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S-Corp Shareholder Compensation


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An S-Corporation pays medical insurance premiums for the 100% shareholder. These premiums are included in the amount reported on his W-2 box 1 income. The Shareholder then deducts these premiums on his 1040.

The plan document defines Plan Compensation as W-2 wages, including deferrals and does not exclude any type of compensation.

Should these premium amounts be included in Plan Compensation used to determine allocations, testing and 415 limits?

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S corp owners are treated the same as self employed persons for the deduction of Health ins. The premium is included as either W-2 income (Line 7) or self employment income on line 12. The health insurance expense is deducted on line 29 to determine AGI. Plan compensation as w-2 wages includes health insurance for the purpose of determining the maximum contribution.

The S corp claims the tax deduction for pension contributions but not for health insurance.

mjb

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If the plan document states the following, would health insurance reported on W-2 box 1 then be included in Plan Compensation? I'm unable to decipher the language.

"For a Participant who is not a Self-Employed Individual, Plan Compensation is W-2 Wages. For this purpose, W-2
Wages are wages within the meaning of Code §3401(a) and all other payments of compensation to an Employee
by the Employer (in the course of the Employer’s trade or business) for which the Employer is required to furnish
the Employee a written statement under Code §6041(d), 6051(a)(3), and 6052, determined without regard to any
rules under Code §3401(a) that limit the remuneration included in wages based on the nature or location of the
employment or the services performed.
For a Participant who is a Self-Employed Individual, Plan Compensation is Earned Income.
Each definition of Plan Compensation includes Elective Deferrals, elective contributions to a cafeteria plan under
Code §125 or to an eligible deferred compensation plan under Code §457, and elective contributions that are not
includible in the Employee’s gross income as a qualified transportation fringe under Code §132(f)(4)."

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  • 6 years later...

There is no question that it is eligible compensation.  I have  a ahrd time believing if the CPA reads hyour plans definition of compensation and its reference to w-2 wages could conclude otherwise.  ASSUMING your document does not exclude Taxable Fringe Benefits.

Austin Powers, CPA, QPA, ERPA

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On 1/25/2019 at 2:48 PM, JPIngold said:

I am having a CPA tell me that they don't feel it should be included in compensation for plan purposes even though my plan's definition of comp is "W-2 wages".

Has anyone ever had the Service question the inclusion?

I have had CPAs try that in the past, but it is plan comp.  I always give them the EOB explanation and they back off.  

EOB current online edition

CHAPTER 1A: IMPORTANT DEFINITIONS -PART I - Compensation  - Part A - Item 1.g.

Quote

IRC §1372 provides that, for purposes of the tax code provisions relating to fringe benefits (including health and welfare benefits), an S corporation is treated as a partnership and a 2% shareholder of the S corporation is treated as a partner in a partnership.

A 2% shareholder means a person who, after application of the attribution rules under IRC §318, owns more than 2% of the S corporation. The effect of this provision is to deny a 2% shareholder an exclusion from gross income with respect to fringe benefits that fall under the reach of IRC §1372.

Where this can affect compensation under the plan is with items such as employer-provided health insurance and employer contributions to a Health Savings Account(HSA) on behalf of the 2% shareholder. This is because IRC §106, which provides for an exclusion from gross income with respect to employer-provided coverage under an accident or health plan, applies only to employees, and not to partners (or 2% shareholders treated as partners for this purpose).

Some practitioners believe that, although these amounts are includible in gross income that, if the 2% shareholder is eligible to deduct the amount in full on his/her personal income tax return, that they should not be included in compensation for IRC §415 purposes. This is not true. What happens to the income on a personal tax return is not relevant to the plan’s treatment of the amounts.

Accordingly, our conclusion is that these amounts should be included in IRC §415 compensation for a 2% shareholder. Also note that, since the amounts attributable to fringe benefits included in a 2% shareholder’s compensation is subject to federal income tax withholding (see IRS Publication 15), and such amounts appear on Box 1 of the Form W-2 issued to the 2% shareholder, these amounts would still be included if the plan uses the W-2 definition described in 2. below or the wages for income tax withholding definition described in 3. below.

 

 

 

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Thanks to you both for the reply. I've never had any doubt, but she was saying that none of the other TPA's she works with in her area (Chicago) treat it as compensation. Of course, she also said that she doesn't consider it a fringe benefit. I'm just glad to hear others validate what I have always said. Thanks and good luck with the rest of the busy season. 

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  • 2 years later...

Additional Question..more years later...

It appears from the above conversation that a greater than 2% S corp owner's taxable insurance is considered by the industry as a Taxable Fringe Benefit and should be considered in plan compensation...Agreed..

I'm throwing another curve ball in ...what if the plan document's compensation definition EXCLUDES Taxable Fringe Benefits.  In this scenario would the taxable S Corp owner's health insurance be excluded for Plan Compensation purposes or because it must be taxable/earned income would it be an exception and stay in their compensation for plan contribution calculations?

Apologies if this was mentioned above already... 

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