How Group Health Insurance Is Taxed for C Corporation Owners
An owner who works in a C corporation is generally treated like any other employee. The corporation deducts the premiums, the owner does not report the benefit as income, and the owner can use the cafeteria plan. Of the four entity types, this is the simplest.
Three Things Happen When the Corporation Pays
Each one follows from the owner being an employee of the corporation.
The Corporation Deducts the Premiums
Premiums the corporation pays for employee coverage are generally deductible as an ordinary business expense, which lowers the corporation’s taxable income. That includes the owner’s coverage, on the same terms as everyone else’s. See how employers deduct group health premiums.
The Owner Reports No Income
IRS guidance generally lets an employee exclude employer-provided health coverage from wages, and from Social Security, Medicare and unemployment tax. An owner who is a common-law employee of the corporation is in the same position. See why employer-paid coverage is tax-free to employees.
The Owner Can Use the Cafeteria Plan
Employees of a C corporation, owner-employees included, can pay their share of premiums through a Section 125 plan before income tax and payroll tax. That is a real difference from S corporation owners and partners, who cannot.
The Owner Has to Be an Actual Employee
The tax treatment rests on employee status, so the details of how the owner is paid matter.
On the Payroll
The owner must be a common-law employee of the corporation, which generally means being paid wages through payroll and not only taking dividends. Set the pay structure with your CPA before the plan year starts.
The Same Plan and the Same Rules
The plan still has to meet the carrier’s participation and contribution rules, and a cafeteria plan cannot favor owners and highly compensated employees.
Dependents Are Covered Too
A health plan can cover the employee’s spouse, dependents and children who are under age 27 at the end of the tax year, and the employer-paid coverage is generally excluded for them as well.
Written Documentation
A written cafeteria plan document and a record of the employer contribution support the tax treatment if it is ever questioned.
Common Problems in a C Corporation
Each of these is simple to avoid at the start and awkward to correct afterward.
Paying Premiums Personally
A policy the owner buys with personal funds is not an employer plan, so the corporation has no deduction for it and the owner has no exclusion. Coverage should be established by the corporation and paid for by it.
Treating the Owner as a Non-Employee
An owner who takes no wages may not qualify as an employee, which puts both the exclusion and cafeteria plan access in doubt.
Overlooking the Small Employer Credit
A corporation with fewer than 25 full-time equivalent employees and below-limit average wages may qualify for the Section 45R credit. Owners of more than 5 percent and their family members are not counted in the calculation.
C Corporation Owner Questions
Is a C corporation owner taxed on the premiums?
Generally no, if the owner is an employee covered under the corporation’s plan. The coverage is excluded from wages the same way it is for any employee.
Can the owner join a Section 125 plan?
Yes, an owner who is an employee of a C corporation can. S corporation owners with more than 2 percent ownership and partners cannot.
How is this different from an S corporation?
In an S corporation, premiums for a more-than-2-percent owner are reported as wages and deducted personally. A C corporation owner has no W-2 reporting of the premium.
Can an owner-only corporation buy a group plan?
Carriers generally require at least one covered employee who is not an owner or the owner’s spouse. Rules vary by carrier.
Does the owner’s spouse count as an employee?
Only if the spouse is a genuine employee. Coverage for a spouse of a covered employee is generally treated the same way as the employee’s own.
Who should confirm my situation?
Your CPA. We can build and document the plan so premiums are paid and reported the way your entity requires.
CFH are licensed insurance brokers, not tax advisors, and this page is general information rather than tax advice. Ownership, family relationships and how the business is taxed all change the result, so confirm your own treatment with your CPA. Our clients also have access to CPAs and attorneys through the firm.
Where These Rules Come From
IRS: Instructions for Form 7206, Self-Employed Health Insurance Deduction · S Corporation Compensation and Medical Insurance Issues · Notice 2008-1 · Publication 15-B, Employer’s Tax Guide to Fringe Benefits
Related Guides
Related reading: Tax Benefits of Group Health Insurance for Owners · S Corporation Owners With More Than 2 Percent · Sole Proprietors · Partners and LLC Members · Small Business Health Care Tax Credit · Section 125 Tax Savings Calculator
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