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Health Insurance deduction for Single employee S-Corp

Very very helpful tax advice - Thank you so much -
I want to see how I can deduct my personal health insurance premium before tax ? I own 100% of my an s-corp with just myself as employee. I pay 820$ for my family HI premium that is in my name . I get a W-2 from my S-corp. Can I re-imburse my HI premium by voucher ( and this willnot appear in my W-2 and will be calculated under my business expense ) - I can write a hiring offer saying that in addition to my salary I can RE-IMBURSE upto 900$ for HI premium for family. Show this amt as a business expense and it will not come in my W-2 . Is this allowed by IRS ?
NOTE: I live in VA which I think allows one person group ins policy and hence know that I cannot deduct the HI premium in my personal name on a pre-tax basis for S-Corp. This is a major expense that is going to decide if I am going to make any money in S-Corp or not

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I'm glad to see that I am

I'm glad to see that I am not the only one confused by this subject. Here is my thinking on the net tax effects. S corp pays the premiums and they are added to sh wages. The S corp gets the deduction either way its recorded whether in wages or insurance. The sh technically is getting the deduction because it is a flow thru entity and his K1 is reduced by the premium amount. Then from the sh point of view his wages are increased which gets reported on 1040 line 7 and also as a reduction on 1040 line 31. The net effect is it's not taxable to the sh. I don't understand why we need to take this added step. Why can't the S corp just take the deduction and be done with it. I think the IRS likes to make things more difficult than they need to be. Respectfully, Harold Patton from Ohio insurance

S-Corp medical insurance tax insanity

Harold55, you are so correct! I followed the irrational logic of the IRS requirement to include health insurance (HI) preimums on greater than 2% owners paycheck as well. You pay federal tax on the value of the HI, and then at year end get to deduct it right off your AGI! Therefore it's insanity to do all this paperwork for NOTHING! Wake up IRS and our elected officials. Everyone keeps asking how can we streamline paperwork...well this one is for the records!

HI premium by voucher ( and

HI premium by voucher ( and this willnot appear in my W-2 and will be calculated under my business expense ) - I can write a hiring offer saying that in addition to my salary I can RE-IMBURSE upto 900$ for HI premium for family. Show this amt as a business expense and it will not come in my W-2 . Is this allowed by IRS ?peninggi badan

Cobra Premiums

Linda,

I am employee of my S-corp with 80% ownership and wife is 20%. She was also working for a company and health insurance was provided by them. Now she resigned from her post and company is offering her cobra which is about 1200 a month(not subsidized). My question to you is can I deduct cobra premiums on 1040 line 29?.If not what is the best option for me, should I establish a HRA policy?

Thanks in advance for your help.

Sam

tax advice - important for

tax advice - important for me, big thanks.

Hi

It is very difficult for almost every one to deduct the premium before tax. because health insurance is not a easy task to do. Thanks for discussing a nice topic

Self-employed individuals

Self-employed individuals typically struggle to afford health insurance, and the tax code provides a nice tax break for corporations that provide health insurance benefits for their employees. Health insurance premiums are exempt from FICA payroll taxes. For employees, health insurance can be paid for with pre-tax dollars, making the insurance a tad more affordable for everyone. Employees who own 2% or more of an S-Corporation, however, have to follow different rules for figuring income and tax deductions. The IRS holds that shareholder-employees will be allowed the deduction for health insurance premiums only if the S-Corporation establishes the health insurance plan and purchases the coverage. Shareholder-employees who purchase coverage under their own name cannot use the above-the-line deduction, but can still include the premiums as an itemized deduction, subject to the limitations on medical expenses.

Actually, that was true

Actually, that was true prior to IRS Notice 2008-01 which was released in January 2008.

Currently, if they include the value of the premiums in W-2 wages, > 2% S shareholders can take the above the line deduction.

L:)

I always had a lot of

I always had a lot of problems with health insurance. And I haven't managed to deduct my premium before tax. Thanks for the information, you helped me a lot.

Employer provided healthcare

Employer provided healthcare coverage uses private insurance companies. The economic effect is basically the same as if the insurance was purchased by the individuals - the various companies offer competitive plans and compete. It is this private sector that is endangered by a "public option" which is government supported.

Employer-sponsored plans do not masquerade as private plans, they are private plans! Whatever tax incentives are provided to companies is beside the point, it supports a private Health Insurance industry. (By the way, the idea of taxing employer provided healthcare benefits keeps coming up as a way to help pay for the disasterous "public option").

Isn't supporting healthcare coverage in this way, the employer provided way, more preferable anyway?

What is not being said is that the Life Insurance reform is really about lowering costs across the board - it is being sold as a plan to make insurance available to more people - but it is really about reducing overall expenditures as the government can expect a larger and larger part of the budget going for medical benefits in the current form, Medicare and Medicaid.

Which way to go

Hi Linda,
I am pretty new to the "on your own" world. I have an offer for say $60/=per hour. And the company is willing do this on a W2 or corp-to-corp as long as there is insurance but Not a 1099.
Also while its not really been specified - if there is travel or other expenses involved it looks like I will need to pay for it out of the hourly rate. So the questions I have are

a) Do I need to set up a S-corp or will an assumed names do (I am located in Indiana)?
b) What type of insurance are they talking about? What type of liability coverage is expected especially if you need to work both from home as well as client site.
c) What's the best way for me to off-set any of the additional expenses
d) How long does it take for me do set up a business (assumed names or S-corp)
e) Which is better for me in this situation (I am not currently worried out health care coverage - though saving money for retirement on a pre-tax basis will really help)

Thanks
IS

Getting Started

Hi IS,

a) You need to setup an corporation or LLC and make the election to be treated as a S corporation. Otherwise, you will be taxed as a sole-proprietor & there your client will be required to report payments to you on a 1099-MISC.

b) I'm assuming professional liability, but I would ask them exactly what they want.

c) The travel expenses should be deductible, although meals will only be 50% deductible.

d) You can create a corporation in about 10 minutes, see the link under "Services". (Full Disclosure: I get a referral fee if you set up your corporation through that link to MyCorporation.com). There are plenty of others. but actually getting everything setup will take about 2-4 weeks. Including payroll accounts, e-filing passwords, EFT setup for payroll taxes. etc. Most of that time is spent waiting for letters or acknowledgments from the IRS or state payroll departments.

e) If you are an employee, what would be the rate & who pays for travel? Would you able to participate in a 401(k) plan, even without company matching? I think you just need to run the numbers to see which is better for you.

-- also, you say you're not concerned about health insurance, but if you had coverage from a previous employer, you might look into the 65% COBRA subsidy that's available to qualifying individuals.

Good Luck!
L:)

>2% s-corp shareholder/employee can not participate in HRA

Hi Linda,

I have read through this thread and all of your advise regarding >2% s corp shareholders/employees. Contrary to clear IRS tax guidlines your advise suggest that a >2% s corp shareholder/employee CAN PARTICIPATE in a HRA. IRS guidelines dictate that a >2% s corp shareholder, for purposes of this section, is NOT treated as an employee AND can not participate. I still do not see your reasoning how you suggest a >2% s corp shareholder can participate in a HRA. (yes I understand your concept of adding the med expense reimbursements under a HRA plan to wages and then deducted on line 29... but if the preface is that a >2% shareholder CAN NOT PARTICPATE IN AN HRA..then how can this be ignored??)
Thanks in advance for your reply. (p.s. I would love to be able to use your service and an HRA plan...but I have only seen IRS guidlines and private letter rullings that disallow the way you suggest a >2% shareholder participates in an HRA).

S Shareholder HRA Participation

When an employee participates in an HRA, the value of the benefit is not subject to any payroll taxes or reporting. In that sense, the > 2% shareholder cannot participate in an HRA.

However, as long as the value of the benefit is included in Box 1 of the W-2, then you are reporting and possibly paying income tax on the value of the benefit. This would not be the case for an unrelated employee.

L:)

Quote got cut off...

... the part that got wiped said:

Individuals that can not personally participate in an HRA include...individuals owning more than 2% of an S corporation.

2% S-corp owner can't participate in HRA?

Hi, Linda:

First, thanks for the excellent, clear discussion on this issue. Following the link to "What is an HRA", the bottom of the first page says:

<<>

Would I be correct that, if one is simply an owner with a more than 2% stake, they can't participate, but if that same owner is also an employee, they can? I'm the 100% shareholder of my new S-corp as well as its only employee, and I'm looking for the best way to pay HI premiums and deductibles for myself, my wife and 2 little kids...

HRA and headliner 163

I have a C Corp that provides medical coverage for my wife, who is 80% owner of S Corp (our two sons each have 10% ownership). Now I want to retire and look into setting up an HRA for her. As I understand (feebly) the HRA rules, there's some question of a one-person health plan and what state you live in (Idaho). Can she have an HRA, does it need to be in corp. name and where do you find list of state rules for this thing? Thanks so much for your insightful efforts to make sense of these regs

Health Benefits for C-Corp.

If the C Corp is providing the health benefits directly to your wife either as an employee or your dependent, there's no IRS reporting required (that would not be the case if your corp was an S corp).

Or is this going to be a new HRA that is part of the S-Corp? If so, then the health insurance can be either in your wive's name or her S-Corp's name. Headliner 163 was superseded by Rev. Proc 2008-01 so the name on the insurance plan can either be the shareholder or the S Corp.

Hope that helps.
L:)

Premiums Yes, but Expenses??

Yes, thank you, I understand the part about premiums (enter on wages, offset on Line 29 thanks to new ruling). I'm wondering how she can deduct medical EXPENSES on Line 29 through the S Corp. Does that reuire an S Corp. HRA and can it be a one-person plan? You mentioned it briefly in one of your posts I think but I wasn't clear on it. Thanks for help, we'll gladly pay FA and the referral fee if that's what is called for.

HRA deductible

This is a fantastic site with a wealth of knowledge. I'm a healthy, young individual forming an S Corp where I am the only employee and would like to combine an HRA with an HSA to cover myself and my spouse who is also healthy. My question revolves around the possibility of selecting a lower deductible for my HRA than for my HDHP in an effort to maximize my HSA-account contributions and decrease my premium. (I got this idea from reading: http://www.irs.gov/pub/irs-drop/rr-04-45.pdf)

Would doing this invalidate my ability to use the HRA for non-HDHP covered expenses such as dental, vision, and my HDHP premiums? It's complicated, so maybe an example would help.

Using 2008 numbers, say that I did the following:

1. Establish a post-deductible HRA account that has a deductible of $2850.
2. Enroll in an HDHP with a deductible of $10000.
3. Fully contribute to my HSA account in the amount of $5700.

With this scenario, I would have to satisfy the HRA deductible of $2850 before then tapping into the HRA to pay for the rest of the deductible of the HDHP which I think is valid. But would this prevent me from using HRA funds to pay for the premiums of the HDHP and the dental / vision benefits until I reached the HRA premium? Hope this question makes sense.

HRA Deductible

Hi,

In example you laid out, you cannot use the HRA to pay for any expenses, including premiums until the HRA deductible has been met.

Did you look at the Limited-Purpose HRA? You could use that to pay for dental & vision premiums + preventative care.

Or you could just have a regular HRA with the HDHP. The HRA could pay the premiums and all out-of-pocket expenses. The disadvantage is you don't get the growth in an account like an HSA provides.

Hope this helps.
L:)

Thanks

Thanks for your reply Linda. Is it possible to have a Limited-Purpose HRA to pay for dental & vision expenses, preventative care, and premiums on the health plan AND also have a post-deductible HRA whose deductible is set lower than that of the HDHP so that it kicks in early thus preserving the ability to combine with an HSA? I hope that makes sense. Not sure if this is too "creative" or too much of a hassle or maybe just flat our unallowed.

I did consider the possibility of only using the HRA with a HDHP to pay for all expenses (premiums and deductible) with the HRA but as you mentioned then you don't get the tax-free growth of the HSA. So I was wondering if there is a way to keep that as a possibility as outlined above. If not, I think that this is the best option even with forgoing the HSA.

HRA Clarification

Linda,

I found this thread really helpful and sheds a lot of light on the HRA path. I have few questions.
1.I guess LLC owners can also follow the same path.
2. I couldn't find any place to open a HRA account. Do I really need to open one or it is just an arrangement to have a document like that.
3. Coredocuments links is not working.
4. Can I reimburse the amount at the end of year instead of every month?

Please clarify.

Thanks
VIJAI

HRA for SMLLCs

Hi Vijai,

1. HRAs are not available for sole proprietors so if your single member LLC is taxed via Schedule C, then this is not an options for you. The only way around it is if your married & you can hire your spouse as an employee. However, the IRS is carefully watching these type of arrangements so you have to be a bit more careful about jumping through the administrative hoops.
2. The "A" in HRA is for Arrangement, not account. You need a written document that sets up the arrangement. The document must have some pretty specific language in it so it's worth the $99 to get one prepared by folks that know the ins & outs.
3. http://coredocuments.com is their web site. The link under "HRAs for S Corps" works for other entity types & I get a referral fee. :)
4. Yes.

Hope this helps.
L:)

Linda, HRA is not available

Linda,

HRA is not available for sole partnership but I have 2 member LLC and I am one of the employee. Then its not considered sole partnership right? So in that case I can take advantage of HRA.

I guess I asked this question in different forum. You did mention to make my spouse as an employee and pay according to the norms. Does it better than taking the cash out from the company as a profit?

Vijai

HRA & LLCs

Hi Vijai,

Same comment applies. If you're taxed as an S-Corp then you could get an HRA.

L:)

Why an HRA & FSA?

Linda,

Yes I am a >2% shareholder/employee of my S Corp and the only employee. Since I am a consultant presently working though my Corp the HRA could definitely pay for the medical expenses. I am looking down the road and possibly could have to take a position with a 'job shop' doing contract work for them and they offer no health insurance. First off, the corporation would have no income since paychecks would made out to me with all taxes deducted. Second, would the 'job shop' acknowledge my FSA allowing me to fund it with pre-tax deductable dollars?

Thanks again,

Ron

HRA w/no Corp Income

By keeping profits in the company you could use them to pay the HRA benefits in years when you have no income in the corp. You could have the corp just pay the HRA payments which are exempt from FICA & FUTA taxes. This will have limited benefits if either you or your spouse are covered by an employer subsidized health plan.

No, the job-shop cannot contribute to another employers FSA through withholdings.

L:)

'Special Ordering Rules' HRA vs FSA

Assuming that the S Corp has an HRA established and now wants to allow pre-tax deductible employee contributions to fund an FSA, flexible spending account. What 'special ordering rules' would be placed on HRA reimbursements vs. FSA funds paying for qualified medical expenses? Some detail would help in understanding this.

Thanks again for your help!

Ron

FSA = no way!

If there's anyway you can get rid of the FSA and instead contribute to an HSA - Health Savings Account - do it!

An FSA expires at the end of each year and you lose what's in it. An HSA is 100% yours and is effectively a 401k for health care. It follows you around from job to job... oh, and it's 100% yours. ;)

I've had one for about 2.5 years now and it's amazing how quickly it can build up with something as little as a $100/month. :)

HRA & HRA would be better

I agree. You can use an HSA in combination with an HRA but special ordering rules apply.

The HRA must be a limited purpose HRA, meaning it can be used to reimburse premiums, dental, vision and preventive care expenses. After the deductible has been reached, the HRA can be used to reimburse all expenses.

L:)

Why an HRA & FSA?

Hi Ron,

Why would you want to do this? Do you have other employees? If you're the only employee why not just let the company pay for the health expenses through the HRA?

L:)

Linda, Thanks again for

Linda,

Thanks again for distilling down to the bottom line.

Have yourself a very Merry Christmas and a Happy New Year.

Ron

Are HRA's Available to TEXAS Corporations?

Linda,
I have recently been told by an insurance agent that a Texas corporation is not allowed to establish an HRA. I also read an article that basically stated the same thing and this article was posted on Core Documents site. Is this true?

Thanks again for your help!

Ron

HRA's in Texas

Hi Ron,

There's nothing that says you can't have an HRA in Texas. In fact this snippet is from the Texas Department of Insurance website:

Texas law does not prohibit an employer from funding employees’ health benefit plan coverage premiums through an HRA.... When a health benefit plan issuer offers an individual health benefit plan in conjunction with such an arrangement, however,... such arrangements are employer health benefit plans subject to all group health provisions, including guaranteed issuance of coverage for small employers and prohibitions against discrimination based on health status related factors for all employers.

The point here is if you offer an HRA, you must offer it to all your employees. And you have to offer them similar benefits under COBRA. Well, if you are the only employee of your corporation, that's no problem. But you have to be aware that in case you plan on hiring them in the future.

L:)

Back to Your 'HSA vs HRA' Statements

Linda,

Your last statement now makes more sense to me!
"I think the HRA provides a better benefit than the HSA. Remember if you already have a high-deductible plan, you can still use HRA to pay the deductible and other expenses."

Assume that an S-Corp 2% shareholder/employee has purchased an individual high deductible medical insurance policy which is HSA compatible. If the employee does not set up an HSA but instead the S-Corp sets up an HRA, the HRA can reimburse 100% of the expenses incurred by the employee before the deductible is met, such as prescription drugs, insurance premiums and the cost of office visits. If an HSA had been set up then all of the above expenses incurred must be applied to the deductible before the HRA would be able to reimburse the expenses. By not creating an HSA this would avoid the problem of the 'special ordering rules', HSA first, HRA second.

Is this a correct statement?

Thanks again,

Ron

HSA & HRA

That sounds right to me.

L:)

Linda, Thanks again for

Linda,

Thanks again for further explanation.

Can you lead me to a list of 'other expenses' that the HRA would be able to reimburse a 2% shareholder/employee?

Thanks again,

Ron

Eligible HRA Expenses

Honestly the list is too long to post here. :) Core Documents has an PDF Brochure What is an HRA? That lists what is & is not allowed under the HRA plan.

L:)

Linda, Thanks soooo much

Linda,

Thanks soooo much for the explaination on contributions to a 401K.

Do you have any advice on the S-Corp contributing to a >2% sharehold/employee's HSA.

Thanks

Ron

HSA vs HRA

Hi Ron,

The HSA contribution made on behalf of a 2% shareholder/employee by the S Corporation is also included in your W-2 wages, not subject to FICA or FUTA taxes and can be used to reduce your Gross Income, just like the HRA reimbursements.

However, the HSA has a lower maximum contribution and must be tied with a high-deductible plan. The eligible HSA expenses are considerably more restrictive than eligible HRA expenses. Any unused portion of the HRA reimbursement can be rolled over to future years.

I think the HRA provides a better benefit than the HSA. Remember if you already have a high-deductible plan, you can still use HRA to pay the deductible and other expenses. The one thing you don't get with the HRA is the tax-free growth of your contributions. HRA must be used for health related expenditures actually incurred. Whereas the HSA contribution is money set aside for future expenses.

L:)

More info needed on S-Corp funding a HSA

Linda,

I read your comments concerning a S-Corp reimbursing a >2% shareholder/employee for insurance premiums via a HRA. All of that makes sense except the statement about it being an advantage of having a 401K and "the HRA payments are also used in calculating the maximum contribution". Can you explain this comment. Does this mean that the maximum contributions made by the shareholder/employee to the 401K will be reduced by the amount of the S-Corp's contributions?

I am a >2% shareholder/employee of a S-Corp and will be applying for a HRA shortly to pay for my individual health insurance premiums written in the shareholder/employee's name.

What I need is a clarification and if possible IRS rulings that allow me to define how much and to what extent are the tax ramifications effecting both the S-Corp and the >2% shareholder/employee in contributing/funding a HSA.

Thanks sooooooo much!

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How HRA Payments interact with 401(k) Contributions

Hi Ron,

The maximum contribution you can make to a 401(k) retirement plan is a total $45,000 for 2007, but that is composed of two parts. The first is salary reduction. The maximum you can have deducted from your salary to fund your 401(k) if $15,500 for 2007. The second part is the company's contribution to your 401(k). This is limited to 25% of your salary.

So since your HRA reimbursement accounts are counted in your salary your company can contribute more (assuming you haven't hit the $45,000 maximum).

For example if your regular salary is $50K, the most your company can contribute is $12,500. But if you also have another $10K of HRA reimbursements your W-2 Wages are $60K so your corporation can contribute $15,000 to your 401(k) plan, or $2500 more.

Note, I'm talking about an HRA, not an HSA. That is a completely different beast. :)

L:)

HRAs for S-Corps

Well, the IRS would say no when it issued Headliner 163, Health Insurance Covering S Corporation Shareholders back in May 2006. This says that in order to deduct the insurance premium there must be a plan in the company's name. Altering the your offer letter to cover the premium really doesn't help.

However, there is something called a Health Reimbursement Arrangement (HRA) or Section 105 Plan that allows the company to reimburse you for your health insurance premiums and other out of pocket medical expenses.

In order for this to work you need to have a written plan. It has to have some very specific language so you just can't add a motion in your corporate minutes & think you have it covered. There are several companies that provide the written plans and administration including Core Documents".

The way these work is you pay the premium & other expenses out of personal funds. Then you submit a reimbursement request with supporting documentation to the company. The company cuts you a check for the reimbursement and includes that in your W-2 wages. But these wages are not subject to FUTA, FICA or Medicare taxes (or state unemployment).

OK. So far this doesn't sound like a win, but bear with me. :)

At the end of the year your W-2 wages include the health reimbursements and are reported on Line 7 of your 1040. Now when you get to line 29, Self-employed health insurance deduction, you get to deduct the health reimbursements from your total income to calculate your AGI. The net result is you don't pay any income or employment taxes on the reimbursements and the company deducts the reimbursements as salary expense.

This is a great way to get money out of your S-Corp without paying taxes on it. The other advantage is the HRA payments count as wages when the IRS is looking at reasonable income. And if you have a 401(k) or SEP-IRA plan, the HRA payments are also used in calculating the maximum contribution.

And, the HRA payments can include other out of pocket expense besides just the premiums. So if you have co-pays, deductibles, over-the-counter meds, dental expenses, contact lens solutions, etc. these all can be reimbursed in the HRA plan. And you can also be reimbursed for mileage to & from your medical appointments at 17cents /mile (19cents for 2008).

I believe you can set a retroactive start date so you could be still reimbursed for expenses from earlier in the year.

The plans are really affordable. You should definitely look into them. I think this is one the best ways S-Corp owners to save on their taxes but aren't taking advantage of it.

Hope this helps!
L:)

scorp rules

I'm a little concerned about your comment that the HRA included in the W2 could be deducted on the personal tax return. Didn't the IRS also say that the only way for scorp owners to take the personal deduction was also related to who owned the policy? i.e. that if there were not a company related policy, then the deduction cannot occur. If so, the savings via the HRA is reduced - you get the premiums covered, but need to pay tax on the value of the benefit.

S Corp Health Insurance

IRS Notice 2008-01 changes the rules. See my article This Just In...New Rules for S-Corps....

Also, the HRA IS an insurance policy in the company's name. That's why it's eligible for the self-employed health insurance deduction.

Without an HRA you can deduct the premium cost. With and HRA you can deduct both the premium and out of pocket health care costs.

L:)

Lind Thank you soooo much -

Lind Thank you soooo much - You charge me a fee for the reply and I will pay double the amount - Yor reply was very very clear and helpful because you have even included a link to one of the companies that sells the documents - Thanks a bunch.

She is awesome!

Folks, isn't Linda amazing? I am awed by how incredibly knowledgeable and helpful she is. I truly wouldn't have survived without her!!

THANKS LINDA.

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