In these times of health care reform, there has been a great deal of discussion about discrimination in health care plans. If your S-corporation offers a health or dental insurance plan, your plan’s provider may have had a discussion with you last year, especially if your plan requires employees to personally contribute a portion (or all) of their premiums. If you own more than 2% of an S-corporation and participate in its health or dental plan, your benefits provider likely informed you that you would now be required to withhold a portion of your insurance premiums from your paycheck as well.

If your S-corporation currently offers or is considering offering a flexible spending arrangement (also called a cafeteria plan or Section 125 plan), please take note: Shareholders who own more than 2% of the stock of an S-corporation cannot have their medical or dental insurance premiums deducted from their paychecks pre-tax because they are not considered to be employees under Internal Revenue Code § 125; rather, they are treated the same as partners in partnerships for these purposes.

As a shareholder owning more than 2% of the S-corporation, your participation in the Company’s flexible spending arrangement could disqualify the entire plan. (Shareholders owning 2% or less are not excluded from participation in their Company’s Section 125 plan.) This exclusion for S-corporation shareholders owning more than 2% of their corporations not only applies to flexible spending arrangements for health insurance and other health care costs, but also includes FSAs for dependent care assistance and for company-sponsored health savings accounts (HSAs). As a general rule, such shareholders are generally ineligible for tax-free fringe benefits through plans provided by the S-corporation.

So, how do you properly comply with the new health care discrimination rules without disqualifying your Section 125 plan? Simply have your portion of your health or dental premiums deducted as an after-tax deduction. Then, at the end of the year, only add the company-paid portion of the premiums to your W-2.

If you have any questions about how to set up post-tax deductions in your payroll system or what other pre-tax deductions are available to you, contact a Boulay advisor at 952.893.9320 or


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