Two percent (2 %) shareholder / officer health insurance - setup example

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Shareholder/officer health insurance can be set up in Accounting CS in a number of ways, depending on how you want the insurance amount to display on forms W-2, 940, and 941. 

 This article provides one example (with notes and tips) of how to set up and process 2% shareholder/officer health insurance. This is not the only way to handle shareholder health insurance for an S-Corp client. Before you follow these steps for your client, consult the appropriate resources to gain a complete understanding, and then modify the steps below, if necessary.

Example

This example assumes the following.

  • The shareholder health insurance amount should display:
    • in Box 1 of Form W-2 as FIT taxable wages
    • on Line 2 of Form 941 as FIT taxable wages
    • on Line 3 of Form 940 as FUTA wages
    • as exempt on Line 4 of Form 940 as a fringe benefit
    • and be shown in Box 14 on the W-2 form.
  • The health insurance amount is being recorded as a year-end adjustment.
  • The tax withheld amount on these forms will not increase.

Setup

  1. Choose Setup > Payroll Items, and add a new Pay type item called 2% Shareholder Health (or something similar).
  2. Set the Calculation type to Fixed amount.
  3. In the Taxability section, set the FUTA exempt payments field to Fringe benefits.
  4. In the W2 Additional Boxes section, mark the Box 14 checkbox and enter a description, such as 2% SH Health (or something similar) to appear in the box with the amount.  
  5. In the Exclusions section, mark the Amount from gross pay presentation and Net Pay checkboxes 

    Note: We marked those checkboxes assuming that the shareholder health amount should not appear in YTD gross and net pay when printing reports, and not appear in gross or net pay on any paystubs. The amount will still appear as taxable wages for FIT on the Payroll Tax Summary report.

  6. In the Tax Exemptions tab, mark the All checkbox to select all of the items.
  7. Clear the Federal Income Tax checkbox. This will allow only the Federal Income Tax to calculate for this pay item.
  8. Clear the State and Local withholding checkboxes when applicable.
  9. Click Enter to save the 2% Shareholder Health pay item.
  10. In the Payroll Items tab of the Setup > Employees screen, activate this new pay item for the employee.

Processing

  1. Choose to Actions > Enter Transactions, and add a payroll check for the shareholder dated 12-31-2019. 
  2. Override the amount column of the 2% Shareholder Health pay item with the total amount of the health insurance.
  3. Override any other pay and deduction items to be $0.00.
  4. FIT will calculate for the payroll check. Override the amount to zero.
  5. Override state and local withholding amounts to zero, if applicable.
  6. Mark the Handwritten checkbox. This enables us to finalize the check without printing it.
  7. Press Enter to save the payroll check.

Other resources

Form W-2 Reporting of Employer-Sponsored Health Coverage - https://www.irs.gov/affordable-care-act/form-w-2-reporting-of-employer-sponsored-health-coverage

General Instructions for Forms W-2 and W-3 - https://www.irs.gov/pub/irs-pdf/iw2w3.pdf

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Internal only

The Affordable Care Act (ACA) did not change the above rules regarding the federal tax treatment of health and accident premiums paid for a 2% shareholder.

However, for tax years after 2013, the ACA imposes penalties on the S corporation if the S corporation offers a health plan that fails to comply with certain market reform provisions, which may include plans under which the S corporation reimburses employees for the cost of individual  health insurance premiums. The potential excise tax is $100 per day, per employee, per violation.

  • For other fringe benefits: Unless otherwise identified as a nontaxable fringe benefit under IRC §401, all fringe benefits provided to greater than 2 percent shareholders are considered taxable for federal income tax purposes. This simply means the individual must include the fringe benefits paid on their behalf in gross income. The most common taxable fringe benefits are: 
     
    The cost of group-term life insurance, up to $50,000 (IRC §79). 
    The amounts paid for or to an accident or health plan (IRC §105 and 106). 
    Meals & Lodging furnished for the convenience of the employer (IRC §119). 

 Find more information about taxable and non-taxable fringe benefits for greater than 2% shareholders here: https://www.dhg.com/article/831-shareholder-fringe-benefits---overview-6