HSA Contributions paid by S corp deductible?

[SLuskin]

I have just read and been confused by IRS Notice 2005-8. It talks about when an hSA is or isn't deductible by an S corp and also if the shareholder can deduct that contribution on her income tax if it has also been imputed as income. Does anyone have a clear explanation?

Also, can you do the following?: An S corp has 5 shareholders, including family members attributed due to Section 318. They have a cafeteria plan for the employees, but of course, cannot participate themselves. They purchase an HSA compatible plan for everyone in the company. For the employees, they contribute $1000 per year into the FSA. For themselves, the owners, they contribute $1000 into the HSA. These contributions are outside the cafeteria plan, because the owners cannot participate. Are these contributions subject to the 35% excise tax because the employees did not receive an HSA contribution? Assuming this is ok, can the S corp consider the $1000 per owner a business expense and then attribute the income to the shareholder, who then deducts it on the income tax return?

Thank you so much for your help and comments.

[GBurns]

Since an S Corp is a pass through entity for tax purposes, wouldn't this be a double deduction of an expense and as such not allowed? It also seems to be a wash transaction that come back to the same net effect anyhow.

[SLuskin]

George, I thought I understood it until I read the notice. Please call or email so I can hear your thought process on this. I thought that it could be considered the same as a health insurance premium paid by the corp. Deductible to the corp as salary, added to the W2 of the shareholder, and deducted as the 100% health insurance expense deduction is deductible.

[mbozek]

I dont understand what is the "double deduction" for the s corp contribution to the HSA. Under IRC 1372 the the S corp deduction for health ins for a 2% shareholder is taxed as imputed income to the shareholder. The shareholder deducts the contribution as an adjustment to gross income on the 1040 if otherwise eligible to claim the deduction for self employed health ins. See Q-3 of the Notice. The deduction by the S corp results in imputed income to the S corp owner which is then deducted under IRC 223(a).

[GBurns]

To give a proper answer I should run the scenario through a client write up system and a tax return prep system, but, I am currently deep in a website set up project and will not get to do this for a few days.

I understand the salary analogy but do not agree with the health insurance analogy but should not comment without having run the scenario. Many things in accounting entries and tax prep are not straightforward but have limitations.

[mbozek]

GB: Under Notice 2005-8, Q-3 HSA contributions provided to a 2% S corp owner are imputed in the owners income from the S Corp and claimed as a deduction by the S corp. Under Q-3 the owner claims a deduction for the HSA contributions if eligible under IRC 223. The analogy for HI comes from IRC 1372 which deems an S corp owner to be a partner for fringe benefits purposes which permits a deduction for HI on the owner's 1040. 1040 instructions for line 31 allow a HI deduction for S corp owners.