Can S Corporation shareholders participate in an HRA?
An S corporation shareholder is not treated the same as a “typical” or “non-family” employee. Because a 2% or more shareholder of an S corporation is treated as a partner, the amount of fringe benefit the shareholder receives is reported on the W-2 subject to Federal and State income taxes but not subject to FICA and medicare. Publication 15-B states: Because you cannot treat a 2% shareholder of an S corporation as an employee for this exclusion, you must include the value of accident or health benefits you provide to the employee in the employee’s wages subject to federal income tax withholding. However, you can exclude the value of these benefits (other than payments for specific injuries or illnesses) from the employee’s wages subject to social security, Medicare, and FUTA taxes. So an S corporation shareholder may participate in an HRA, but must report the amount of fringe benefit reimbursed by the corporation on the W-2.
