C corporation Health Insurance Deduction
C corporation health insurance deductions can be taken for health plan premiums paid for shareholders, employees, and their families.3 min read
2. Reducing Corporate Taxes Through Health Plans
C corporation health insurance deductions can be taken for health plan premiums paid for shareholders, employees, and their families, no matter how large or small the corporation may be. It is one of the benefits of establishing a business as a C corporation rather than the other choices available to business owners, which include sole proprietorships, LLCs, and even S corporations.
In addition, C corporations can also deduct the costs incurred through a Medical and Dental Reimbursement Plan. This type of plan covers owner and employee healthcare expenses that the insurance plan does not pay for, with the only stipulation being that the plan is not discriminatory, meaning it must be available to employees as well as owners. This provides an excellent added benefit for closely held C corporations because, in addition to deducting the cost for the business, the owners/employees are not taxed for the payments.
Healthcare plans fall under the category of a fringe benefit that corporations can offer their employees. These are benefits provided to employees on a non-cash basis that are fully tax-deductible expenses for a C corporation. They are not, as a rule, tax-deductible for other business entities. The IRS has established guidelines as to what is and what is not a fringe benefit, and it is advisable that a business retain an experienced tax advisor or employee benefits advisor to take full advantage of fringe benefits the company wishes to provide its employees.
Examples of Tax Deductible Fringe Benefits
Fringe benefits are excellent ways that corporations can use to attract talent, provide security for its employees, and also enjoy the value that they receive by being able to deduct the costs of many of these benefits. Forms of tax-deductible fringe benefits that C corporations can offer their shareholders and employees include:
- Health and Dental Plans: These are plans that an employer enters into with a healthcare provider that provides employees with coverage for things such as visits to doctors and dentists, prescriptions, and hospital expenses. The employee is usually responsible for an established deductible, and the insurance company pays any costs above the deductible amount.
- Long-term Care Insurance: This insurance provides coverage for employees in need of custodial care, including daily activities such as bathing or dressing, and which can take place in the employee’s home, a treatment facility, or community organization.
- Medical Reimbursement Plans: Medical Reimbursement Plans cover costs for payments for health care expenses that fall beyond the scope of the regular health insurance plan. They typically are for services, such as vision or dental insurance, that fall outside the company’s group health care plan.
- Group Term Life Insurance: These life insurance plans offered by a C corporation, automatically cover all eligible employees at premiums that are based on the number of employees enrolled in the plan, not the health of the employee. However, many plans have what are called rate bands, that are adjusted based on the employee’s age.
- Disability Insurance: This is for employees who are unable to work due to a disability. In most cases, there is a waiting period before it kicks in and they can be discriminatory in nature per IRS regulations unless provided under a cafeteria plan.
In many of these cases, the company’s contribution to the plan is tax-deductible and is not included in the employee’s taxable income. However, in the case of Group Term Life Insurance (if the plan is non-discriminatory) only up to $50,000 can currently be deducted by the company and be considered non-taxable income for the employee. Payments received through disability insurance are treated as taxable income.
Reducing Corporate Taxes Through Health Plans
It is entirely possible that owners of small C corporations can enjoy the same tax advantages as S corporations, in that the C corporations avoid having to pay any income tax at all. However, unlike an S corporation, where the tax burden is passed onto the owner’s personal income tax, the C corporation owner can also deduct their share of the health care premiums. This advantage can overcome the double taxation standard that exists when the C corporation is taxed on earnings and the owners/employees are also taxed based on the income they derive from working at the company.
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