S Corp Wages used for 401(k) Plan

[Guest jusducki]

Owners of Subchapter S Corp have the following info on their W-2:

Box 1 Wages $111,204.33

Box 5 Medicare Wages $120,000

Box 12a Deferral $18,000 (catch-up included)

Box 14 Other: $ 9,204.33 SCor Med

So - what compensation would you as a TPA use for 401(k)? If you're a CPA, what compensation would you tell TPA to use?

Thanks....

[Guest mjb]

I think the math is wrong. Under IRC 1372 the wages of a 2% or more S corp owner must include the amount of health ins provided by the employer (similar to a partner). The employee deducts the amount of the health ins from his taxable income on line 32 of the 1040 which reduces his adjusted gross income. The w-2 should show $120,000 as wages and $9,204 as health ins contribution. This isnt rocket science. It is explained in the IRS instructions for completing the 1040. The $18,000 contribution is included as medicare wages because it is FICA wages. Of course you need to check the plan doc to see what is the definition of comp. Its not up to the CPA to determine.

[GBurns]

Aside from the inclusion issue that mjb points out, the arithmetic still does not seem right.

[Guest jusducki]

Aside from the inclusion issue that mjb points out, the arithmetic still does not seem right.

[E as in ERISA]

I think this is what they did

120,000.00 Total wages for medicare (includes 401(k) deferrals but not medical)

< 18,000.00> 401(k) deferrals

+ 9,204.33 Medical

__________

111,204.33 Wages for income taxation (includes medical but not 401(k) deferrals)

Don't know treatment of medical for S-Corp anymore. Is that right?

[Guest jusducki]

I think this is what they did

120,000.00 Total wages for medicare (includes 401(k) deferrals but not medical)

< 18,000.00> 401(k) deferrals

+ 9,204.33 Medical

__________

111,204.33 Wages for income taxation (includes medical but not 401(k) deferrals)

Don't know treatment of medical for S-Corp anymore. Is that right?

[Guest jusducki]

We used the $120,000 but CPA said that was wrong - he still hasn't provided us the comp he believes should be used but did say that many accountants are making this mistake with S Corp compensation and causing problems with the IRS - we'll use whatever comp he tells us but will advise the broker on the case we believe CPA is calculating this all wrong (our case will be more solid with continued feedback from posts here)...thanks thusfar for the responses..

I think this is what they did

120,000.00 Total wages for medicare (includes 401(k) deferrals but not medical)

< 18,000.00> 401(k) deferrals

+ 9,204.33 Medical

__________

111,204.33 Wages for income taxation (includes medical but not 401(k) deferrals)

Don't know treatment of medical for S-Corp anymore. Is that right?

[E as in ERISA]

Now for what purpose are you using compensation? 415? ADP? And, if so, how does plan define compensation?

[Guest jusducki]

Compensation is defined as W-2 wages - section 6041(a). This is a Safe Harbor (3%) 401(k) plan with a New Comp Profit Sharing contribution too.

[Lori Friedman]

The Form W-2, Box 1 computation is correct (based on all the information that we have available to us), because the health benefits are subject to income taxation but not to Medicare taxation.

[Santo Gold]

For plans that use W-2 compensation, aren't elective deferrals required to be used for compensation? In this case, that would mean using the $120,000. Then, since it is an S-Corp, you would add to that the health premiums for S-corp owners. So, wouldn't that mean for this owner, compensation is $129,204.33?

[Guest mjb]

JD: What 401k compensation are you referring to? I dont understand why you are asking the cpa for the definition of 401k comp instead of using the plan definition for determining contributions for the owners? Or is this for 414s purposes which allows exclusion of 401k deferrals but not health ins for S corp owners? the plan will have the defintion of comp.

[Guest SWH]

I think (as a TPA and CPA) that Santo is right. The comp would be $129,204.33.

I've had to fight the battle with CPAs on including 2%SH medical on W-2s b/c they no longer want to include b/c 100% deductible. They are putting on K-1s instead of W-2s. I've tried to explain that this has implications on the retirement side when we receive compensation from clients, alas....you know how the story goes.

[Guest mjb]

I dont know how the CPA thinks the health ins premium is deductible by the employer when IRC 1372 provides that it is includible in owner's comp. and deducted on the employee's 1040. The deduction is never claimed by the corp. (unlike the contribution to the 401k plan is which a deduction of the s corp.)