Navigating S-Corporation Health Insurance (2023): Updates & Eligibility FAQs

S-Corporation Health Insurance in 2023: Navigating the Maze of Eligibility 

As we steer through 2023, the world of health insurance for S corporation owners continues to evolve. If you're an owner with more than a 2% stake in an S-corporation, there's some good news awaiting you. But, before you jump the gun, it's essential to be aware of the rules of engagement. Let's dive deep into the recent developments and address some of the most commonly asked questions about S-corporation health insurance eligibility. 

Steps to Safeguard Your Health Insurance Deductions: To sail smoothly and steer clear of potential $100-a-day penalties from the ACA, consider these steps: 

  • Record the health insurance costs on the S corporation’s books. 

  • Display the health insurance premiums on the owner-employee’s W-2 form (include in Box 1...not to be included in Boxes 3 or 5). 

  • For more than 2 percent of owner-employees, claim your health insurance deduction as "self-employed health insurance" on Schedule 1 of Form 1040. 


For the rank-and-file champs in your corporation, the S corporation doesn’t have to dangle the carrot of health insurance. But if they do, they better make sure it's an ACA plan that shines. Think along the lines of the qualified small employer health reimbursement arrangement (QSEHRA) or the individual coverage HRA (ICHRA). 

Here’s a quirky tidbit: The S corporation can reimburse those more than 2 percent owners for their swanky individual insurance sans penalties. But, God forbid they reimburse the rank-and-file troops without the protective shield of QSEHRA or ICHRA. Why? That nasty $100-a-day penalty per employee, that's why. 

Now, onto those burning questions... 

FAQs on S-Corporation Health Insurance Eligibility

1. Does the health plan need to cover only the shareholders and their families?

No. Health insurance plans within an S-Corporation must extend coverage to all current employees. Plans that exclusively cover owners and their families will not qualify for business expense deductions. 

2. Can the eligibility criteria favor highly compensated individuals?

No, they can't. Plans must be crafted to ensure that they do not discriminate in favor of highly compensated individuals. The coverage terms and benefits should be equitably distributed amongst employees across all levels. 

3. Who should be covered under group health plans?

Group health insurance plans in an S-Corporation should be offered to all full-time W-2 employees. It's essential to note that while employees must be offered coverage, they have the option to opt-out. Offering coverage only to select employees is not compliant. 

4. Are there limitations on the benefits provided?

Yes. The health benefits provided must align with customary coverage determined by the insurance provider. Plans should not be overly generous or tailored specifically for owners or top executives to the detriment of other employees. 

5. How do reimbursed individual health insurance plans work?

Reimbursed individual health insurance plans can qualify. However, it's crucial for these reimbursements to be made under an "accountable plan," ensuring proper substantiation of the expenses. 

6. Are self-insured plans a viable option?

While self-insured plans can be used, they come with their own set of complexities. These plans require adherence to specific rules, such as nondiscrimination testing, to qualify. On the other hand, fully insured plans, often regarded as more straightforward, tend to be preferred by many S-Corporations. 

7. Can owner/shareholder eligibility surpass that of regular employees?

No. Health insurance plans should primarily benefit all full-time employees. Owner or shareholder eligibility should not exceed the provisions available to full-time staff. 

8. How can one determine the deductibility of benefits?

The deductibility of health benefits within an S-Corporation hinges on the categorization of the benefits. They are evaluated based on whether they qualify as "employee benefits" or "owner benefits," determined by the criteria mentioned above. 

9. What's the best way to ensure compliance with these regulations?

Given the intricacies of health insurance provisions and the tax implications, consulting a benefits advisor or tax professional is advisable. Their expertise can guide S-Corporations in structuring their health plans to ensure they qualify for deductibility. 


Closing Thoughts:

The heart of the matter is clear: health insurance plans in S-corps should primarily serve all full-time employees. If you feel like you're wading through murky waters, consider bringing a benefits advisor on board. They can steer your ship clear of potential pitfalls and ensure smooth sailing in the realm of health insurance deductions. 

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Tim Thompson CPA PLLC is located in Dallas, Texas and is an expert in all areas of Texas taxes. We can help with individual or business taxes, tax resolution, tax preparation, and tax planning services.