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Taxation of Health Insurance for S-corporations

posted on:  5/30/2006    revised: 3/10/2010

 

IRS issued much-needed clarification on health insurance for S-corporation shareholders on May 15, 2006 at http://www.irs.gov/businesses/small/article/0,,id=157049,00.html .  It was not that the issues are complicated but rather that there are so many variables imposed by insurance laws and common health insurance practices.  Many taxpayers and advisers were confused.  Unfortunately, they will still be confused after reading this.

Part of the confusion is that the language used to phrase a question is so important in this topic.  This is one of those tax topics that simply changing or adding a single word will change the tax treatment and the advise given by a tax professional.  Consequently, taxpayers complain about conflicting advice when, most likely, the real problem issue was in the wording of the inquiry.  (Not that there hasn't been plenty of bad advice given by the professional community on this topic - including an errant publication that I wrote a few years ago).

The bottom line is that an s-corporation, just like any other business, can best provide health benefits through a tax-qualified plan like an HRA or MERP.  The rest is fairly straightforward - even if not the response a taxpayer wants to hear.

It is also important that the IRS guidance does not touch on a number of issues that are  important to many S-corporation owner/employees, including:

  • coverage provided through a spouse/employee/dependent

  • planning opportunities to provide health insurance as an "above the line" deduction

  • wage tax planning (IRS guidance apparently presumes this is not an issue)

  • health savings accounts

  • treatment of uninsured health expenses

  • LLCs that elect tax treatment as S-corporations

  • elections of s-corporations regarding tax treatment

In my opinion, there is not enough published information on these topics for the average business owner to make the best decisions and properly report taxes on these issues.  The high number of S-corporations that improperly report taxes on health insurance is evidence of this problem.

Certainly the IRS clarification is welcome.  (And I did not miss the fact that this official clarification is great for Freedom Benefits' business because it emphasizes the importance of using an HRA as an umbrella to provide health insurance when health insurance may not otherwise receive favorable tax treatment).  But there are more questions left unanswered than were answered in the latest IRS guidance.  Each of these issues will eventually be covered by myself and other tax commentators, but for now S-corps are still left to stab in the dark on the details of this topic.

 

 

keywords:   HRA, S-corporation, LLC, health insurance taxation

 

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Copyright 2010 by Tony Novak. Originally produced and published for the "AskTony" column syndication prior to 2007. Edited and independently republished by the author in March 2010. All rights reserved.