Year-End Health Insurance Reporting for Small Businesses

This message serves as your annual reminder that portions of the Affordable Care Act taking effect in 2015 continue to have an impact on small businesses in general and on Subchapter S Corporations in particular. These provisions may impact the way you report your Company’s health insurance premium expense in a number of ways. We discuss two common situations in the paragraphs that follow.

First, employers are NOT permitted to reimburse their employees tax-free for the cost of premiums the employee pays on an individual policy. In order to avoid a penalty for such reimbursements, the reimbursement must be included in the employee’s taxable wages for federal, state, local income taxes and be subject to employment taxes.

Second, a Subchapter S Corporation can deduct the cost of company paid health insurance premiums for a greater than 2% shareholder-employee only as additional compensation. This can be accomplished by either having the S Corporation pay the premium directly to the insurance company or by reimbursing the shareholder by December 31, 2023 for the amount of health premiums paid personally. The premium payments must then be included as additional compensation on Form W-2 for the shareholder-employee. The wage adjustment for S Corp Health Insurance premiums should only be subject to federal income tax and not to other withholding and employment taxes.

It should also be noted that the 2% shareholder may deduct the health insurance premiums paid by the S Corporation as an adjustment to income on his or her individual federal tax return. Failure to follow these rules may result in the disallowance of the deduction by the S Corporation.

If you are preparing your own payroll filings, please be aware of these adjustments when making your tax payments and preparing fourth quarter & annual payroll filings.  If you have a payroll service provider (like ADP or Paychex), you should notify them as soon as possible of your necessary health insurance premium adjustments.  If you wish, we would be happy to assist you in this process.

If you have any questions or require additional information, please do not hesitate to call our office at 724-731-0150.