[Anonymous]

Hi, I was hoping someone could help explain this question to me. I thought that health insurance paid by an employer was a non-taxable fringe benefit to the employee?

Lane Inc., an S corporation, pays single coverage health insurance premiums of $4,800 per year and family coverage premiums of $7,200 per year. Mill is a ten percent shareholder-employee in Lane. On Mill’s behalf, Lane pays Mill’s family coverage under the health insurance plan. What amount of insurance premiums is includible in Mill’s gross income?

a. $0

b. $720

c. $4,800

d. $7,200

Explanation

Choice “d” is correct. $7,200 of insurance premiums (the amount of family coverage premiums, as indicated in the question) is includible in Mill’s gross income.

Rule: Fringe benefits paid by an S corporation are deductible by the S corporation only for non-shareholder employees and those employee-shareholders owning 2% or less of the S corporation. Other fringe benefits paid are deductible by the S corporation if included as part of gross income from the S corporation for the individual receiving the benefits (i.e., included as part of income on the shareholder’s W-2).

Choices “a”, “b”, and “c” are incorrect, per the above rule.

Can someone just clarify the following rules to me:

– Health insurance provided by an employer is non-taxable to the employee, except in this case, why?

– Health insurance payments by a C corporation for employees are fully deductible.

– Health insurance payments by an S corporation are only deductible for an employee that owns less than 2% or if it is included in their W-2.

Thanks in advance!

[jtcali]

If you are a 2% or greater shareholder in an S-corp you have to include the full amount in gross income but then you can deduct the full amount as an adjustment to income in arriving at AGI. This is the self-employed health insurance deduction. Hope that helps.

[Author]

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