An Update: 2023 Health Insurance for S-Corporation Owners
If you operate your business as an S-Corporation, you will continue to enjoy good news in 2023 regarding your health insurance.
In this article, we give you the ins and outs of what you need to do 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.
The good news is that the old rules still apply.
Step 1: Get the cost of the health insurance on the S-Corporationʼs books. You can do this in one of two ways:
- Direct Payment: The S-Corporation can make the premium payments directly to the insurance company for the accident and health insurance policy that covers the owner-employee who has more than 2 percent ownership (and his or her spouse and dependents, if applicable).
- Reimbursement: The owner-employee who has more than 2 percent ownership can make the premium payments to the insurance company and furnish proof of the premium payments to the S-Corporation, which in turn reimburses the owner-employee for the premium payments.
Step 2: The S-Corporation includes the health insurance premiums on the owner-employeeʼs 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.
Step 3: You (the owner-employee with ownership of more than 2 percent of your S-Corporation) claim the health insurance deduction as “self-employed health insurance” on line 17 of Schedule 1 of your Form 1040, providing you qualify as we explain below.
Beware—Two Hurdles to the 1040 Deduction
To claim the self-employed health insurance deduction on line 17 of your Form 1040, Schedule 1, you need to meet the following two rules:
- You and your spouse must not have access to employer-subsidized health insurance. You cannot take the self-employed 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.
- You must have an adequate salary. Your deduction for the insurance premiums cannot exceed the amount of your salary from the S-Corporation. (Good news: You cannot have this problem if the S-Corporation puts the health insurance on your W-2 as it is supposed to do.)
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.
Because the S-Corporation did not establish a medical care plan for you, 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.
Here the S-Corporation established the medical plan, and you qualify (providing no other employer health insurance is available to you or your spouse) to deduct the insurance premiums included on your W-2 as self-employed health insurance on Schedule 1 of your Form 1040.
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 either the qualiﬁed small employer health reimbursement arrangement (QSEHRA) or the individual coverage HRA (ICHRA).
- For details on the QSEHRA, see Announcing NEW Tax-Deductible Penalty-Free Health Plans for Small Businesses.
- For details on the ICHRA, see New Individual Coverage HRA Turns the Clock Back to Pre-ACA Health Care Options
The S-Corporation can reimburse the more-than-2-percent owners for individually purchased insurance and face no penalties.
But should the S-Corporation reimburse rank-and-ﬁle employees for individually purchased insurance without use of the QSEHRA or ICHRA, it faces 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.
Group Insurance and You
Suppose your S-Corporation provides group health insurance to all employees, including you, a more-than-2-percent shareholder-employee. The S-Corporation must treat you differently from the way it treats non-owner employees. Here is 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.
More-than-2-percent 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 on your personal tax return using the self-employed health insurance deduction (step 3).
Currently, the IRS does not enforce any non-discrimination provisions of the Affordable Care Act.11 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 governmentʼs 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 donʼt 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.
The good news is that your 2023 S-Corporation health insurance treatments continue as before. Your S-Corporationʼs health insurance plan can cover you and your spouse, dependents, and children under age 27.
But remember that you can qualify for the self-employed health insurance deduction only if ﬁrst you go through all the IRS-required steps. This is easy. You simply:
- Make the S-Corporation pay for your insurance premiums, either directly or through reimbursement to you;
- Have the S-Corporation include the health insurance as wages on your W-2; and
- Deduct the cost of the premiums using the self-employed health insurance deduction on Schedule 1 of Form 1040.
And then, to qualify for the above deduction, neither you nor your spouse may be eligible for health insurance provided by another employer.
As for the rank-and-ﬁle employees, donʼt reimburse any individually purchased health insurance. You can use the QSEHRA or ICHRA, which can enable a limited amount of reimbursement for individually purchased insurance and other medical costs. Alternatively, you can use group insurance as a beneﬁt for non-owner employees.
So there you have it; some good news about your health insurance on the latest developments in 2023 health insurance for S-Corporation owners.
To ensure that your health insurance deductions are in order and to avoid the $100-a-day penalties for violating the Affordable Care Act (ACA) rules, please review the 3 steps above in the Takeaways.
If you are looking to provide health benefits to employees through the S-Corporation, there are many tax-advantaged options available. If the S-Corporation provides group health insurance to all employees, including the shareholder-employee, the same rules apply. If you have any questions, need clarity, or need help understanding how to provide health insurance benefits for your employees, please contact us at Morris + D’Angelo. This is our Expertise!
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Parts of this article are published with permission from Bradford Tax Institute, © 2021 Daniel Morris, Morris + D’Angelo
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