Income inclusion for self-insured medical plan benefits paid to S shareholders.

• Author: Brown, Robert R., Jr.

Effective for tax years beginning Jan. 1, 1991, Rev. Rul. 91-26 provided guidance for reporting requirements for accident and health insurance premiums paid by S corporations on behalf of its 2% shareholders. In its ruling, the IRS stated that, under Sec. 1372, these premiums paid on behalf of the 2% shareholder/employees as consideration for services rendered will be treated like guaranteed payments from a partnership under Sec. 707(c). As such, the premium are deductible in full by the corporation and includible in the shareholder's gross income. The shareholder then deducts a portion of this amount from gross income on his personal tax return to arrive at adjusted gross income (AGI). The rest is a Schedule A itemized deduction subject to the 71/2% of AGI floor.

An issue arises for S corporations with self-insured medical reimbursement plans that include shareholders. For fringe benefit purposes, an S shareholder is not an employee. Thus, benefits paid to or on behalf of a 2% S shareholder may not be excluded from that individual's income. The question arises as to what amount should be includible in the shareholder's gross income-the total dollar amount of claims paid during the year or some other factor or equivalency (such as a COBRA amount). Rev. Rul. 91-26 spoke strictly of health insurance "premiums" and did not specifically address the reporting requirements for the amounts paid through self-insured plans.

Sec. 105(e) provides that amounts received by employees under a...