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Pension and Employee Benefits: Code, ERISA, & Regulations
This series provides an authoritative and comprehensive reference to the full text of benefits-related provisions of the Internal Revenue Code, the full text of ERISA, and related proposed and final regulations, as well as the official IRS and DOL preambles, and Committee Reports.
The IRS has released special rules regarding the deduction by two-percent shareholder-employees of S corporations of accident and health insurance premiums that are paid or reimbursed by the S corporations and included in the shareholders’ income.
A two-percent shareholder-employee may deduct amounts paid for accident and health insurance under Code Sec. 162(l) if the insurance plan was established by the S corporation. A plan is considered to be established by the S corporation if (1) the S corporation makes the premium payments in the current tax year or (2) the two-percent shareholder makes the premium payments, furnishes proof of the payments to the S corporation, and is reimbursed by the S corporation in the current tax year.
For the two-percent shareholder-employee to deduct the amount of the accident and health insurance premiums, the S corporation must report the accident and health insurance premiums paid or reimbursed as wages on the two-percent shareholder-employee’s Form W-2 in that same year. In addition, the shareholder must report the premium payments or reimbursements from the S corporation as gross income on his or her Form 1040.
The deduction is not allowed to the extent that the amount of the deduction exceeds the earned income derived by the shareholder-employee from the trade or business with respect to which the plan providing the medical care coverage is established. Also, the deduction is not allowed for amounts during a month in which the shareholder-employee is eligible to participate in any subsidized health plan maintained by an employer of the employee or of the spouse of the employee.
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