Compensation for Plan Purposes

[Dougsbpc]

An S-corporation sponsors a 401(k) plan. The plan covers 2 employees including the 100% shareholder.

The corporation pays medical insurance premiums for the shareholder. These premiums do show up as income in box 1 of the shareholders W-2 but not in box 5 (medicare wages).

The plan defines wages as W-2 salary subject to code section 3401(a).

We believe plan salary (less than $100k in this case) should only be wages subject to withholding at the source (i.e. box 5)

Does anyone disagree and believe the taxable premiums need to be part of plan salary?

Thanks.

[ETA Consulting LLC]

I don't think it would. There's W-2, 415 Safe Harbor, and Withholding. The withholding wages would generally be the wages reflected on the last paystub during the year. These will be amounts for which taxes were withheld before paying the employee. The premiums, on the other hand, would be additional amounts reported as W-2 that wouldn't have been reflected on the last paystub of the year (as it would've been taxable income that is reported at year end).

I could be wrong, but based on your fact pattern this would be my approach.

Good Luck!

[PensionPro]

The health insurance premiums are includible as plan compensation. These amounts are W-2 compensation. Heath and accident insurance premiums paid on behalf of the greater than two percent S corporation shareholder-employee are wages for income tax withholding purposes on the shareholder-employee’s Form W-2. These benefits are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes.