HSA contributions as S corp officer income

[DrGuch]

Hello!

I am a sole owner/employee of my S corp. Am I able to include my HSA contributions as compensation? So I'm looking at deducting the contributions as an S corp expense, adding it to my compensation in box 1 of my W2, then deducting it again in Schedule 1 of the 1040. It'll probably save me a couple hundred bucks in Medicare taxes. It looks like a correct way to do it, but I'd appreciate some input.

Thanks!

[spiritrider]

A small nitpick.

Technically, you are not deducting the HSA contributions as an S-Corp expense. The reason it is included in your W-2 Box 1, is because the HSA contributions are added to your Form 1120S Line 7 Compensation of officers*. That is what is deducted as an S-Corp expense.

*This what is known as an after-tax benefit. This is what allows the compensation to be FICA exempt and what allows you to claim the HSA deduction. Owners of pass-thru businesses can not receive pre-tax health and welfare benefits.

[DrGuch]

Thanks spiritrider.

I'm not sure I understand what you said about the HSA being an 'after-tax benefit'. I mean, by doing the process as I described, the contribution is exempt from personal income taxes, right?

Also, another question about healthcare expenses if you don't mind indulging me here. Can I include out-of-pocket dental expenses as part of officer compensation? We decided to skip dental insurance for 2020 and just paid out of pocket. Since I don't have dental insurance to include in the compensation, can I include the OOP expenses instead?

Thanks again, really appreciate it.

[spiritrider]

I'm not sure I understand what you said about the HSA being an 'after-tax benefit'. I mean, by doing the process as I described, the contribution is exempt from personal income taxes, right?

Effectively yes, but it is an after-tax benefit at the business level. Then you take an HSA deduction on your personal tax return. This is similar to any W-2 enployee making HSA contributions by direct deposit instead of a salary reduction and then taking the HSA deduction.

Also, another question about healthcare expenses if you don't mind indulging me here. Can I include out-of-pocket dental expenses as part of officer compensation? We decided to skip dental insurance for 2020 and just paid out of pocket. Since I don't have dental insurance to include in the compensation, can I include the OOP expenses instead?

No, you can not include out-of-pocket healthcare costs. Those can only be paid/reimbursed from a pre-tax healthcare plan. Which as I already pointed out, a pass-thru business owner can not participate in. Your only option is dental insurance.

[DrGuch]

I figured I can't include those OOP costs. Didn't consider that when we decided to skip dental insurance last year (and this year). Oh well, now I know.

Thank you very much!