I recently started working for an s corp. there are two shareholders which each own 50% and work in the company consistently. the company offers health insurance. however, one shareholder does not use this insurance and has personal health insurance and has been using the company to reimburse him/her through distributions. On the books, distributions have been equal. However, according to the IRS, this is a fringe benefit and has to be considered as wages, reported on the W2 in box 1 and considered as taxable income. ( I called and asked.)

Since this was a fringe benefit, can it also be a distribution? (I really don't think so.) Since this has to be reported as wages, does this make the distribution balance unequal? If so, how do I correct this problem before 2013 W2's are printed?