Deducting S corporation Health Insurance Premiums

Notice 2008-1

Notice 2008-1 contains the rules (and examples) for deducting accident and health insurance premiums by a more-than-2% shareholder/employee of an S corporation.

Section 1372(a) provides that, for purposes of applying the income tax provisions of the Code relating to employee fringe benefits, an S corporation shall be treated as a partnership, and any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership.

Definition of a 2% Shareholder

The following is from IRS Notice 2008-1:

For purposes of § 1372, the term "2-percent shareholder" is any person who owns (or is considered as owning within the meaning of § 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.

How an S corporation Deducts Health Insurance Premiums

An S corporation deducts the premiums it pays for accident and health insurance to cover a 2% shareholder/employee (and his spouse and dependents) as compensation paid to the shareholder/employee. In other words, the premiums are included in the shareholder/employee's salary and reported on the individual's W-2 form.

Notice 2008-1 states that health insurance premiums paid or furnished by an S corporation on behalf of its 2 percent shareholders in consideration for services rendered "are treated for income tax purposes like partnership guaranteed payments under § 707(c) of the Code. Rev. Rul. 91-26, 1991-1 C.B. 184."

Health Insurance Premium Deduction Rules

The rules that apply to S corporations also apply to:

Plan Must be Established By the Business:

If you're a more-than-2% shareholder/employee in an S corporation, a partner in a partnership, or a member in a multi-member LLC, you may only deduct health insurance premiums directly on Form 1040, line 29, Self-employed health insurance deduction, IF the health insurance plan is considered to have been established by the business and not by you personally.

In determining if the business estabished the plan, whose name the policy is in is not taken into account (it could be in the more-than-2% shareholder/employee's name or in the business's name).

The following two elements are considered in determining who established the plan:

  1. Who actually pays the premiums, and
  2. How the premiums are reported for income tax purposes by both you and the business

For the plan to be considered established by the business, the business must pay the premiums and include the the premiums in the more-than-2% S corporation shareholder/employee's gross wages on Form W-2. If the more-than-2% S corporation shareholder/employee puts the policy in his own name, personally pays the premiums without getting reimbursed from the business, the plan is not considered to have been established by the business and the .

Any One of Three Scenarios Must Be Satisfied

For an accident and health insurance plan to be considered established by the business, any one of the following three scenarios must apply:

Scenario 1:

The business obtains an accident and health insurance policy in the business's name to cover its more-than 2% shareholder/employees (in the case of an S corporation), partners (in the case of a partnership), and members (in the case of a multi-member LLC). The plan also covers their spouses and dependents:

Scenario 1 Result:

Scenario 2:

A more-than-2% shareholder/employee, partner, or member of a multi-member LLC obtains an accident and health insurance policy in his own name:

Results of Scenario 2:

Scenario 3:

A more-than-2% shareholder/employee, partner, or member of a multi-member LLC obtains a policy in his name to cover himself his spouse and two children.

Results of Scenario 3:

When a 2% S corporation Shareholder, Partner, or LLC Member May Not Claim the Deduction on Form 1040, Line 29:

Here's a situation where health insurance premiums may not be deducted directly on Form 1040, line 29:

In this case, the plan was not established by the business because the business did not pay any of the premiums nor did the business reimburse the premiums to the 2% shareholder/employee, partner, or LLC member.

The premiums may not be deducted on Form 1040, line 29. Instead, the deduction may only be claimed on Schedule A as an itemized deduction as a medical expense.

Note: As of 2013, to get a tax benefit for medical expenses on Schedule A, medical expenses must exceed 10% of adjusted gross income for individuals under 65 years of age (7 1/2% for individuals 65 or older). The 7 1/2% of AGI exception for taxpayers 65 or older will be in effect from 2013 through December 2017, unless Congress extends this exception.


Do not include amounts for any month you were eligible to participate in an employer-sponsored health plan (Section 162(l)(2)(B)) or amounts paid from retirement plan distributions that were nontaxable because you were a retired public safety officer.

You cannot claim the health insurance premium deduction if you file Form 1040A or Form 1040EZ.

Earned Income From Trade or Business Limitation

The deduction for health insurance premiums is not allowed to the extent that the amount of the deduction exceeds the earned income derived by the taxpayer from the trade or business with respect to which the plan providing the medical care coverage is established.

Amended Returns

Taxpayers who did not claim the health insurance deduction on a prior year's return may file an amended return on Form 1040X. It must be filed timely (3 years from the due date of the original return, plus extensions, or 2 years from the date the tax was paid, whichever is later).

You need to write the following at the top of the amended return:

Notice 2008-1 contains the rules (and examples) for deducting accident and health insurance premiums by a 2% shareholder/employee of an S corporation.

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Did you receive Form 1095-A during 2014?
You will receive Form 1095-A if you or a family member enrolled in health insurance coverage through the Health Insurance Marketplace.

The information on Form 1095-A, Health Insurance Marketplace Statement, is used to complete Form 8962, Premium Tax Credit (PTC). Use Form 8962 to figure the amount of your premium tax credit (PTC) and reconcile it with any advance payments of the premium tax credit (APTC).

You must complete Form 8962 and file it with your return if you want to claim the premium tax credit or if you received premium assistance through advance credit payments.

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