We strongly recommend S-Corporation owners talk to their licensed tax professional or CPA.
If you are an S Corporation owner and reimbursing your employees for their premiums with a QSEHRA (Small Business HRA), you’re probably wondering how you can achieve the same tax advantage as your employees now that tax time is upon us.
Am I eligible to participate in the small business HRA plan?
Can my family be reimbursed for premiums?
We get a lot of questions about this, and given the layers of policy and tax law that govern this subject, we thought we should break it down for you in plain English. The short answer is that your participation depends on how your company is set up.
If it's set up as an S Corporation and you own more than 2%, you may already have the benefit of being able to deduct medical insurance premiums (scroll to page 21 of the PDF for more details) without participating in a small business HRA (QSEHRA).
Good news, right?
There's a few rules and requirements that you need to know ahead of time.
Here’s what you need to know.
Why S Corporation owners don't need a QSEHRA
As an S Corporation owner, you already have the benefit of being able to deduct monthly premiums. Unlike your employees, there's no need or additional benefit from a small business HRA.
The reason for this lies in the way your company is set up. S corporations are not subject to corporate income tax. Instead, they are a pass-through entity, much like a partnership, so shareholders are taxed individually. That means that if you are an shareholder with more than 2% of the company’s share, you are not considered an employee and are therefore not eligible to participate in your company’s small business HRA plan.
In the eyes of the IRS, you are self-employed, even if you give yourself a W2.
It's important to note that your family can’t participate in QSEHRA either. That means your spouse, parents, children, and grandchildren cannot receive small business HRA reimbursements, even if they are W2 employees of the company or are on the same insurance policy as you.
Eligibility requirements for deducting insurance premiums (without a QSEHRA)
Good news, shareholders with more than 2% ownership! The IRS categorizes you as self employed, which means you are eligible to claim monthly premiums as deductions on your tax return. The self-employed health insurance deduction ensures that self-employed individuals like you get a break on their healthcare costs.
It’s available if you:
- Are self-employed
- Have a net profit from your business
- Are not able to receive health insurance coverage from a spouse or employer
According to the IRS site:
You must be one of the following to qualify for the deduction:
The insurance plan must be established under your business.
- A self-employed individual
- A partner in a partnership
- A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.
For more-than-2-percent shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income.
However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
In other words, if you are a S Corporation owner and your insurance plan was established under your business, then you are eligible.
How to establish an insurance plan under your S Corporation business
There’s two ways to do this. For shareholders who own more than 2%, the insurance policy can either be in the name of your company or in your name as the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. Remember, if the policy is set up in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on your W-2 as wages to be included in your gross income. If not, the insurance plan will not be considered to be established under your business, making you ineligible for the self-employed tax deduction for medical expenses.
How much you can deduct depends on how much you make
Taxpayers who meet all of these requirements can deduct what they pay for health insurance, up until the limit of their net business income (after business expenses). That means potentially 100% of monthly premium costs!
You read that right. One hundred. Percent.
For most everyone else, the IRS allows them to deduct qualified medical expenses that exceed 7.5% of your adjusted gross income for 2017 and 2018. And starting next year, all taxpayers may only deduct the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income. So deducting 100% is a big deal!
It also means that if your net business profit for the year is lower than the total yearly cost of your health insurance premiums, then you can only deduct the amount equal to your business profit.
Where to pencil this in on your tax return
The total amount spent on healthcare premiums for yourself and your family goes on Form 1040, Line 29. There is no need to itemize it.
Remember: If you have purchased your plan through the Exchange and receive a subsidy on your monthly payments, you can only deduct the cost of your payment each month, not the original price of the plan.
Take Command Health is here to help
As you can see, the way a business is set up affects if the business owner and their dependents will qualify to participate in the HRA. Take Command Health has a team of experts ready to answer your questions regarding your HRA and health insurance options. Our Small Business Platform and QSEHRA administration tool are designed to make tax time a breeze.