable for federal/state income tax (with some state exceptions) is = Yes.
These payments are not subject to Social Security and Medicare taxes if the requirements for exclusion under section 3121(a)(2)(B) are satisfied.
So, the taxable for FICA/Medicare taxes = No.
For example, the shareholder has a salary of $1000 per pay period and $90 for premium in that period. The wages subject to income tax are $1090 and the wages subject to Fica/Medicare are $1000 for the pay period. Presuming no income tax withheld, the check stub has 1,090 gross less 90 premium less 62.00 for FICA and 14.50 for Medicare for a net check of 923.50.
The corporation reports 1090 wages paid, of which 1000 were subject to FICA/Medicare and 76.50 collected from employees for the pay period on the payroll tax reports.
The corporation reports 1090 wages paid per pay period and 76.50 payroll tax (after it is paid by the employer) on the corporate tax return.
The >2% shareholder reports 1090 wages and can potentially deduct the 90 as self employed health insurance as an adjustment to income if otherwise qualified.
It is not clear how the payroll tax reports (or corporate books) have been prepared for the premiums paid through the course of the year. Not all S corporation shareholders know how to prepare these reports.
I have seen insurance premiums treated as a distribution to the shareholder and not deducted by the corporation (which appears to be what has been attempted in your case). If the premiums have not been included in the payroll reports you may wnat to consider that to avoid amending payroll reports; but it is not the technically correct reporting.
I hope this helps to clarify further for you.