How S-Corp Owners Can Deduct Health Insurance Expenses in 2021

Ever since 2008, people who own more than a 2 percent share in an S-corporation in Round Rock, TX have been allowed to purchase individual health insurance under their name and then get reimbursed by that corporation. The premiums for these insurance policies were included on the W2 for the shareholder, and the shareholder would then be allowed to deduct those premiums on Form 1040, on the very first page. This created a lower adjusted gross income (AGI).

However, the Affordable Care Act placed a ban on employers reimbursing their employees for individual health insurance premiums, which created a bit of confusion. After all, wouldn’t this get in the way of this provision for S-corp shareholders?

Here’s a quick overview of what you, as a shareholder for an S-corp, should know about this issue when working with a professional for business tax prep in Round Rock, TX.

Obtaining those health insurance deductions

The IRS released an explanation in 2014 stating that any shareholder who is the sole corporate employee of an S-corp is still allowed to be reimbursed by that S-corp for individual health insurance.

As of early 2015, though, the IRS had still not directly addressed the issue of what would happen in instances where there are multiple people who own more than 2 percent shares. If there is more than one such shareholder, would that mean the corporation would not be able to reimburse those insurance premiums?

Ultimately, the IRS released Notice 2015-17, which provided guidance related to this issue that included the following points:

  • S-corps are allowed to continue reimbursing those individual market premiums for shareholders who own more than 2 percent until the IRS releases further guidance stating otherwise. As of 2020, this means those reimbursements are still applicable.
  • If any shareholder has an individual plan covering their spouse and the spouse also is an employee of the corporation, that reimbursement occurs as if it were just being granted to a single covered employee. This is an especially ideal circumstance for small businesses run by married couples, who will be able to continue to have their premiums reimbursed and deducted on their 1040s. It’s also beneficial because the ACA usually prevents businesses with only two employees who are married from getting group health insurance plans.

S-corps are not required to establish individual coverage health reimbursement arrangements or qualified small employer health reimbursement arrangements, and can reimburse the shareholder for either some or all of the cost of their individual market health insurance plans, then include the amount of reimbursement in the shareholder’s W2 income. This means, for example, if the shareholder earns $60,000 in W2 wages and receives $7,500 in a health insurance premium reimbursement through the S-corp, their reported income on their taxes for W2 box 1 would be $67,500 rather than $60,000. The shareholder then deducts that amount using the self-employed health insurance deduction when they file their taxes.

For more information about how health insurance deductions work for S-corps, contact the experienced CPAs in Round Rock, TX at Perrin Anderson Rastogi Tax Services LLC today.