HSA Contribution and FICA taxes for S-Corp owner

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Topic Author
snowman
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HSA Contribution and FICA taxes for S-Corp owner

Post by snowman » Mon Oct 28, 2013 9:13 pm

I would like to solicit advise from CPAs and/or other small business owners on this issue.

I am a 100% owner/shareholder of my S-Corp providing consulting services. I pay myself reasonable salary, as well as distribution of profits. I was always under the impression that HSA contributions are excluded from FICA taxes (in my case double, as I am both employer and employee, so 15.3%). My CPA, who prepares my business tax return, is adamant that I cannot avoid paying FICA taxes, and that the way I have been doing it all these years - making deposit out of my personal account and taking deduction on line 25 of personal 1040 - is the right way to do it. He says that even if I had my company make a contribution on my behalf, there is no way to avoid FICA taxes.

Now I have read so many times about other S-Corp owners who make HSA contributions through their company PRECISELY so they avoid paying FICA taxes. Some even do it because it increases their gross income, so they can contribute more to their retirement account (25% of W-2 salary).

Can someone shed more light on it? Is my CPA right or wrong? Is this one of those "it depends" situations? If so, what are the factors? I can provide more info if necessary, but I think my situation is very straightforward - one person owner/employee, salary plus distribution, no cafeteria plan, just a solo 401k.

Thank you so much for your time and help!

Jack
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by Jack » Mon Oct 28, 2013 10:58 pm

Your CPA is correct. You can read it directly from the IRS here.

http://www.irs.gov/pub/irs-drop/n-05-08.pdf

HSA contributions by a S-corp to a 2-percent shareholder are treated as guaranteed payments, added to gross wages and subject to FICA.

jared
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Joined: Sun Jul 06, 2008 11:57 pm

Re: HSA Contribution and FICA taxes for S-Corp owner

Post by jared » Mon Oct 28, 2013 11:10 pm

IRS Notice 2005-8
For employment tax purposes, when contributions are made by an S corporation to an HSA of a 2-percent shareholder-employee, the 2-percent shareholder-employee is treated as an employee subject to Federal Insurance Contributions Act (FICA) tax and not as an individual subject to Self-Employment Contributions Act (SECA) tax. ( See Announcement 92-16, 1992-5 I.R.B. 53, clarifying the FICA (Social Security and Medicare) tax treatment of accident and health premiums paid by an S corporation on behalf of a 2-percent shareholder-employee.) However, if the requirements for the exclusion under section 3121(a)(2)(B) are satisfied, the S corporation's contributions to an HSA of a 2-percent shareholder-employee are not wages subject to FICA tax, even though the amounts must be included in wages for income tax withholding purposes on the 2-percent shareholder-employee's Form W-2, Wage and Tax Statement.

Topic Author
snowman
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by snowman » Tue Oct 29, 2013 10:31 am

Thank you both for responding!

I read this notice in the past, especially Q3-A3 directly addressing my situation. From that stand point, FICA taxes apply, no questions asked. However, there is that exception that jared underlined (definition of wages). When I talked to my CPA in the past about it, he was adamant there is no exception for an S-Corp owner like me, FICA taxes ALWAYS apply. And to not complicate W-2 reporting, make it simple and take the deduction on personal 1040 return.

That's when I started to doubt whether he is correct on this issue. I cannot tell you how many times I read (even on this forum!) that S-Corp owners should always have the company contribute to HSA to save on FICA taxes. That's why I was hoping to hear from small business CPAs that prepare S-Corp business tax returns for their clients - how do they handle company contribution to owner's HSA account on W-2 and K-1?

Q1: I was wondering if the way they handle it is that they increase gross wages only in box 1 of W-2, but not in boxes 3 and 5, and decrease profit on K-1 by corresponding amount. Than, the owner/employee takes tax deduction on personal tax return. This is the only way I can imagine getting around paying FICA taxes. Do you guys agree with me on this?

Q2: If the above is incorrect/illegal, the law does allow for S-Corp to make a contribution on behalf of owner/employee. Does that mean that correct handling of this deduction would be just like above, with the exception that all 3 boxes - 1, 3 and 5 - are increased by the amount of contribution, not just box 1?

Q3: And finally, if 2 above is correct, does that mean that having an S-Corp make a contribution is still preferred to making personal contribution, even if there is no FICA tax saving achieved? The reason being that my solo 401k contribution can be increased since my gross wages were increased by the amount of HSA contribution?

Is there anything I am missing in all this?

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Hayden
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by Hayden » Tue Oct 29, 2013 11:17 am

Bump.
I, too, have been struggling with this. I've seen conflicting answers on this question.
I think the correct answer is to report it on W2 Box 1, but I'm not an accountant.

SobeCane
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by SobeCane » Tue Oct 29, 2013 9:28 pm

would also like to get a definitive answer on this.

jared
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by jared » Wed Oct 30, 2013 11:49 pm

snowman wrote:I read this notice in the past, especially Q3-A3 directly addressing my situation. From that stand point, FICA taxes apply, no questions asked. However, there is that exception that jared underlined (definition of wages). When I talked to my CPA in the past about it, he was adamant there is no exception for an S-Corp owner like me, FICA taxes ALWAYS apply.
Has your CPA ever provided an explanation as to why there is no exception? Has he read the notice? Why would the notice even mention the exclusion under 3121(a)(2)(B) if it's impossible to meet?

If there are no discrimination issues (the benefit is provided to employees generally or a class of employees), then I do not see why corporation's contributions to the 2% shareholder-employee's HSA are subject to FICA tax.

Topic Author
snowman
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by snowman » Thu Oct 31, 2013 3:34 pm

Thanks, jared, for your suggestion.

We went over this a year ago with my CPA. I even provided couple of articles from the web, suggesting that S-Corp owners should always choose the company to contribute to employee's HSA account. His counter-argument was that even if I had my company contribute on a pre-tax basis, it still would not lower FICA taxes. His main point was that no matter how I make contribution - company pre tax, company post tax, employee post tax - I will not be able to avoid paying FICA taxes.

We are just entering the end of the year business tax planning period where we have to make certain decisions. Unlike employee contributions due next April, company contributions are due before year end, so I thought I might ask this great forum before making HSA-related decision.

I re-read relevant notices before I posted my question. I am just puzzled that there could be so much confusion out there on this very issue! It appears to me that even CPAs have hard time grasping it, judging by contradicting advise offered on tax forums. I am reluctant to bring this up for discussion with my CPA again, unless I get a clear indication from experts here that the advise he offers may not be correct.

notmyhand
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by notmyhand » Thu Oct 31, 2013 6:05 pm

I am also very interested in this as I was not aware it was possible to avoid FICA taxes. Can anyone actually link 3121(a)(2)(B)? I cannot seem to find the publication this is referring to.

Thank you for bringing this up!

jared
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by jared » Thu Oct 31, 2013 8:23 pm

notmyhand wrote:I am also very interested in this as I was not aware it was possible to avoid FICA taxes. Can anyone actually link 3121(a)(2)(B)? I cannot seem to find the publication this is referring to.

Thank you for bringing this up!
This is referring to section 3121 of the Internal Revenue Code. Here is a link: http://www.law.cornell.edu/uscode/text/26/3121

futureman
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by futureman » Thu Oct 31, 2013 9:02 pm

We have an FSA plan and I as the S corp owner cannot use it. I think this is a similar rule with the HSA.

dissonance
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by dissonance » Tue Mar 25, 2014 3:04 pm

You can do a pre-tax payroll HSA deduction and to take advantage of a FICA deduction; the 2% shareholder rule is only against SCORPs contributing and therefore treating it as a business expense. It doesn't prevent the employee from contributing via pre-tax payroll.

dissonance
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by dissonance » Wed Jul 23, 2014 8:09 pm

yzhang12 wrote:You can do a pre-tax payroll HSA deduction and to take advantage of a FICA deduction; the 2% shareholder rule is only against SCORPs contributing and therefore treating it as a business expense. It doesn't prevent the employee from contributing via pre-tax payroll.
I take this back..it is not accurate. Here's the proper interpretation:

2005-8 states:

Code: Select all

Contributions by a partnership to a bona fide partner’s HSA are not contributions by an employer to the HSA of an employee. See Rev. Rul. 69-184. Contributions by a partnership to a partner’s HSA for services rendered to the partnership that are treated as guaranteed payments under section 707(c) are deductible by the partnership under section 162 (if the requirements of that section are satisfied (taking into account the rules of section 263)) and are includible in the partner's gross income.

Under section 1372, for purposes of applying the provisions of Subtitle A that relate to fringe benefits, an S corporation is treated as a partnership, and any 2-percent shareholder of the S corporation is treated as a partner of such partnership. Therefore, contributions by an S corporation to an HSA of a 2-percent shareholder-employee in consideration for services rendered are treated as guaranteed payments under section 707(c). Accordingly, the contributions are deductible by the S corporation under section 162 (if the requirements of that section are satisfied (taking into account the rules of section 263)) and are includible in the 2-percent shareholder-employee’s gross income. In addition, the 2-percent shareholder-employee is not entitled to exclude the contribution from gross income under section 106(d).
So far, we've established that employer HSA contributions are considered guaranteed payments to the employee-shareholder and are deductible as a business expense (1120S) to the employer but must be included under gross income for the employee (Schedule K-1). We've avoided the employer's FICA/FUTA taxes so far.

2005-8 further states:

Code: Select all

For employment tax purposes, when contributions are made by an S corporation to an HSA of a 2-percent shareholder-employee, the 2-percent shareholder-employee is treated as an employee subject to Federal Insurance Contributions Act (FICA) tax and not as an individual subject to Self-Employment Contributions Act (SECA) tax. (See Announcement 92-16, 1992-5 I.R.B. 53, clarifying the FICA (Social Security and Medicare) tax treatment of accident and health premiums paid by an S corporation on behalf of a 2-percent shareholder-employee.) However, if the requirements for the exclusion under section 3121(a)(2)(B) are satisfied, the S corporation’s contributions to an HSA of a 2-percent shareholder-employee are not wages subject to FICA tax, even though the amounts must be included in wages for income tax withholding purposes on the 2-percent shareholder-employee’s Form W-2, Wage and Tax Statement. The 2-percent shareholder-employee, if an eligible individual as defined in section 223(c)(1), is entitled under sections 223(a) and 62(a)(19) to deduct the amount of the contributions made to the 2-percent shareholder-employee’s HSA during the taxable year as an adjustment to gross income on his or her federal income tax return.
3121(a)(2)(B) states:

Code: Select all

(a) For purposes of this chapter, the term “wages” means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include--

(2) the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of—

(B) medical or hospitalization expenses in connection with sickness or accident disability
We've further established that FICA taxes are not required because an HSA contribution is excluded from the wage definition (wages shall not include any payments for insurance made to an employee on the account of medical expenses). This means that on your W-2 from your company, box 1 will show the your salary + HSA contribution, but your FICA (W-2 boxes 3 and 5) will not. Remember to adjust line 8 of your 1120S (salary/wages) accordingly. Then you pay ordinary income tax on both the Employer's HSA contribution + your wages and claim a deduction on 1040/8889. This is the ideal tax situation because you've eliminated EE/ER FICA and ER FUTA from your HSA contribution and still deducted the HSA contribution from your ordinary income (assuming the HSA contribution would otherwise have been pass through income as a regular distribution to the employee anyways and thus taxed as ordinary income).

This scenario also applies to healthcare premiums for employee-shareholders (except for the ordinary income deduction). Basically, it's money after ordinary income tax you'd spend anyway, why not save some FICA/FUTA taxes on it?

smallbizguy
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by smallbizguy » Mon May 11, 2015 3:26 pm

How would you guys feel about the following scenario:

5 Employees, four of them family (parents, daughter-spouse), two owners. Fifth employee is off-site, no ownership.
One owner elects coverage for her family.
Parents decline coverage
off-site fifth employee (non owner) decline coverage

User avatar
Lieutenant.Columbo
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by Lieutenant.Columbo » Wed Dec 30, 2015 11:32 pm

yzhang12 wrote:
yzhang12 wrote:You can do a pre-tax payroll HSA deduction and to take advantage of a FICA deduction; the 2% shareholder rule is only against SCORPs contributing and therefore treating it as a business expense. It doesn't prevent the employee from contributing via pre-tax payroll.
I take this back..it is not accurate. Here's the proper interpretation:

2005-8 states:

Code: Select all

Contributions by a partnership to a bona fide partner’s HSA are not contributions by an employer to the HSA of an employee. See Rev. Rul. 69-184. Contributions by a partnership to a partner’s HSA for services rendered to the partnership that are treated as guaranteed payments under section 707(c) are deductible by the partnership under section 162 (if the requirements of that section are satisfied (taking into account the rules of section 263)) and are includible in the partner's gross income.

Under section 1372, for purposes of applying the provisions of Subtitle A that relate to fringe benefits, an S corporation is treated as a partnership, and any 2-percent shareholder of the S corporation is treated as a partner of such partnership. Therefore, contributions by an S corporation to an HSA of a 2-percent shareholder-employee in consideration for services rendered are treated as guaranteed payments under section 707(c). Accordingly, the contributions are deductible by the S corporation under section 162 (if the requirements of that section are satisfied (taking into account the rules of section 263)) and are includible in the 2-percent shareholder-employee’s gross income. In addition, the 2-percent shareholder-employee is not entitled to exclude the contribution from gross income under section 106(d).
So far, we've established that employer HSA contributions are considered guaranteed payments to the employee-shareholder and are deductible as a business expense (1120S) to the employer but must be included under gross income for the employee (Schedule K-1). We've avoided the employer's FICA/FUTA taxes so far.

2005-8 further states:

Code: Select all

For employment tax purposes, when contributions are made by an S corporation to an HSA of a 2-percent shareholder-employee, the 2-percent shareholder-employee is treated as an employee subject to Federal Insurance Contributions Act (FICA) tax and not as an individual subject to Self-Employment Contributions Act (SECA) tax. (See Announcement 92-16, 1992-5 I.R.B. 53, clarifying the FICA (Social Security and Medicare) tax treatment of accident and health premiums paid by an S corporation on behalf of a 2-percent shareholder-employee.) However, if the requirements for the exclusion under section 3121(a)(2)(B) are satisfied, the S corporation’s contributions to an HSA of a 2-percent shareholder-employee are not wages subject to FICA tax, even though the amounts must be included in wages for income tax withholding purposes on the 2-percent shareholder-employee’s Form W-2, Wage and Tax Statement. The 2-percent shareholder-employee, if an eligible individual as defined in section 223(c)(1), is entitled under sections 223(a) and 62(a)(19) to deduct the amount of the contributions made to the 2-percent shareholder-employee’s HSA during the taxable year as an adjustment to gross income on his or her federal income tax return.
3121(a)(2)(B) states:

Code: Select all

(a) For purposes of this chapter, the term “wages” means all remuneration for employment, including the cash value of all remuneration (including benefits) paid in any medium other than cash; except that such term shall not include--

(2) the amount of any payment (including any amount paid by an employer for insurance or annuities, or into a fund, to provide for any such payment) made to, or on behalf of, an employee or any of his dependents under a plan or system established by an employer which makes provision for his employees generally (or for his employees generally and their dependents) or for a class or classes of his employees (or for a class or classes of his employees and their dependents), on account of—

(B) medical or hospitalization expenses in connection with sickness or accident disability
We've further established that FICA taxes are not required because an HSA contribution is excluded from the wage definition (wages shall not include any payments for insurance made to an employee on the account of medical expenses). This means that on your W-2 from your company, box 1 will show the your salary + HSA contribution, but your FICA (W-2 boxes 3 and 5) will not. Remember to adjust line 8 of your 1120S (salary/wages) accordingly. Then you pay ordinary income tax on both the Employer's HSA contribution + your wages and claim a deduction on 1040/8889. This is the ideal tax situation because you've eliminated EE/ER FICA and ER FUTA from your HSA contribution and still deducted the HSA contribution from your ordinary income (assuming the HSA contribution would otherwise have been pass through income as a regular distribution to the employee anyways and thus taxed as ordinary income).

This scenario also applies to healthcare premiums for employee-shareholders (except for the ordinary income deduction). Basically, it's money after ordinary income tax you'd spend anyway, why not save some FICA/FUTA taxes on it?
This is VERY helpful!

1/ is it still current in Dec 2015?

2/ does the HSA account/plan have to be in the name of the shareholder/employee? Or can it be a FAMILY HSA account in the name of the spouse?

3/ even if it is the "employee's HSA", can the family contribution be contributed?

4/ health insurance premiums deduction: Is the employee/shareholder alone premium that is deductible? Or the family's?

Thanks.
Lt. Columbo: Well, what do you know. Here I am talking with some of the smartest people in the world, and I didn't even notice!

Spirit Rider
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Re: HSA Contribution and FICA taxes for S-Corp owner

Post by Spirit Rider » Thu Dec 31, 2015 1:47 am

JLMA wrote:This is VERY helpful!

1/ is it still current in Dec 2015?

2/ does the HSA account/plan have to be in the name of the shareholder/employee? Or can it be a FAMILY HSA account in the name of the spouse?

3/ even if it is the "employee's HSA", can the family contribution be contributed?

4/ health insurance premiums deduction: Is the employee/shareholder alone premium that is deductible? Or the family's?

Thanks.
1. I'm not aware of any recent changes on this subject in the Internal Revenue Code (IRC), Code of Federal Regulations (CFR), or IRS guidance (bulletins, notices, revenue rulings, etc...). For example, IRS Notice 2005-8 referenced above for HSAs is more than ten years old and the health insurance guidance exceeds this.

2. Employer contributions are only deductible if made to the HSA account of the employee. There is definitive IRS guidance on this by IRS Notice 2008-59 Q&A 26.

3. When you have a qualified family HDHP plan, both spouses are eligible individuals for HSA accounts/contributions. The family contribution may be 100% either spouse or anywhere in between by mutual agreement of the spouses. This is clearly spelled in IRS Publication 969. So it is beneficial for the S-Corp owner/employee to receive the full contribution.

4. While I have no specific knowledge of this question, I can not see any reason why it wouldn't include the premium for a family plan as is true for any other corporation.

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