[mypetmeatball]

Having a bit of trouble wrapping my head around this one:

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 10% shareholder-employee in Lane. On Mill’s behalf, Lane pays Mill’s family coverage under the health insurance plan. What amount of insurance premiums are includible in Mill’s gross income?

a. 0

b. 4,800

c. 7,200

d. 720

I understand why the full 7,200 is a benefit, but I don’t understand why it’s all included to Mill personally. I mean, the premiums are covering the entire S-Corp, and he is merely 10% of the S Corp. Why would he need to take on all 7.200 and not just 720?

[Resacups]

The question is stating that if an employee chooses to have coverage for his or herself for a calendar year, it is 4,800 or if he or she elects to insure their entire family is 7,200.

In this instance, the 10% SH has chosen to insure the family, so you will include 7,200 in gross wages on the W-2.

Hope this helps.

BEC: 01/09/12 PASSED
AUD: 05/29/12 PASSED
REG: 07/19/12 PASSED
FAR: 11/12/12 PASSED

[Praying I Pass]

Fringe benefits paid to shareholders owning over 2% of the S Corp stock are not deductible to the S Corp, and are included in the gross income of the shareholder/employee. This question is testing that rule. If Mill owned 2% or less of the S Corp stock, Mill would have included 0 in gross income and the S Corporation would have taken an ordinary business deduction (which would have flown through to him). However, because Mill owns more than 2% of the S Corp stock, the S Corp can not take a deduction and Mill must include the payments in his gross income.

[CPA Dex]

Praying I pass, the S Corp CAN take the deduction on the 1120, just not as a health insurance deduction. Since the amount is added to box 1 of the employee's W2, this $7200 increases wages expense for the S Corp.

[Noct]

By the way, health insurance premiums included in the shareholder's gross wages are not subject to payroll tax. Furthermore, the shareholder can take the self-employed health insurance adjustment (an above-the-line deduction) for the amount of included premiums on his individual tax return, so the benefit is still tax free.

FAR - 79 - 07/2012
AUD - 65, 78 - 11/2012
BEC - 76 - 11/2012
REG - 78 - 01/2013
ETH - 98 - 01/2013

Material: Wiley books

[JoeL]

The tricky work is “includible”, not must include. Include or not include, it is the Shareholder's choice

Why? Let me explain. Generally S corp cannot deduct heath insurance premium for Shareholder employee who has 2% or more shares. However, if the Shareholder choose to include the premium in his gross income, then the S corp can deduct the premium, regardless 2% rule. So it is the shareholder's choice. Since the S corp pay the entire family's premium, so, the entire $7200 is includible, regardless the 10% ownership……….

[Noct]

I think there's been a misinterpretation of the OP's question. ” Why would he need to take on all 7.200 and not just 720?”. Answer: 7200 is the premium for one family, not the entire company.

FAR - 79 - 07/2012
AUD - 65, 78 - 11/2012
BEC - 76 - 11/2012
REG - 78 - 01/2013
ETH - 98 - 01/2013

Material: Wiley books

[Author]

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