Shareholder Health Insurance Reimbursement

Shareholders are not allowed a deduction for health insurance on page one of their individual income tax return, unless premiums have been paid by the corporation directly or reimbursed to the shareholder and such amount has been added to the shareholder/employee's W-2. Provisions under the Affordable Care Act (ACA) make this type of reimbursement of health insurance premiums subject to the Group Health Plan provisions required in the legislation. If the corporation is reimbursing or paying premiums in this manner for only one person you are deemed to be in compliance with the group plan rules under the regulations. However, if more than one person is being reimbursed or covered in this manner, you could be out of compliance with the Group Health plan provisions and subject to a penalty of $100 per day per employee. In order to avoid the penalty and still get the full tax deduction when more than one employee is involved the company needs to establish a true group plan for the shareholders and/or employees to participate in. Otherwise, the company should treat the reimbursement as taxable income to the employee and have them take the deduction on Schedule A of their individual return. These rules are complex and can subject you to significant penalties if you do not handle the reimbursement correctly.