If an S corporation pays accident and health insurance for their 2% shareholder-employees, the premiums paid by the S corporation are considered wages; however, the taxability of those wages depends on the plan under which the premiums are paid.
The FICA and FUTA taxability of health insurance premiums paid by an S corporation on behalf of 2% or more shareholders/employees depends on the plan under which the amounts are paid.
The Internal Revenue Code defines a 2% shareholder as any shareholder owning, directly or indirectly, more than 2% of an S corporation's stock (refer to IRC section 1372).
Amounts paid by an S corporation for accident and health insurance covering a 2% shareholder-employee are wages for federal income tax withholding purposes, and must be reported as wages on the employee's Form W-2 (refer to IRS Revenue Ruling 91-26).
The FICA taxability of these accident and health insurance premiums depends on whether the requirements under IRC section 312(a) are met (refer to IRS Announcement 92-16). The requirements are satisfied if the payments are made under a plan or system for employees and their dependents generally, or for a class of employees and their dependents. Then, the premiums paid by the S corporation on behalf of 2% shareholder-employees are exempt wages for FICA.
Federal Unemployment Tax Act (FUTA) section 3306(b)(2)(B) is identical to IRC section 3121(a)(2)(B). If the requirements are satisfied, the premiums paid by the S corporation on behalf of 2% shareholder-employees are exempt wages for FUTA.
The taxability of health insurance premiums paid by an S corporation on behalf of 2% or more shareholders-employees may vary by state for state income tax, state unemployment insurance, and local taxes.
Check with your tax professional or state for additional information.