Taxes

Reaping the Benefits: 2% Shareholder Health Insurance

September 13, 2018

2% shareholder health insurance is an amazing fringe benefit for shareholders. Learn the ins and outs, and how it's different than other types of insurance.

Smiling people high-fiving

2% Shareholder Insurance – explained by great-grandma and treats

Learning the differences among limited-liability corporations (LLCs), c corps, and s corps can be confusing. It may remind you of your Great-Grandmother trying to remember her great-grandkid’s names, and who their parents are. Who belongs where, and what belongs to them?

It is a whole lot of distribution, allocation, and membership. At the end of the day, the easiest thing to do is identify the pros of each entity. One such pro is the 2% shareholder health insurance, which is only available to an s corp.

An s corp is a company with limited liability for all shareholders and have distributions which are not subject to self-employment tax. They’re the only entity which offers 2% shareholder health insurance, so that keeps at least one aspect straight.

What is a 2% shareholder?

The one thing all corporations have in common is the shareholder. A shareholder is someone who owns a minimum of one share of a company’s stock. A shareholder can also be a business or an institution.

2 Shareholder health Insurance 5The advantage of company stock ownership is that it allows you to make money when the company profits, but you’re not responsible for the company’s debt. Kind of like when Great-Grandma gives all the great-grandkids an envelope with a twenty dollar bill at Christmas, but they don’t have to help pay for funeral costs when she kicks the bucket (poor grandma).

A 2% shareholder owns a minimum 2% of company stock at any point throughout the year, or has at least 2% of the voting power. Shareholders are privy to certain proprietary company information. They can inspect company records, sue directors and officers, vote on important company issues, attend meetings, and receive dividends.

An s corp cannot have more than 100 shareholders. These 100 shareholders can be employees and outsiders alike.

What is a fringe benefit?

In order to provide a total compensation package that’s competitive with other employers, many corporations offer fringe benefits. Fringe benefits are perks, outside of a regular salary, which effectively increase the total amount an employee earns. Like how Great-Grandma gives candy to the kids in her neighborhood and she also never rats them out when they are being mischievous.

Some fringe benefits include bonuses, group term life insurance, personal use of a company car, Health Savings Accounts, employee discounts, and education reimbursement. Fringe benefits can be in one of two categories:  taxable and non-taxable.

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What is 2% shareholder health insurance?

2 Shareholder health Insurance 1While many companies offer health insurance to their regular employees, a fringe benefit of being a shareholder is the 2% shareholder health insurance. Remember – this is only available to s corps.

This type of health insurance is only available to the parties who have at least a 2% buy-in. Think about how Great-Grandma might give all the kids in the neighborhood a piece of candy, but she only bakes cookies for her own great-grandkids and their best friends. The best friends would be the 2% shareholders.

Individuals with this insurance reap the benefits of the insurance coverage, without necessarily having to be employed with the company.

How does 2% shareholder health insurance differ from regular health insurance?

The two major differences between 2% shareholder health insurance and group health insurance are that covered people must meet certain requirements, and they’re taxed differently.

As mentioned before, it’s not even necessary for someone to work for a company in order to receive this kind of health insurance. The requirement being they must meet the 2% threshold where shareholding is concerned.

How do you tax 2% shareholder health insurance?

2 Shareholder health Insurance 2As mentioned before, the 2% shareholder health insurance does not have the same taxation process as regular group health insurance. For example, while the premiums are tax-deductible for the company, they are taxable for the covered individuals.

Whereas most employees see their health insurance premiums withheld before tax calculations, the shareholder’s health insurance is taxed right along with regular wages. Two things they are not taxed for is Social Security and Medicare (FICA) or unemployment (SUTA and FUTA).

How do I complete a W-2 for 2% shareholder insurance?

If you are completely baffled about how to include 2% shareholder health insurance, don’t be! The only thing you need is the W-2 form, and a little guidance.

The most important thing to remember is that 2% shareholder health insurance is considered wages, tips, and other compensation in box 1. After all, Great-Grandma values her sweets—and you’d better remember the gesture!

Since this payment is not taxable for Social Security and Medicare, nothing is included in box 3.

In box 14, you will include the value of the 2% shareholder health insurance.

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What is the downside of 2% shareholder health insurance?

One potential pitfall with 2% shareholder insurance is the mismanagement of the transaction during payroll. Many payroll personnel don’t realize they must include this type of insurance as earned wages on the W-2.

Sue Headshot
Sue Shirley, Journey Payroll, President of Tax Operations

The shareholder can lose the opportunity to deduct their premiums at the end of the year if the benefit is not properly coded because this type of insurance is considered self-employed health insurance. This can end up being a costly error to the shareholder.

The cost to the insured is not the only cost; s corps can expect penalties when they don’t properly complying with certain market reform provisions.

Sue Shirley, Shareholder and President of Tax Operations ensures you can trust Journey to properly code your benefit.  She explains, “Journey is very familiar with how to add shareholder insurance to W2s, so don’t worry. We send reminders towards the end of the year, reminding clients to submit their 2% shareholder insurance amount prior to W2 printing.  All we need is that amount from yourself or your CPA, and we’ll take care of the rest on your W2!”

Remember not to take the benefit for granted

The takeaway here is that the 2% shareholder health insurance can be a nice benefit for people who would like to cover themselves and their family members, by means of company investment.

In other words, remember to be nice to Great-Grandma, and she will be sure to sweeten the pot. Just follow the rules and regulations of the IRS, and they won’t leave a bad taste in your mouth.


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