Providing quality health insurance for yourself and your employees is crucial for any business. But the rules around who can receive tax-free health benefits vary depending on your corporate structure. Specifically, C corporations have unique advantages when it comes to deducting health insurance costs for owners and shareholders.
In this comprehensive guide, we’ll explain how a C corporation can legally pay for owners’ health premiums and why this provides tax savings compared to other business structures.
What is a C Corporation?
First, let’s review what defines a C corporation.
A C corporation, sometimes called a C corp, is a legal business structure that is taxed separately from its owners under subchapter C of the Internal Revenue Code. The C corp is considered a distinct legal entity apart from shareholders.
Here are some key attributes of a C corp:
- Subject to corporate income taxes on net profits
- Shareholders have limited liability protection
- Ownership is through shares of stock
- No restrictions on ownership structure – can have unlimited shareholders
- Owners pay taxes on dividends from profits
- Considered regular corporations by the IRS
This differs from an S corporation which passes income directly to shareholders to avoid double taxation. S corps have restrictions like a limited number of shareholders.
Most large companies and many small businesses incorporate as a C corp. The exact number fluctuates year to year but over 1.5 million corporations filed taxes as C corps in 2019 according to IRS data.
Tax Benefits of C Corps for Owner Health Premiums
One of the main advantages a C corp offers is the full deductibility of health insurance premiums and other fringe benefits for employees and owners.
Specifically, a C corp can deduct 100% of health insurance premiums paid for:
This applies to owners who are bona-fide employees of the C corp and own any percentage of the company.
There is no requirement for the C corp to offer the same level of coverage to all employees. So higher-ranking employees like owners and executives can receive more expensive plans compared to rank-and-file employees.
In contrast, S corps can only deduct health premiums for employees, not owners with more than a 2% stake in the company. Anything paid for a 2%+ owner must be included in their salary and wages subject to payroll taxes.
By deducting premiums directly, a C corp provides three tax advantages:
1. Tax deduction for the corporation
The C corp can deduct 100% of health premiums as a business expense, reducing its taxable income.
2. No payroll taxes
Health premiums are not subject to Social Security, Medicare, or federal unemployment taxes.
3. Tax-free benefit for employees/owners
Employees and owners do not pay federal income or payroll taxes on the value of employer-provided health insurance.
This benefit also applies to group term life insurance up to $50,000 per person and long-term care insurance premiums.
How Much Can a C Corp Deduct for Owners’ Health Premiums?
A C corporation can deduct the full cost of health insurance premiums for owners and their dependents without any dollar limits. This includes premiums for:
- Individual health plans
- Family health plans
- Group health plans
- Self-insured health plans
- COBRA coverage
As long as the owners are employees of the C corp, the amounts paid are fully deductible as a business expense. The corporation gets the deduction even if it reimburses employees for insurance they purchase directly.
There is also no limit on the number of owners that can receive deductible health benefits. If the C corp has 10 shareholders who are active employees, premiums for all 10 owners are 100% deductible.
The only requirement is that premium payments must be an ordinary and necessary business expense and not excessive based on individual circumstances. But in most cases, typical health plan rates for owners are reasonable and meet this standard.
Key Takeaways on C Corp Owner Health Premiums
To recap the key points on deducting owner health insurance premiums with a C corporation:
- C corps can deduct premiums paid for shareholder-employees and their dependents
- No deduction limits or dollar caps apply
- Provides tax deduction for corporation and tax-free benefits for owners
- Not subject to payroll taxes like FICA, FUTA, or Medicare tax
- S corps limited to deducting premiums for non-owner employees
- Applies to various types of health plans and COBRA coverage
This tax treatment provides a key advantage of the C corp structure when it comes to health benefits.
Setting Up a C Corp HRA
For C corps that want to optimize their health benefits, setting up a health reimbursement arrangement (HRA) can provide additional savings.
An HRA lets companies reimburse tax-free for qualified medical expenses, including insurance premiums. This provides triple tax savings:
- Tax deduction for the corporation
- No payroll tax for reimbursements
- Tax-free benefit for employees
Under an HRA:
- Owners must participate as employees
- Each employee can have a different reimbursement allowance
- HRAs can only reimburse substantiated medical expenses
HRAs provide flexibility for C corp owners to design customized benefits. And the corporation still deducts reimbursed amounts.
Some examples of qualified medical expenses reimbursable through an HRA include:
- Health insurance premiums
- Doctor visits
- Prescription drugs
- Dental and vision costs
- Psychiatric care and counseling
Combining a C corp structure with an HRA allows shareholders who are active employees to receive significant tax-advantaged health benefits.
Consulting With a Tax Advisor
Deciding whether to form a C corporation as well as the proper structure to optimize health benefits can get complex.
It’s smart to work with a qualified tax advisor or attorney when making choices about your corporate structure and employee benefits. They can help ensure you meet all IRS requirements to take full advantage of C corps’ deductibility of owner health insurance.
The right business structure combined with tax-efficient benefits like an HRA can maximize savings and provide attractive health coverage options for both owners and employees.
- C corporations can deduct health insurance premiums paid for owners/shareholders who are employees
- No limits exist on the amount deductible for owners and their dependents
- Provides tax deduction for the corporation plus tax-free health benefits for employees/owners
- Sets up opportunity to pair C corp with HRA for additional benefits tax savings
- Consult a tax professional to ensure proper setup to optimize deductions
Leveraging the power of a C corporation for tax-advantaged health benefits can be a smart strategy for many businesses. Working with experts to implement this properly is key to maximizing savings.
S-Corp Owner Health Insurance Tax Strategy – Boris Musheyev, Tax Advisor
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