IRS Publishes Memo on Deductibility of S Corporation Shareholder Health Insurance Costs
The IRS recently published IRS Chief Counsel Memorandum 201912001, which is dated December 21, 2018, and relates to health insurance costs of employee family members of 2 percent S corporation shareholders. The memo addresses an individual who owns 100 percent of an S corporation, where the S corporation employs one of the individual’s family members. Under the IRC’s Sec. 318 family attribution rules, the family member is considered to be a 2 percent shareholder of the S corporation. The S corporation provides a group health plan for all employees, and the amounts paid by the S corporation under the plan are generally included in the family member’s gross income. The question presented in the memo is whether the family member is entitled to a deduction for the amounts paid by the S corporation under the group health plan.
According to the memo, an individual who is a 2 percent shareholder of an S corporation pursuant to the Sec. 318 ownership attribution rules is entitled to a deduction for amounts paid by the S corporation under a group health plan for all employees and included in the individual’s gross income. In order for an employee who is a 2 percent shareholder to deduct the amount of the premiums, the S corporation must report the group health plan insurance premiums paid or reimbursed on the 2 percent shareholder’s Form W-2 in that same year, and the shareholder must report the premium payments/reimbursements on their Form 1040 for that year.
For employers, the memo has limited application. IRS memos are informational only and generally cannot be relied upon as direct guidance. However, this memo does serve as some indicator on how the IRS may position themselves on a particular issue. Because the memo relates to federal income taxation and deductions, employers should seek outside counsel for any direct questions.