"report the wages as indicated on his w2 and not deduct the health insurance premiums. It seems by doing this I have done as much I can and the rest should fall on the employer to investigate. Fair?"

I would describe that as your safest course of action.

"Notice 2008-1 states that if the shareholder purchased the health insurance in his own name and paid for it with his own funds, the shareholder would not be allowed an above-the-line deduction."

Treating that payment either as a distribution to the Shareholder-employee, to then make their own premium payment or as the reimbursement, bypassing the W2 box 1 entry, turns this into a personal policy and not qualifying for tax deduction as "if the medical care coverage was established by the S corporation and the shareholder met the other self-employed medical insurance deduction requirements."

https://www.irs.gov/businesses/small-businesses-self-employed/s-corporation-compensation-and-medical...

"On the other hand, if the corporation obtains and pays for health insurance in its name, covers the shareholder under the policy, and reports the premiums as W-2 wages to the shareholder, then the shareholder is allowed an above-the-line deduction. Similarly, if the shareholder purchased the health insurance in his own name but the S corporation either directly paid for the health insurance or reimbursed the shareholder for the health insurance and also included the premium payment in the shareholder's W-2, the shareholder would be allowed an above-the-line deduction.

The bottom line is that in order for a shareholder to claim an above-the-line deduction, the health insurance premiums must ultimately be paid by the S corporation and must be reported as taxable compensation in the shareholder's W-2."

BTW, I found a succinct answer from another forum (a benefits forum) that puts your two issues together, and additionally, how this impacted retirement plan contribution calculations.

"There is no 2% shareholder-employee compensation to be added to their W-2 Box 1 compensation to base employer retirement plan contributions on. Even worse, the self-employed health insurance deduction is only available for 2% shareholder-employees if the the premiums were paid or reimbursed by the S-Corp and included in their W-2 Box 1 wages. See IRS Notice 2008-1*, claiming the deduction in these circumstances would be tax evasion.

*This notice provides rules under which a 2-percent shareholder-employee in an S corporation is entitled to the deduction under §162(l) of the Internal Revenue Code for accident and health insurance premiums that are paid or reimbursed by the S corporation and included in the 2-percent shareholder-employee’s gross income.

If the health insurance premiums were paid or reimbursed by the S-Corp and CPA is claiming the 2% shareholder-employees health insurance premiums as S-Corp deductions on Form 1120S would be fraudulent. Pass-thru business owners can never be the beneficiary of pre-tax health benefits. Regardless the paid or reimbursed health insurance premiums must be still reported as taxable wages. I'm not sure if failure to include the health insurance premiums as Officer compensation would be fraudulent, but it would inflate the S-Corp's ordinary income used to calculate the QBI deduction. Failure to include the compensation and report it on Form W-2 could also be a reporting error.

I would think most plan documents would require plan compensation to be that compensation claimed by the business and reported on Form W-2 Box 1. Here again, failure to include the health insurance premiums in Officer compensation and included in W-2 Box 1 wages, precludes taking the Self-employed health insurance deduction on Form 1040."

So, all kinds of wrong, here.

I haven't had cause to dive into this so deeply for a while. I never even considered the retirement planning aspect of this error.