S-Corp Medical Insurance Premium for >2% Shareholder

rjp21 · ‎April 23, 2023

We have an S-Corp where my husband is the Owner. His medical insurance premium is paid 100% from the company account.

We have an employee who is currently on our Sec 125 Cafeteria Plan. Our company policy is that the company pays 50% of his premium (only him, not spouse or family). The employee is paying the remaining 50% for his premium and 100% for his spouse's premium. If he becomes a >2% Shareholder, what are our obligations? Keep the same percentages, or are we obligated to pay 100% of his and/or 100% of his spouses' premiums? My understanding is that a >2% Shareholder can no longer participate in the pre-tax advantages of the Sec 125 plan.

The CPA we consult for our accounting issues did not know the answer. I use QuickBooks for our bookkeeping and payroll, plus I use TurboTax Business for our tax returns.

LieraMarie_A · ‎April 23, 2023

Hi there, @rjp21

As you correctly pointed out, under IRS regulations, if an employee becomes a >2% shareholder, they are no longer eligible to participate in the pre-tax advantages of the Sec 125 Cafeteria Plan. This means that their premium contributions must be made on an after-tax basis.

The company is not obligated to pay any percentage of the premiums for the >2% Shareholder employee or their spouse. However, the company may choose to continue paying a portion of the premiums as part of the employee's compensation package.

It's important to note that there may be additional tax implications for the employee and the company if the employee becomes a >2% shareholder. I recommend contacting the IRS to ensure that you are complying with all relevant laws and regulations.

To understand more about S-Corp Compensation and Medical Insurance and how to track it in QuickBooks Online Payroll, see the following resources available:

Get back to us if you need further assistance in setting up the payroll item. We're always here to help!

View solution in original post

LieraMarie_A · ‎April 23, 2023

Hi there, @rjp21

As you correctly pointed out, under IRS regulations, if an employee becomes a >2% shareholder, they are no longer eligible to participate in the pre-tax advantages of the Sec 125 Cafeteria Plan. This means that their premium contributions must be made on an after-tax basis.

The company is not obligated to pay any percentage of the premiums for the >2% Shareholder employee or their spouse. However, the company may choose to continue paying a portion of the premiums as part of the employee's compensation package.

It's important to note that there may be additional tax implications for the employee and the company if the employee becomes a >2% shareholder. I recommend contacting the IRS to ensure that you are complying with all relevant laws and regulations.

To understand more about S-Corp Compensation and Medical Insurance and how to track it in QuickBooks Online Payroll, see the following resources available:

Get back to us if you need further assistance in setting up the payroll item. We're always here to help!

rjp21 · ‎April 23, 2023

LeiraMarie, thank you for the confirmation.

rjp21 · ‎April 23, 2023

It's also interesting that QuickBooks tagged this post with "QuickBooks Online". I actually use "QuickBooks Desktop", but I didn't list a product since my question was not relevant on which QB product I use.

Kevin_C · ‎April 23, 2023

Thanks for getting back to this thread, rjp21.

I'm glad to know my peer, LieraMarie_A, was able to provide the information you need regarding your concern. Rest assured that the information shared by my peer above applies to QuickBooks Desktop. Please also know that we've updated the product tag with the one you're using.

Don't hesitate to post again or leave a comment in this thread if you have any other questions in the future. I'm more than happy to answer them. Have a great day!

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S-Corp Medical Insurance Premium for >2% Shareholder