The way it is supposed to work is the company includes your health insurance premiums in box 1 of your W-2 form, but not in box 3 or 5 so you don't pay social security tax on it.
The company deducts the wage amount as reported in box 1 on the S corporation tax return, thereby reducing the company income by the amount of the health insurance.
Next, you pick up the wage income and then deduct the self-employed heath insurance on your personal tax return. Thus, the company deducts the health insurance, then you break even on reporting it on your tax return. Your benefit then is the lower S corporation income reported to you, since the health insurance was deducted from the S corporation income.
So, the health insurance needs to by paid by the company in order for the shareholder to get the deduction.
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