HSA contributions, S Corp owner, and FICA taxes

[jacoavlu]

Jan 1 will be first time my family will be on an HSA eligible plan. I’m a >2% S Corp owner. I had planned to make the $7,000 contribution with Jan payroll, and presumed doing this would save FICA tax.

But, in chatting with Lively, WCI’s top ranked HSA provider, they indicated this arrangement was not allowed for an S Corp owner, that I would instead have to make the contribution after tax, and claim the deduction on my return (which doesn’t avoid FICA tax). They linked me to this page on their site: https://livelyme.com/smb-owners-can-i-contribute-to-an-hsa/

Here’s the relevant language from them:

S-Corp: Please be aware that any owner who owns >2% is ineligible to receive pre-tax contributions. Anyone in this designation is considered an “owner” from an IRS perspective as such must receive HSA contributions on a post-tax basis and receive the tax benefit at the end of the year.

Now it’s not that big of a deal because I’m not saving any SS tax either way. But I’ll take the tax savings wherever I can get them.

So in researching more I found this thread and relevant post on bogleheads which if I read correctly is concluding Lively is wrong, and I can contribute through payroll and save FICA.

https://www.bogleheads.org/forum/viewtopic.php?t=125518#p2131536

So who’s right?

[spiritrider]

Lively is correct that small business owners of pass-thru entities can not receive pre-tax health and welfare benefits. This applies to health insurance premiums and HSA contributions for S-Corp 2% shareholder-employee's.

However, Lively has made a clear error by omission. You most definitely are able to receive deductions and FICA exemption on these. It just requires s specific detailed process.

1. The S-Corp pays directly or reimburses the health insurance premium and/or makes directly or reimburses the HSA contributions.
2. These after-tax payments are reported on the S-Corp's Form 1120s Line 7 Officer Compensation.
3. They are also reported on the 2% shareholder-employee's W-2 Box 1 wages, but NOT Boxes 3 Social Security wages and 5 Medicare wages.
4. The shareholder-employee then reports on their personal Form 1040 the Line 25 HSA deduction and the Line 29 Self-Employed health insurance deduction*.

This effectively makes the health insurance premiums and HSA contributions income and FICA tax exempt.

* You may only take the self-employed health insurance deduction if you are not eligible for a group health insurance plan of you or your spouse's employer.

[jacoavlu]

Perfect. We already do this process for our health insurance premiums. So it should be easy to add the HSA contribution in the same manner.

Thanks as always spiritrider! You’re such an asset to the forum.

[spiritrider]

I would just add. Even though we are 14 years after the introduction of HSA accounts and 13 years after IRS Notice 2005-8 regarding HSA contributions for S-Corp 2% shareholder-employees.

Some payroll software and/or services still do not properly handle HSA contributions for SCorp 2% shareholder-employees. It may be necessary to make such contributions outside of payroll, manually adjust Form 1120S and manually generate and file Form W-2.

[jacoavlu]

I sent an email to Shobin at Lively about this, with a link to this thread. I'll update if I get a response. Would be great to see them provide this tax-beneficial guidance directly to their S corp owner-customers.

[beagler]

spiritrider wrote:

Lively is correct that small business owners of pass-thru entities can not receive pre-tax health and welfare benefits. This applies to health insurance premiums and HSA contributions for S-Corp 2% shareholder-employee’s.

However, Lively has made a clear error by omission. You most definitely are able to receive deductions and FICA exemption on these. It just requires s specific detailed process.

1. The S-Corp pays directly or reimburses the health insurance premium and/or makes directly or reimburses the HSA contributions.
2. These after-tax payments are reported on the S-Corp’s Form 1120s Line 7 Officer Compensation.
3. They are also reported on the 2% shareholder-employee’s W-2 Box 1 wages, but NOT Boxes 3 Social Security wages and 5 Medicare wages.
4. The shareholder-employee then reports on their personal Form 1040 the Line 25 HSA deduction and the Line 29 Self-Employed health insurance deduction*.

This effectively makes the health insurance premiums and HSA contributions income and FICA tax exempt.

* You may only take the self-employed health insurance deduction if you are not eligible for a group health insurance plan of you or your spouse’s employer.

Click to expand...

Is the S-Corp 2% shareholder HSA contribution ok to do if one has employees?

There is some rule about contributing to all employees "equally" if one does pre-tax HSA employee contributions.

Can one do only the 2% shareholder contribution (since it's mostly after-tax and different rule?) without pre-tax HSA contributions to all employees?

[spiritrider]

The S-Corp 2% shareholder HSA contribution is 100% income "after-tax". The fact that it is FICA exempt does not factor in. It is not subject to comparability and anti-discrimination rules because it is not a pre-tax employee health & welfare benefit.

In fact an S-Corp 2% shareholder can not receive pre-tax health & welfare benefits even if they offer them to their employees. In that case they still must use this method to pay health insurance premiums and HSA contributions after-tax.

[beagler]

spiritrider wrote:

I would just add. Even though we are 14 years after the introduction of HSA accounts and 13 years after IRS Notice 2005-8 regarding HSA contributions for S-Corp 2% shareholder-employees.

Some payroll software and/or services still do not properly handle HSA contributions for SCorp 2% shareholder-employees. It may be necessary to make such contributions outside of payroll, manually adjust Form 1120S and manually generate and file Form W-2.

Click to expand...

S-corp health insurance and S-corp HSA contributions wind up being treated the same(except where they are deducted on the 1040).

If my payroll provider doesn't have an S-corp HSA contribution type can I just lump it in with the S-corp health insurance?

[spiritrider]

Yes, that has been the workaround for years for running the actual payroll. Technically, the HSA amount should be reported separately on W-2 Box 14 as "2%HSA" rather than lumping it in with "2%HI" as this will cause. However, Box 14 is for "information only" and is not required.

[vectorsquidge]

Thanks so much for the detailed responses, Spiritrider!

In this situation when I file my quarterly 941s, should I also include the contributions on behalf of the owner in part 1 box 2 "wages, tips, and other" and then reduce taxable social security and medicare wages in lines 5a and 5c? It seems like that's only way that the W2 and W3 will match the total on the 941s.

From my research, it sounds like as long as I don't "withhold" the HSA contribution or insurance payment during payroll processing but instead make these payments separately, I've followed proper protocol. Do you concur?

[DMFA]

vectorsquidge wrote:

Thanks so much for the detailed responses, Spiritrider!

In this situation when I file my quarterly 941s, should I also include the contributions on behalf of the owner in part 1 box 2 “wages, tips, and other” and then reduce taxable social security and medicare wages in lines 5a and 5c? It seems like that’s only way that the W2 and W3 will match the total on the 941s.

From my research, it sounds like as long as I don’t “withhold” the HSA contribution or insurance payment during payroll processing but instead make these payments separately, I’ve followed proper protocol. Do you concur?

Click to expand...

It ends up coming out in the wash and not being included in your personal taxable income.  If you include them, then you're going to end up paying taxes on them with your quarterlies and getting them back with your annual.

Remember that as a pass-through entity, your S-corp will end up at zero every year, since it all gets paid to you (wages, distribution, retirement) or as employer FICA as shown on 1120S.  It's a deduction for your S-corp (line 7), then added to yours on W-2 (box 1), then subtracted from yours on 1040 (line 25).  So 2 deductions minus 1 taxable expense equals 1 deduction in the end.

Caveat is that I have not directly done this maneuver, but this should certainly not alter your tax liability.  The point of quarterlies is to avoid penalties, and you'd have to be off by 10% of your liability...you'd have to be earning pretty low for $7,000 of income to push you off by that far.

[PassionateLife]

This will be my first year contributing to an HSA after I decided to switch to an HDHP today (after a lot of back and forth calculations).  However, I am not sure how to set this up in my payroll.  Is the HSA like 401K contribution where there's a company match/contribution and an individual one?  I use Gusto for Payroll and just created this additional HSA benefit as > 2% S-Corp Owner, and it seems that I am forced to put down a monthly deduction for the employee and the company.  Gusto manages HSA for an annual fee of $200 and also a monthly fee, so I'd rather set up a no-fee account at Fidelity (that I just read in another blog recently).

[jacoavlu]

I’m pretty sure that if you’re a 2% S Corp shareholder the HSA contribution should be 100% employer. Then, the contribution amount is included in your W2 Box 1 but not Box 5 comp and then deducted on your personal return. Just like health insurance premiums.

[spiritrider]

As @jacoavlu said; the S-Corp (employer) either pays or reimburses the HSA contributions. Then the amount is deducted on Form 1120S Officer Compensation, W-2 Box 1 wages, but not Boxes 3 SS wages and 5 Medicare wages.

Different software packages treat this differently, including some who don't handle it all and you have to do it manually. I have no knowledge about how you have to mechanize this in Gusto.

[ma91pmh]

My apologies for digging up an old thread but this seems by far the most educated piece I have been able to find on this topic. Does anyone have any further experience post this of using gusto for generating HSA contributions and having them file taxes correctly? I just had a long discussion with one of their support staff and was left unconvinced. Gusto has a tendency to hide the details to be more "user friendly" so it is hard to tell if the way they advise is going to lead to the actual outcome I want