S Corporation and 2% Shareholder Health Insurance

[mjf06241972]

if a business is an s-corp and the owner has 2% shareholder health insurance, is this part of their compensation that can be used for calculation purposes?  I don't think so since not subject to SS or Medicare?

[justanotheradmin]

1. What is the plan document's definition of compensation?

2. Are there any exclusions to the definition of compensation in the document? Fringe benefit exclusions? Shareholder insurance exclusions? 

I will tell you that most of our plans use a W-2 based definition of compensation, without any exclusions that would affect shareholder insurance premiums. So those plans include it in calculations. 

[mjf06241972]

There are no exclusions in compensation but I would think if not subject to FICA, you cannot use as compensation.  Like the S-Corp dividend is normally not used, only W2 income for this reason.

[RatherBeGolfing]

On 3/29/2019 at 9:04 PM, mjf06241972 said:

There are no exclusions in compensation but I would think if not subject to FICA, you cannot use as compensation.  Like the S-Corp dividend is normally not used, only W2 income for this reason.

If your document is W-2 comp no exclusions, its included.  

See prior discussion here

The ERISA Outline Book has a good explanation on why it is included as plan compensation.  

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.

 

[mjf06241972]

Thank you for the help!

[nancy]

If the plan excludes fringe benefits would you exclude the health insurance from plan compensation?

[spiritrider]

2% Shareholder-employees can not receive fringe benefits. Health insurance paid or reimbursed by the S-Corp is additional compensation and not a fringe benefit. So the exclusion of fringe benefits should have no effect.

[justanotheradmin]

13 hours ago, spiritrider said:

2% Shareholder-employees can not receive fringe benefits. Health insurance paid or reimbursed by the S-Corp is additional compensation and not a fringe benefit. So the exclusion of fringe benefits should have no effect.

I think the question arises because under IRC §1372 the 2% Shareholder expense rules are explained as how to treat fringe benefits for partnerships. 

https://www.law.cornell.edu/uscode/text/26/1372

Since the IRC seems to include health insurance premiums a fringe benefit, the question makes sense. 

If health insurance premiums (a fringe benefit) are treated as compensation for 2% shareholders, does that then mean it is no longer a fringe benefit? Can it be both for plan purposes? 

I don't actually know the answer or have any research on it, but considering many plan documents have spots where fringe benefits can specifically be excluded from plan compensation, I would gather that as a generally rule, fringe benefits ARE compensation, at the same time that they are fringe benefits. 

There might be some nuance particular to the health ins. premiums for 2% shareholders that I don't know about, but as a generally rule something can certainly be BOTH a fringe benefit and compensation.