Health insurance for S corp. shareholders.

• Author: Ziegler, Raymond J.

The IRS stated in an article that an S corporation's sole shareholder-employee cannot purchase health insurance in his or her own name and still be eligible for the above-the-line deduction under Sec. 162(1) for the premiums; see Headliner Volume 163 (May 15, 2006), available at www.irs.gov/businesses/ small/article/0,,id=157049,00.html.

Sole Proprietors

In Chief Counsel Advice (CCA) 200524001, the IRS held that a self-employed individual who is a sole proprietor and purchases health insurance in his or her own name may treat it as purchased in the name of the sole proprietor business. Thus, the insurance would qualify under Sec. 162(1) and the purchaser could deduct the premiums above-the-line (if all the other Sec. 162(1) provisions are met).

S Corporations

For certain fringe benefits (such as health insurance premiums) paid by the S corporation, the entity is treated as a partnership; any shareholder who owns more than 2% of the S stock will be treated as a partner of such partnership under Sec. 1372(a). Accident and health insurance premiums paid by a partnership on a partner's behalf are guaranteed payments under Sec. 707(c) if paid for services rendered in the capacity of a partner and to the extent determined without regard to partnership income; see Rev. Rul. 91-26. These guaranteed payments are deductible by the partnership under Sec. 162 and includible in the recipient-partner's gross income.

Thus, the premiums paid by the S corporation are deductible as compensation to the 2% shareholder and should be included in his or her Form W-2.

Per Sec. 162(1)(5), a 2% shareholder treated as a partner under Sec. 1372 will be treated as a self-employed person and may deduct the premiums...