Year-End Health Insurance Reporting for Small Businesses

Dear Friends,

This message serves as your annual reminder that portions of the Affordable Care Act taking effect in 2015 continue to affect small businesses—particularly Subchapter S Corporations. These rules may impact how your Company reports health insurance premium expenses. Below are two common situations to keep in mind. 

1. Reimbursement of Employee Health Insurance Premiums
   Employers may reimburse employees tax-free for premiums paid on individual health insurance policies only if the reimbursement is made through an Individual Coverage Health Reimbursement Arrangement (ICHRA) or a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA).

If reimbursement is not made through one of these arrangements, then—to avoid penalties—the reimbursement must be included in the employee’s taxable wages for federal, state, and local income tax purposes and must also be treated as wages for employment tax purposes.

2. Health Insurance for >2% S Corporation Shareholder-Employees
   A Subchapter S Corporation may deduct the cost of Company-paid health insurance premiums for any greater-than-2% shareholder-employee only if those premiums are treated as additional compensation. This can be done either by:

• having the S Corporation pay the premiums directly, or
• reimbursing the shareholder by December 31, 2025 for premiums paid personally.

In either case, the premium amounts must be included as additional wages on the shareholder-employee’s Form W-2. These additional wages are subject only to federal income tax withholding, not to Social Security, Medicare, or other employment taxes.

The shareholder may then take an above-the-line deduction for these health insurance premiums on their individual federal income tax return. Failure to follow these rules may cause the IRS to disallow the Corporation’s deduction.

If you prepare your own payroll filings, please be mindful of these adjustments when submitting tax payments and preparing your 4th-quarter and annual payroll reports. If you use a payroll service (such as ADP or Paychex), notify them as soon as possible of any required health insurance wage adjustments. We would be happy to assist with this process if needed.

If you have questions or would like additional information, please call our office at (724)731-0150.