Category: Deductions & Credits; Corporations;
Partnerhips & LLCs Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Can a partnership or S corporation deduct payments to a Medical Savings Account (MSA) made on behalf of partners or more-than-2% shareholders of an S corporation? The tax provisions that create MSA's and the related Committee Reports as well as the so-called "Blue-Book" explanation of the various tax acts passed in the 104th Congress do not specifically address the issue of how MSA contributions are handled in the context of partnerships and S corporations. Moreover, the IRS has not provided guidance of any sort. It is my opinion that there in nothing inherently different about an MSA that would cause it to be treated differently from ordinary medical insurance premiums paid on behalf of partners and more-than-2% shareholders of an S corporation. An individual cannot be an employee and a partner in the same partnership. IRC Section 105, the section that allows employees to exclude insurance benefits attributable to employer-provided health insurance, is specifically inapplicable to partners. See Section 105(g). Section 106, which allows exclusion of employer-paid health insurance premiums has a similar restriction for partners. IRC Section 1372(a) says for the purposes of employee fringe benefits, an S corporation shall be treated as a partnership, and a more-than-2% shareholder of an S corporation shall be treated as a partner of such partnership. Revenue Ruling 91-26, 1991-1 CB 184, provides comprehensive instructions about handling employer provided accident and health insurance premiums on behalf of partners and more-than-2% shareholders of S corporations. A partnership that pays accident and health insurance premiums on behalf of a partner treats such amounts as guaranteed payments to the partner. See Section 707(c) and Regulation Section 1.707-1(c). In essence, the partnership gets a deduction for the premiums paid, and the partner then takes such amounts into income. The partner cannot exclude such amounts from income under Section 106. The partners is then eligible to deduct the appropriate percentage thereof as allowed by Section 162(l). As an alternative, the partnership can choose to show the medical insurance premiums paid as a reduction of the partner's cash distributions. In that case, the partnership does not deduct the premiums, and the partner is still able to deduct the appropriate percentage of the premiums paid on his behalf as allowed by Section 162(l). An S corporation is allowed essentially the same treatment. The S corporation deducts the premiums, but the more-than-2% shareholder is not allowed to exclude them from gross income under Section 106. These amounts should be included on the shareholder's W-2. As with a partnership, the shareholder is then able to deduct the appropriate percentage allowed by Section 162(l). Unlike a partnership, however, the alternative of reducing distributions is not available in the S corporation context. There is no reason to think that an MSA should be treated differently. It seems to me that the principles articulated by Revenue Ruling 91-26 should be generally applicable to any employee fringe benefit paid by a partnership or S corporation including MSA's. |
