S Corp Solo 401k - Can health premiums count as wages?

[Guest notmyhand]

So I am quite sure this probable isn't allowed but I'm not seeing it in the IRS individual 401k regulations themselves so I figured someone here would might know the answer. My plan documents (Vanguard) are also unclear on the issue.

As an s-corp owner, let's say I pay myself 50k in W2 wages. Out of that I am able to contribute $17.5k as an employee to my individual 401k and my company can also contribute 25% ($12.5k) as the employer portion. Now, I must have the company reimburse me for my health care premiums in order to be able to write them off so that also gets added to Box 1 (wages, tips, and other compensation) of my W2 on top of the 50k salary. It also gets added to line 7 (compensation of officers) of form 1120S. Therefore, as they are added as though they were wages, can I contribute 25% of that amount to my solo 401k as well? Let's say my health care premiums were $4000 for the year and therefore would increase my wages to $54,000. Can I then contribute $13,500 instead of $12,500 for the employer portion? Would the same also work for HSA contributions that were reimbursed in the same manner?

Thank you for your time!

[Jim Chad]

Any thoughts? Anyone?

[K2retire]

It is my understanding that the taxable health insurance premiums are included in income for plan purposes if the plan defines compensation as either W-2 wages or Section 3401 taxable wages. I've seen conflicting information about whether it is included in the Section 415 definition of comp.

[Guest notmyhand]

Here is the definition from the plan. It seems to reference W2, 3401, and 415 definitions. It says the employer elects so if I state I elect W2 wages I should be okay with using health care premiums to contribute?

General Definition The following definition of Compensation will apply.

As elected by the Adopting Employer in the Adoption Agreement (and if no election is made, W-2 wages will apply), Compensation will

mean one of the following:

1. W-2 wages Compensation is defined as information required to be reported under Code sections 6041, 6051, and 6052 (wages, tips, and

other compensation as reported on Form W-2). Compensation is further defined as wages within the meaning of Code section 3401(a) and

all other payments of compensation to an Employee by the Employer (in the course of the Employers trade or business) for which the

Employer is required to furnish the Employee a written statement under Code sections 6041(d), 6051(a)(3), and 6052. Compensation must

be determined without regard to any rules in Code section 3401(a) that limit the remuneration included in wages based on the nature or

location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2)).

2. 3401(a) wages Compensation is defined as wages within the meaning of Code section 3401(a), for the purposes of income tax

withholding at the source but determined without regard to any rules that limit the remuneration included in wages based on the nature or

location of the employment or the services performed (such as the exception for agricultural labor in Code section 3401(a)(2)).

3. 415 safe-harbor compensation.

a. The term Compensation includes:

i. Wages, salaries, fees for professional services, and other amounts received (without regard to whether or not an amount is

paid in cash) for personal services actually rendered in the course of employment with the Employer maintaining the Plan, to

the extent that the amounts are includible in gross income (or to the extent amounts would have been received and includible

in gross income but for an election under Code sections 125(a), 132(f)(4), 402(e)(3), 402(h)(1)(B), 402(k), or 457(b)). These

amounts include, but are not limited to, commissions paid to salespersons, compensation for services on the basis of a

percentage of profits, commissions on insurance premiums, tips, bonuses, fringe benefits, and reimbursements or other

expense allowances under a nonaccountable plan as described in Treasury Regulation section 1.62-2©.

ii. In the case of an Employee who is an Employee within the meaning of Code section 401©(1) and regulations promulgated

under Code section 401©(1), the Employees earned income (as described in Code section 401©(2) and regulations

promulgated under Code section 401©(2)), plus amounts deferred at the election of the Employee that would be includible

in gross income but for the rules of Code sections 402(e)(3), 402(h)(1)(B), 402(k), or 457(b).

iii. Amounts described in Code section 104(a)(3), 105(a), or 105(h), but only to the extent that these amounts are includible in

the gross income of the Employee.

iv. Amounts paid or reimbursed by the Employer for moving expenses incurred by an Employee, but only to the extent that at the

time of the payment it is reasonable to believe that these amounts are not deductible by the Employee under Code section 217.

v. The value of a nonstatutory option (that is an option other than a statutory option as defined in Treasury Regulation section

1.421-1(b)) granted to an Employee by the Employer, but only to the extent that the value of the option is includible in the

gross income of the Employee for the taxable year in which granted.

vi. The amount includible in the gross income of an Employee upon making the election described in Code section 83(b).

vii. Amounts that are includible in the gross income of an Employee under the rules of Code sections 409A or 457(f)(1)(A) or

because the amounts are constructively received by the Employee.

b. The term Compensation does not include:

i. Contributions (other than elective contributions described in Code sections 402(e)(3), 408(k)(6), 408(p)(2)(A)(i), or 457(b))

made by the Employer to a plan of deferred compensation (including a simplified employee pension described in Code section

408(k) or a simple retirement account described in Code section 408(p), and whether or not qualified) to the extent that the

contributions are not includible in the gross income of the Employee for the taxable year in which contributed. In addition, any

distributions from a plan of deferred compensation (whether or not qualified) are not considered as Compensation for Code

section 415 purposes, regardless of whether such amounts are includible in the gross income of the Employee when distributed.

ii. Amounts realized from the exercise of a nonstatutory option (that is an option other than a statutory option as defined in Treasury

Regulation section 1.421-1(b)), or when restricted stock or other property held by an Employee either becomes freely transferable

or is no longer subject to a substantial risk of forfeiture (see Code section 83 and regulations promulgated under Code section 83).

iii. Amounts realized from the sale, exchange, or other disposition of stock acquired under a statutory stock option (as defined in

Treasury Regulation section 1.421-1(b)).

iv. Other amounts that receive special tax benefits, such as premiums for group term life insurance (but only to the extent that

the premiums are not includible in the gross income of the Employee and are not salary reduction amounts that are described

in Code section 125).

v. Other items of remuneration that are similar to any of the items listed in paragraphs (b)(i) through (b)(iv) above.

[John Feldt ERPA CPC QPA]

As long as you understand that "elect" means the written and executed (signed) adoption agreement for the plan had been properly marked with the checkbox that defines compensation as W-2 wages.

[Guest notmyhand]

What a great site! I greatly appreciate the answers as that means I will be able to contribute more!

So just to triple check -

1. My plan election (with Vanguard) states no election is allowed to define wages. The plan information states that if no election is made then W-2 wages are the default.

2. The plan, as shown above, defines W-2 wages as "compensation is defines as information to be reported under Code sections 6041, 6051, and 6052 (wages, tips, and other compensation as reported on Form W-2). Compensation is further defined as wages within the meaning of Code section 3401(a) and all other payments of compensation to an Employee by the Employer.....Compensation must be determined without regard to any rules in Code section 3401(a) that limit the remuneration included in wages based on the nature or location of the employment or the services performed (such as the exception for agricultural labor). Thus, I should not be concerned that code 3401(a)(20) states wages means all remuneration, "except that such term shall not include remuneration paid for any medical care reimbursement made to or for the benefit of an employee under a self-insured medical reimbursement plan (within the meaning of section 105(h)(6)."

Am I understanding that all correctly? Box 1 in W-2 matters, Code 3401(a)(20) does not?

Thank you so much for all of the help!

[K2retire]

Be careful using box 1 of the W-2. Any pre-tax salary deferrals are excluded from box 1 and usually included in the definition of plan compensation.

[Guest notmyhand]

Yes you are correct, I should have said box 1 plus employee contributions. Thank you!

[Farmergal]

We are also S corp- no employees other than selves.

Question- are you using QuickBooks to track this and if so HOW are you making QB add in the medical premium. I'm doing it manually on the final paycheck for S Corp officers.

If you follow the QB protocol for setting up this payroll item for the 25% profit share (match) it will only calculate this amount on the gross salary excluding the medical premium.