1) The foundation: why >2% S‑corp shareholders are different

• For fringe benefits, more‑than‑2% S‑corp shareholders do not qualify for the standard tax‑free employer health benefit exclusion. Health insurance premiums the corporation pays on their behalf must be included in the shareholder’s wages for income tax purposes (but not FICA/FUTA), and the shareholder may be able to claim an above‑the‑line SEHI deduction under § 162(l) on Form 1040. The IRS fact sheet states: “The health and accident insurance premiums paid on behalf of the greater than 2 percent S corporation shareholder‑employee are deductible by the S corporation as fringe benefits and are reportable as wages for income tax withholding purposes on the shareholder‑employee’s Form W‑2. They are not subject to Social Security or Medicare (FICA) or Unemployment (FUTA) taxes.” Report in Box 1 (wages) but not Boxes 3 or 5 Wage Compensation for S Corporation Officers (FS‑2008‑25).

• For general qualification and reporting background, see S corporations.

2) How the deduction works for the shareholder: § 162(l) SEHI

• If the plan is established under (or considered established under) the S‑corp and premiums are properly treated as wages to the more‑than‑2% shareholder, the shareholder may claim a SEHI deduction for premiums paid for medical, dental, vision, and qualified long‑term care insurance for themselves, their spouse, dependents, and children under 27. Use Form 7206 to compute the deduction and report it on Schedule 1 (Form 1040), line 17 Instructions for Form 7206 • 2024 Form 7206 • 2024 Schedule 1 (Form 1040).

• “Plan established under the business” requirement: For more‑than‑2% shareholders, the policy can be in the S‑corp’s name or the shareholder’s name. If in the shareholder’s name, the S‑corp must reimburse the premiums and include the reimbursement in Box 1 of the W‑2; otherwise the insurance is not considered established under the business and the § 162(l) deduction can be jeopardized Instructions for Form 7206.

• Earned income limit: The SEHI deduction cannot exceed the shareholder’s “earned income” from the business under which the plan is established. For more‑than‑2% shareholders, wages from the S‑corp are treated as earned income for § 162(l). The instructions emphasize the earned‑income cap and that you must compute separately by business/plan Instructions for Form 7206.

• Other coverage limitation: You cannot take the SEHI deduction for any month you were eligible to participate in any subsidized employer plan (including a spouse’s employer plan), even if you did not enroll. This rule applies separately to long‑term care versus other medical plans Instructions for Form 7206.

3) S‑corp payroll reporting mechanics (for >2% shareholders)

• Corporate payment or reimbursement of the shareholder’s premiums should be included in the shareholder’s W‑2 Box 1 as wages subject to income tax withholding. Do not include in Boxes 3 or 5 for FICA or FUTA. This is the linchpin step that makes the plan “established under the business” and unlocks the shareholder’s potential § 162(l) deduction Wage Compensation for S Corporation Officers (FS‑2008‑25).

• The S‑corp deducts the premiums as a business expense on the corporate return, but the benefit is taxable wages to the shareholder for income tax purposes; the shareholder then potentially deducts the same premiums on their Form 1040 as SEHI, subject to the earned‑income and subsidized plan limitations above Wage Compensation for S Corporation Officers (FS‑2008‑25) • 2024 Instructions for Form 1120‑S.

4) Affordable Care Act market reforms: caution on reimbursement plans

• Employer payment plans that reimburse employees’ individual premiums are treated as group health plans subject to ACA market reforms and generally cannot be integrated with individual policies to satisfy those rules. Employers may face § 4980D excise tax exposure ($100/day per employee). See IRS guidance and references to Notice 2013‑54 and Notice 2015‑17 (limited transition relief through June 30, 2015 for certain small employers, and discussion of 2% shareholder‑employee arrangements) Employer health care arrangements.

• 2% shareholder arrangements: The IRS indicated transitional relief (through the end of 2015) from § 4980D excise tax for failures to satisfy market reforms solely due to a 2% shareholder‑employee healthcare arrangement, pending further guidance. This history underscores the need to keep shareholder arrangements distinct from common‑law employee benefits and to use compliant group plans or permitted HRA designs for non‑shareholder employees Employer health care arrangements.

5) Coordinating SEHI with the Premium Tax Credit (PTC)

• If you had Marketplace coverage and advance PTC (APTC) payments, you must reconcile the PTC on Form 8962. Special coordination rules apply when you claim a § 162(l) SEHI deduction and also have Marketplace coverage. Treasury regulations set sequencing/limitation steps and give examples 26 CFR § 1.36B‑4.

• For comprehensive PTC guidance and worksheets (including interactions with employer coverage/HRAs), see the IRS publication list that includes Publication 974 (Premium Tax Credit) Guide to business expense resources (Pub. 535 mapping).

6) Step‑by‑step compliance checklist for S‑corp owner health insurance

• Adopt and document the S‑corp’s health insurance arrangement for >2% shareholders (direct payment or reimbursement), ensuring the corporation either pays the premiums or reimburses the shareholder and includes the amount in Box 1 of the W‑2 (not FICA/FUTA) Wage Compensation for S Corporation Officers (FS‑2008‑25).

• Verify the plan is “established under the business”: if the policy is in the shareholder’s name, the S‑corp must reimburse and W‑2 the premiums to meet this requirement Instructions for Form 7206.

• Avoid noncompliant employer payment plans for common‑law employees. Use a compliant group health plan or permissible HRA/QSEHRA designs as applicable; otherwise, § 4980D excise tax may apply Employer health care arrangements.

• At year‑end, the shareholder reports the W‑2 wages (including the premium amounts) on Form 1040, and completes Form 7206 to compute the § 162(l) deduction for premiums paid, limited by earned income and months not eligible for subsidized employer coverage Instructions for Form 7206 • 2024 Form 7206.

• If Marketplace coverage/APTC existed, file Form 8962 and apply the coordination rules so that both PTC reconciliation and § 162(l) are computed correctly 26 CFR § 1.36B‑4 • Publication 974 listed here Guide to business expense resources.

7) Reasonable compensation matters

• Because § 162(l) limits the deduction to earned income from the business, S‑corp owner‑employees should ensure their W‑2 compensation is reasonable for the services performed. IRS guidance highlights factors (training, duties, time, comparable pay, etc.) and cautions against substituting distributions for wages Wage Compensation for S Corporation Officers (FS‑2008‑25).

8) Practical examples

• S‑corp pays $10,000 in medical premiums for a >2% shareholder. The S‑corp includes $10,000 in Box 1 of the shareholder’s W‑2 (but not Boxes 3 or 5); the S‑corp deducts the premiums as a business expense. On the shareholder’s Form 1040, Form 7206 computes a potential SEHI deduction for the $10,000, limited by the shareholder’s S‑corp “earned income” (W‑2 wages) and months not eligible for subsidized employer coverage. If the shareholder had Marketplace APTC, the SEHI deduction and PTC are coordinated under the regulation Wage Compensation for S Corporation Officers (FS‑2008‑25) • Instructions for Form 7206 • 26 CFR § 1.36B‑4.

• S‑corp reimburses common‑law employees for their individual premiums through an employer payment plan. This arrangement is a group health plan that generally fails ACA market reforms and may trigger the § 4980D excise tax absent proper integration or exceptions. Adopt a compliant group plan or permitted QSEHRA/ICHRA structure (subject to current rules) Employer health care arrangements.

9) Key forms and references

• W‑2 reporting: Include >2% shareholder premiums in Box 1 (wages) only; not Boxes 3 or 5 Wage Compensation for S Corporation Officers (FS‑2008‑25).

• SEHI computation and reporting: Instructions for Form 7206 • 2024 Form 7206 • 2024 Schedule 1 (Form 1040).

• PTC reconciliation and coordination rules: 26 CFR § 1.36B‑4 • Publication 974 noted here Guide to business expense resources.

• Corporate reporting context: 2024 Instructions for Form 1120‑S.

• ACA employer arrangement cautions: Employer health care arrangements.

10) Bottom line for S‑corp owners

To preserve the SEHI deduction, make sure the S‑corp either pays or reimburses your premiums and includes them in Box 1 of your W‑2. Confirm that no months are disallowed due to eligibility for subsidized employer coverage, and that your earned income (reasonable wages) is sufficient to absorb the deduction. If you used Marketplace coverage and received APTC, follow the coordination rules with the PTC on Form 8962. For rank‑and‑file employees, don’t use noncompliant reimbursement arrangements—use a proper group health plan or permitted HRA structure to avoid ACA excise taxes Wage Compensation for S Corporation Officers (FS‑2008‑25) • Instructions for Form 7206 • Employer health care arrangements • 26 CFR § 1.36B‑4.

If you’re unsure whether your current setup meets all requirements—or whether you’re maximizing the SEHI deduction while staying ACA‑compliant—work with a tax advisor experienced in S‑corp and shareholder‑employee rules to review your payroll reporting, plan documentation, and PTC coordination before filing. For general S‑corp guidance, see S corporations.