published October, 2012
IRS Notice 2008-1 ruled that under certain situations, a 2% or more shareholder is allowed an above-the-line deduction (that’s the good kind) even if the health insurance policy is purchased in the name of the shareholder. The notice has four examples; three have the shareholder purchasing health insurance and the other has the S corporation purchasing the health insurance.
The Notice says if the shareholder purchases the health insurance in his own name and pays for it with his own funds the shareholder is NOT allowed an above-the-line deduction (that’s worse, it gets deducted on Schedule A and is subject to various limitations). On the other hand, if the shareholder purchases the health insurance in his own name but the S corporation either directly pays for the health insurance or reimburses the shareholder for the health insurance AND ALSO includes the premium payment in the shareholder’s W-2, the shareholder IS allowed an above-the-line deduction.
For a shareholder to claim an above-the-line deduction (the good kind), the health insurance premiums have to be paid by the S corporation and have to be included in the shareholder’s W-2, so if you have an S Corporation, and you have health insurance, be sure the W-2 will reflect this—contact your payroll provider before year end! The Premiums are income to the shareholder, but are not taxed as Social Security, Medicare nor the various state taxes (except as state income).