This Just In... New Rules for S-Corps Shareholders Deducting Health Premiums
By now most S-Corps shareholders have heard about IRS Headliner 163. This said S-Corp shareholders with >2% ownership in the corporation could not take the same deduction to gross income for self-employed health insurance premiums as sole-proprietors or partners unless there was a policy written in the company's name.
This created a proverbial Catch-22 if you and/or your spouse are the only employees of the corporation. Insurance regulations in many states specifically prevented insurers from writing business policies with just one member. Instead these people were required to get individual health insurance plans.
The IRS has finally cleared this inconsistency with the recent publishing of Notice 2008-01. Catchy title, almost as good as Headliner 163. :)
For those of you how don't want to try to read "taxlish", here's the upshot: Effective 2008, if you are a >2% shareholder of an S-Corporation whether your health insurance policy is in your personal name or the company's you can deduct the value of the premiums as an adjustment to gross income as long as the value is included in your W-2 wages. Either the corporation can pay the premiums directly or you can have them reimbursed. If you don't include the premiums in your wages you can't take the deduction.
While it's nice that the IRS has evened the playing field for the sole-proprietors, partners & S-Corp shareholders in this regard, I still think the HRA has more advantages than simply deducting your health care premiums. I don't know about you're plan, by mine still leaves doctor co-pays, deductibles, labs and other costs I have to pay out of pocket. These kind of expenses don't apply to the deduction to gross income. Unless they are part of a reimbursement plan, like an HRA.
The one good thing Headliner 163 did was bring HRAs and the under utilized tax section 106 out of the medicine closet.