it is very possible the S-Corp return was prepared inaccurately. the premiums for health insurance paid by the S-Corp for each 2%+ shareholder should have been reported as compensation on line 7 or 8. in addition the premiums should have been reported as part of gross wages box 1 on the W-2's (specifically allocated). also reported in box 14.
from 2017 1120-s instructions
lines 7 and 8
Include fringe benefit expenditures made on behalf of officers and employees owning more than 2% of the corporation's stock. Also report these fringe benefits as wages in box 1 of Form W-2. Don't include amounts paid or incurred for fringe benefits of officers and employees owning 2% or less of the corporation's stock.These amounts are reported on line 18.
report amounts paid for health insurance coverage for a more-than-2% shareholder (including that shareholder's spouse, dependents, and any children under age 27 who aren't dependents) as an information item in box 14 of that shareholder's Form W-2. A more-than-2% shareholder may be allowed to deduct such amounts on Form 1040, line 29. To find out if the shareholder can claim this deduction, see Self-Employed Health Insurance Deduction in chapter 6 of pub 535
fringe benefits includes health insurance.
if the health insurance was not handled as described above, the only deduction allowed for it would be as a schedule A medical expense.
