Core Rule for >2% S‑Corp Owners

• Accident and health benefits are generally excludable for rank‑and‑file employees, but if you are a >2% S‑corp shareholder, the cost of employer‑paid health insurance for you must be included in your W‑2 wages for income tax purposes (not subject to Social Security, Medicare, or FUTA), with the potential to claim a deduction on your individual return if other conditions are met Wage Compensation for S Corporation Officers (IRS Fact Sheet); Publication 15‑B (2025).

• 2% S‑corp shareholders are not treated as employees for cafeteria plan purposes; therefore, you generally cannot receive cafeteria plan benefits (such as health FSA, dependent care FSA, or other §125 salary‑reduction arrangements) on a pre‑tax basis Publication 15‑B (2025).

Accident and Health Benefits: What Works and How to Report

• Employer‑paid health insurance for >2% owners: Include the premiums in Box 1 (wages) of the shareholder‑employee’s W‑2, but do not include them in Boxes 3 or 5 (FICA/Medicare); generally exempt from FUTA. Done correctly, the shareholder may qualify for the self‑employed health insurance deduction under §162(l) on the individual return (subject to statutory requirements) Wage Compensation for S Corporation Officers (IRS Fact Sheet).

• Employer payment plans that reimburse employees for individual market premiums generally violate ACA market reforms and can trigger the $100/day per employee excise tax under §4980D. Use compliant structures (e.g., an eligible small employer QSEHRA or a compliant group plan) instead Employer health care arrangements.

HSAs (Health Savings Accounts)

• HSAs are permitted benefits, but >2% shareholders cannot receive HSA contributions through a §125 cafeteria plan because they are not treated as employees for cafeteria plan purposes. If an employer contributes directly to an HSA (outside a cafeteria plan) for eligible employees, those contributions may be excludable to those employees; eligibility and HDHP rules are detailed in Publication 969 Publication 15‑B (2025); Publication 969 (2024).

Cafeteria Plans (§125): >2% Shareholder Limitations

• 2% shareholders cannot participate as employees in a §125 cafeteria plan; they cannot receive health FSA, dependent care FSA, or other salary‑reduction benefits on a pre‑tax basis Publication 15‑B (2025).

• Notice 2014‑55 provides limited additional midyear election change options for cafeteria plans (for Marketplace enrollment timing and certain hour reductions) for eligible participants generally; however, >2% shareholders remain ineligible for cafeteria plan benefits due to the shareholder rule Publication 15‑B (2025).

Group‑Term Life Insurance and Other Common Fringes

• Group‑term life insurance (GTL): The general employee exclusion for up to $50,000 of coverage applies subject to nondiscrimination rules and the valuation table in Pub. 15‑B. Ensure proper treatment and avoid discriminatory designs; special rules can apply depending on plan structure and who qualifies as an “employee” Publication 15‑B (2025).

• Working condition fringes: Items provided primarily for business reasons (for example, employer‑provided cell phones for noncompensatory business reasons) can be excludable as working condition fringes; follow the business‑use and substantiation rules in Pub. 15‑B Publication 15‑B (2025).

• De minimis fringes: Low‑value, infrequent benefits (e.g., occasional snacks) may be excludable; Pub. 15‑B explains the limits and examples Publication 15‑B (2025).

• Athletic facilities and no‑additional‑cost services: Certain on‑premises athletic facilities and excess capacity services can be excludable if the plan meets Pub. 15‑B criteria and nondiscrimination rules; confirm specifics before implementation Publication 15‑B (2025).

Qualified Transportation Fringes

• Employee exclusion rules for transit passes, commuter highway vehicles, and qualified parking (including monthly limits) are described in Pub. 15‑B; ensure proper application and reporting for employees. (Employer deduction disallowance rules for certain transportation benefits reside in §274; employee exclusion amounts remain governed by Pub. 15‑B.) Publication 15‑B (2025).

Accountable Plans (Business Expense Reimbursements)

• Proper business expense reimbursements under an accountable plan are not treated as fringe benefits and can be excluded from wages if they meet the business connection, substantiation, and return‑of‑excess requirements. This applies to owners and employees alike; failure to meet accountable plan rules causes reimbursements to become taxable wages Publication 15 (2025).

W‑2 Reporting and Payroll Tax Treatment for Health Benefits (Critical for >2% Owners)

• Health and accident insurance premiums paid by the S‑corp for >2% shareholder‑employees: Include in Box 1 (wages) on the W‑2; do not include in Boxes 3 or 5; generally exempt from FUTA. Correct W‑2 reporting helps preserve eligibility for a self‑employed health insurance deduction on the shareholder’s individual return (subject to §162(l) requirements) Wage Compensation for S Corporation Officers (IRS Fact Sheet).

Small Employer Health Insurance Credit (§45R)

• If your S‑corp is an eligible small employer that provides health coverage to employees through an Exchange, the §45R small employer health insurance credit may be available. Annual inflation‑adjusted amounts for §45R and other provisions are published in IRS revenue procedures; see Section 2.10 in Rev. Proc. 2025‑adjusted items for current thresholds Revenue Procedure 24‑40.

ACA Compliance: Avoid Impermissible Reimbursement Arrangements

• Do not reimburse employees for individual market health premiums through noncompliant employer payment plans. These arrangements are generally considered group health plans that fail ACA market reforms and may trigger §4980D excise tax penalties. Consider permitted arrangements, such as QSEHRA for eligible small employers, or compliant group coverage Employer health care arrangements; Health Reimbursement Arrangements (HRAs).

Practical “Do / Do Not” Summary for >2% S‑Corp Owners

• Do:

  • Include employer‑paid health premiums in Box 1 W‑2 for >2% owners; exclude from FICA/FUTA. Consider the individual §162(l) deduction if statutory requirements are met and the plan is properly established by the S‑corp Wage Compensation for S Corporation Officers (IRS Fact Sheet).

  • Use accountable plans for business reimbursements and apply Pub. 15‑B rules for working condition and de minimis fringes Publication 15 (2025); Publication 15‑B (2025).

  • Verify employee exclusions and monthly limits for qualified transportation fringes per Pub. 15‑B Publication 15‑B (2025).

• Do not:

  • Participate in a §125 cafeteria plan as a >2% shareholder; you cannot receive health FSA or dependent care FSA benefits pre‑tax Publication 15‑B (2025).

  • Reimburse individual health insurance premiums through noncompliant employer payment plans; these arrangements generally violate ACA market reforms and can trigger §4980D excise tax exposure Employer health care arrangements.

Final Thoughts

For S‑corp owner‑operators, the biggest traps are cafeteria plan participation and accident/health benefit reporting for >2% shareholders. Get W‑2 reporting right (Box 1 inclusion, not Boxes 3/5) for owner health premiums, and use Publication 15‑B to confirm fringe exclusions and nondiscrimination rules. Avoid ACA‑noncompliant reimbursement arrangements; if you offer health coverage to rank‑and‑file employees, explore whether the §45R credit applies and ensure your plan structure complies with ACA market reforms. When structured properly, S‑corp owner‑operators can still leverage many fringe benefits (e.g., working condition, de minimis, on‑premises facilities) while keeping owner benefits tax‑efficient and penalty‑free Publication 15‑B (2025); Publication 969 (2024); Employer health care arrangements.