There are additional Form W-2 reporting requirements for a greater than 2% shareholder of an S corporation (shareholder) if their health care plan costs are paid by the S corporation. This also includes immediate family members of greater than 2% shareholders of an S corporation.
Amounts paid for health, vision, and/or dental insurance plans must be included on the shareholder’s Form W-2. The health care plan costs are subject to federal and state income tax withholdings. If the shareholder’s health care plan costs are paid as part of a group plan that covers both shareholders and non-shareholders, they are not subject to FICA, Medicare, and FUTA taxes. If an employer does not report a shareholder’s health care plan costs on a Form W-2, the IRS can deny the income tax deduction for the S corporation shareholder’s health care plan costs.
If you have not been running the shareholder’s health care plan costs through payroll at the time that they were paid, we suggest that you run the total annual health care plan costs through payroll no later than the final payroll for the year. Consider the following:
- The health care plan costs should not increase the shareholder’s take-home paycheck. Rather, the shareholder’s “normal” paycheck would be reduced by the appropriate amount of Federal and state income tax withholdings on the health care plan costs.
- Employer provided health care plan costs should be included in Box #1 and Box #16 on the shareholder’s Form W-2 as taxable wages.
- Employer provided health care plan costs should not be included in Form W-2 Boxes #3 and #5, Social Security and the Medicare wages, provided that the exception for group plan Social Security and Medicare taxes described in the paragraph above applies.
- Shareholder’s health and/or dental insurance costs should also appear in Box #14, with the notation “2%HI” to indicate that it is health insurance.
- If the S corporation made a Health Savings Account (HSA) contribution for a shareholder, that too is reported in Box #14, but with the notation “2% HSA.”
If you issue 250 or more Form W-2s, the cost of employer provided health care plan costs for all non-owner employees must be reported in Box #12, Code DD. While Box #12 is required for non-owner employees only if you issue 250 or more Form W-2s, we recommend that you consider reporting the cost of employer provided health care plan costs in Box #12, Code DD, as that information can be useful to employees and their tax return preparer. The IRS has indicated that it will require that all employers, regardless of size, report the cost of employer provided health care plan costs on all employee Form W-2s in the future.
As a final note, employers should use extreme caution in reimbursing employees for any health care costs that employees have paid on their own. Such a reimbursement program could subject the employer to a penalty of as much as $36,500 per year, per employee getting such a reimbursement. There are some qualified reimbursement plans that would not result in the penalty, but they have stringent requirements and have limited applicability. This restriction on health care cost reimbursements applies to all employers, of any size S corporation, and not employers.
If you have any questions about the above information, please contact Jennete Griggs or Sarah Long at our office at 541.687.1170.