When I was setting up my s-corp back in 2006 I was upset that for employee-owners of the S-corp.
1. If you obtain a health policy in your name and pay for it yourself, then you can not deduct the premium payments on your 1040.
2. If the S-corp makes the payments for your individual policy, they are treated as guaranteed payments (because you are part-owner) and hence are included on your W2 and again, you can not deduct them.
3. The premiums paid towards a group plan established in company name are deductible. But for me (and for other healthy folks ) such group plans are waaaaaaaay more expensive that individual policies.
I had confirmed my research with 2 CPA's too.
But according to this, IRS issued a different clarification in Dec 2007.
It states that you can
1. Have all employees (including 2% owners) obtain an individual health / accident policy in their own name
2. Have the s-corp pay the expenses directly OR
Let the employee pay and have the S-corp reimburse the expenses
In either case,
1. These payments will be treated as expense for the s-corp thereby reducing the s-corp profits
2. These payments will be reported as wages on W2
3. The employee will be able to take a deduction under I.R.C. §162(l) for 2008
Couple of requirements
1. The company must establish a plan ( No biggie here - just print a Simple page that says the company will reimburse health premiums, have the CEO (that is you) sign it and file it in your records)
2. The reimbursement request by the employee must be received and processed before Dec 31.
3. The payments must be included in W-2 Box-1.
In fact, it seems you can amend past year returns and claim the deduction.
Thanks to Tax tip for small family businesses thread for spurring this research.
edit: added a link to a sample form
