Should I Purchase Health Insurance Through My S-Corp

Question

I currently have an S-Corp, of which I am the only employee. As of this year, I started purchasing my own health insurance through healthcare.gov. In previous years, my wife and I were insured through her employer.

From my initial research, it appears that I can only deduct health insurance if it is purchased by my corporation. It looks like in some states, it is possible to purchase insurance and have the corporation reimburse the costs. It's not clear to me what the criteria is for this, and whether I qualify in Illinois.

Is it a common practice to purchase insurance through a single-employee S-Corp? Can I reimburse my premiums for this year if I have already paid for them (in my own name, not the S-Corp)?

Answer 1

The answer seems to depend on where you live. Perhaps you already found this, but the summary from the IRS is:

The insurance laws in some states do not allow a corporation to purchase group health insurance when the corporation only has one employee. Therefore, if the shareholder was the sole corporate employee, the shareholder had to purchase his health insurance in his own name.

The IRS issued Notice 2008-1, which ruled that under certain situations the shareholder would be allowed an above-the-line deduction even if the health insurance policy was purchased in the name of the shareholder. Notice 2008-1 provided four examples, including three examples in which the shareholder purchased the health insurance and one in which the S corporation purchased the health insurance.

Notice 2008-1 states that if the shareholder purchased the health insurance in his own name and paid for it with his own funds, the shareholder would not be allowed an above-the-line deduction. On the other hand, if the shareholder purchased the health insurance in his own name but the S corporation either directly paid for the health insurance or reimbursed the shareholder for the health insurance and also included the premium payment in the shareholder’s W-2, the shareholder would be allowed an above-the-line deduction.

The bottom line is that in order for a shareholder to claim an above-the-line deduction, the health insurance premiums must ultimately be paid by the S corporation and must be reported as taxable compensation in the shareholder’s W-2.

https://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/S-Corporation-Compensation-and-Medical-Insurance-Issues

I understand this to mean that you can only get the deduction in your case (having purchased it in your own name) if your state does not allow your S-Corp to purchase a group health plan because you only have one employee. (I don't know specifically if Illinois fits that description or not.) In addition, there are rules about reporting health insurance premiums for taxes for S-Corp share members that you should also check. Personally, I think that it's complicated enough that advice from a CPA or other tax advisor specific to your situation would be worth the cost.

Answer 2

I'm not sure about reimbursement, you'll have to talk to a tax adviser (CPA/EA licensed in your State). From what I know, if you pay your own insurance premiums - they're not deductible, and I don't think reimbursements change that. But again - not sure, verify.

However, since you're a salaried employee, even if your own, you can have your employer cover you by a group plan. Even if the group consists of only you. Then, you'll pay your portion as part of the pre-tax salary deduction, and it will be deductible. The employer's portion is a legitimate business expense. Thus, since both the employee and the employer portions are pre-tax - the whole cost of the insurance will be pre-tax.

The catch is this: this option has to be available to all of your employees. So if you're hiring an employee a year from now to help you - that employee will be eligible to exactly the same options you have. You cannot only cover owner-employees.

If you don't plan on hiring employees any time soon, this point is moot for you, but it is something to keep in mind down the road as you're building and growing your business.