HSA deduction if I am over 2% owner of a S-corp

Submitted by Paul Witthauer on Wed, 2018-11-21 15:32

was told if I am a 2% or greater owner of a S-Corp I can not contribute or deduct the contribution.. What is the rule?

Permalink Submitted by David Mertz on Wed, 2018-11-21 17:03

Health insurance premiums paid by the S corp as well as HSA contributions made through the S corp for a more-than-2% shareholder are not deductible on the S corp’s tax return as insurance payments. Instead, these payments by the S corp must be included in the more-than-2% shareholder’s wages, box 1 of the shareholder’s W-2 and deducted on the S corp’s tax return as wages. The more-than-2% shareholder then takes a deduction for the health insurance premiums as a self-employed health insurance deduction on their personal tax return and reports the HSA contribution as a personal contribution on Form 8889 of their personal tax return.
If you meet the HSA eligibility requirements, you can certainly make a personal HSA contribution, deductible on your personal tax return via Form 8889, even if the contribution is not through the S corp.
https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical-insurance-issues

Permalink Submitted by William Tuttle on Thu, 2018-11-22 04:02

You must run the health insurance premium through the S-Corp in order to take the Self-employed health insurance deduction. Also neither you or your spouse can be eligible for employer group health insurance whether you enroll in coverage or not.
As pointed out by DMx, you can just directly make personal HSA contributions and still take the HSA deduction.
However, while the health insurance premium and HSA contributions made directly by or reimbursed by the S-Corp are deducted by the S-Corp as officer compensation and reported on your W-2 Box 1 wages. They are not reported on Boxes 3 (Social Security wages) and 5 (Medicare wages) . Making them taxable compensation, but Fica tax exempt.
The bottom line is that they end up deductible to you personally, just not the S-Corp. Essentially a shell game to get around the fact that owners of pass-thru entities can not receive pre-tax health and welfare benefits from the entity.