Partnerships, S-Corporations and self-employed health insurance plans have different best practices for medical fringe benefits.

12.22.12

“Medical Fringe Benefits” by Debbie Petrone, CPA, MTax, CGMA | Senior Manager – Tax

PARTNERSHIPS:

  • Partnership payments made for health insurance premiums and or qualified long-term care insurance payments for the partner, spouse and dependents must be treated as guaranteed payments to be deductible.
  • The partners must render services in their capacity of partners and payments must be made without regard to partnership income. This creates a deduction for the partnership, but taxable income to the partners.
  • Reported on line 10 of the Form1065 and line 4 of the K-1. The partners can then deduct the premiums in arriving at AGI on the Form 1040. The amount reported as a guaranteed payment is subject to self-employment tax.
  • The amount of the partnership paid health premiums should be separately stated to each recipient partner by reporting the amount on line 13M of the K-1 (Other deductions) as health insurance so that the partners can deduct them appropriately on their 1040s.
  • The partner’s self-employed insurance premiums are deductible if 1) the partnership has a net profit 2) to meet the net profit test, more than one source of self-employment income may not be combined and 3) the deduction is limited to the lesser of premiums paid or net profit from the business after deducting ½ of the SE tax and any SIMPLE, SEP or qualified plan contribution from the business’ income.

Partnerships, S-Corporations and self-employed health insurance plans have different best practices for medical fringe benefits.

S CORPORATIONS:

  •  S corporation payments made for health insurance premiums and or qualified long-term care insurance payments for the 2% or over shareholder, spouse and dependents must be treated as gross wages to be deductible.
  • Applies to shareholders that own directly or non-directly (through attribution) 2% or more of the S corporation stock on any one day of the corporate tax year.
  • The fringe benefit S corporation rules follow the partnership rules in that partners are considered “self-employed” rather than considered “employees”.
  • The health insurance payments are reported in box 1 (federal wages), box 16 (Ohio wages), and box 14 of the W-2. The medical premiums reported as wages are not subject to employment taxes.
  • The self –employed health insurance deduction is subject to two limits: 1) not available if the 2% shareholder or spouse is eligible to participate in another employer-subsidized health insurance plan in any one month or part of the month and 2) the deduction cannot exceed the taxpayer’s earned income derived from the business that provides the health insurance plan. S corporation shareholders treat their social security wages from the S corporation as earned income for this limitation.
  • Therefore, if an S corporation 2% shareholder has a W-2 that reflects medical insurance paid on his behalf and his wife is covered under her employer’s plan for two months, the couple cannot take an above the line deduction for the self employed health insurance for the two months there were two plans in effect. If there was only the husband’s plan in effect for the remaining ten months of the year, then those premiums are considered self employed health. However, the couple still can deduct the medical insurance paid for the first two months of the year as an itemized deduction subject to the applicable 7.5% of AGI rules.
  • If the employer paid health insurance is not reported on the W-2 correctly, it is NOT deductible by the corporation, but still could be deducted as an itemized deduction similar to the above situation.

MEDICARE PREMIUMS QUALIFY FOR SELF-EMPLOYED HEALTH INSURANCE DEDUCTION:

  • The Internal Revenue Service has recently advised that self-employed individuals (partners and 2% S corporation shareholders) can be reimbursed for the Medicare health insurance premiums withheld from their social security checks. These reimbursements must be made by the end of the year and added to the employer paid health insurance gross up on the W-2.