Employers come in every shape and size. There are regular C corporations, S corporations, sole proprietors, limited liability corporations and partnerships. To some extent they all have, or could have, employees.
Providing benefits to employees is a very important role of employers. For the small business owner, the cost of providing health insurance coverage can be prohibitive. Offering tax savings on insurance and health care expenses is a way of boosting benefits to employees.
As much as business owners want to offer or perhaps help pay for insurance coverage, they too want to save on taxes—and there are several ways to do that. Yet which is best for each company entity? Let’s take a look at how different types of companies can provide non-taxable benefits to their employees and, at the same time, receive a tax write-off.
Delivering benefits to employees and employee-owners of a business can be accomplished in a variety of ways from a straight increase in taxable wages to non-taxable vehicles comparable to the cafeteria plan benefits of premium reimbursement accounts and health flexible spending accounts (FSAs), health reimbursement arrangements (HRAs) or health savings accounts (HSAs).
C corporations
C corporations can provide non-taxable benefits through cafeteria plans, HRAs or HSAs, and owners can generally participate right along with their employees. However, the plans cannot discriminate in favor of the owners or other highly compensated employees.
Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the corporation.
Health care expenses may be paid by employees through an FSA or HRA established by the corporation or through an HSA plan. The corporation may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.
S corporations
More than 2 percent shareholders of an S corporation cannot participate in premium reimbursement accounts, FSAs or HRAs. Neither can their spouse, children, parents or grandparents. However, S corporations may sponsor a plan for their other employees and benefit from the savings on payroll taxes.
Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the corporation. Self-employed owners may deduct on their tax returns up to 100 percent of medical and qualified long term care insurance premiums that cover them, their spouse and dependents who are included in the shareholder’s gross income.
Health care expenses may be paid by employees through an FSA or HRA established by the corporation or through an HSA plan. The corporation may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.
Partnerships
Partners of a partnership cannot participate in premium reimbursement accounts, FSAs or HRAs, but may sponsor a plan and benefit from the savings on payroll taxes. A partner’s spouse or other family members who are bona fide employees of the partnership may generally participate in premium reimbursement accounts, FSAs and HRAs. However, the plans cannot discriminate in favor of the owners or other highly compensated employees.
Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the partnership. Self-employed owners may deduct on their tax returns up to 100 percent of medical and qualified long term care insurance premiums that cover them, their spouse and dependents that are included in the partner’s gross income.
Health care expenses may be paid by employees through an FSA or HRA established by the partnership or through an HSA plan. The partnership may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.
Limited Liability Corporations
When a limited liability corporation (LLC) is taxed as a partnership, members of the LLC cannot participate in premium reimbursement accounts, FSAs or HRAs, but may sponsor a plan and benefit from the savings on payroll taxes. A member’s spouse of other family members who are bona fide employees of the LLC may generally participate in premium reimbursement accounts, FSAs and HRAs. However, the plans cannot discriminate in favor of members or other highly compensated employees.
Group insurance premiums may be paid by employees through premium reimbursement accounts or HRAs established by the corporation. Self-employed owners may deduct on their tax returns up to 100 percent of medical and qualified long term care insurance premiums that cover them, their spouse and dependents that are included in the member’s gross income.
Health care expenses may be paid by employees through an FSA or HRA established by the corporation or through an HSA plan. The corporation may make contributions to an HSA for all owners and employees covered by a qualifying high-deductible health plan.
Sole Proprietorships
While the sole proprietor cannot participate in premium reimbursement accounts, FSAs or HRAs, the spouse of the sole proprietor may be able to participate in an HRA sponsored by the company. The employee-spouse must be a bona fide employee and not considered self-employed. This means the owner’s spouse can be employed by the company and the company can pay the family’s medical, dental, and vision expenses plus family coverage health insurance and long term care premiums through the business.
The HRA option is an especially attractive benefit when the spouse is the only employee. The HRA can be established with a high limit to fit the family’s needs. If the sole proprietorship employs other employees, the owner may not wish to offer them such a high plan limit. If all employees are not offered the same limit in an HRA, the plan would generally be considered discriminatory.
A dependent or other family member who is an employee and has a business relationship with the sole proprietor also may be able to participate in the HRA. This usually means that the dependent or family member works in the business and receives a paycheck.
Self-employed owners who cannot employ a spouse may deduct on their tax returns up to 100 percent of medical insurance premiums and qualified long term care premiums that cover them, their spouse and dependents. Sole proprietors with no spouse or dependents as bona fide employees may take advantage of the lower premiums of a high-deductible health plan and make tax-deductible contributions to an HSA.
Although unrelated employees of all the entities listed in Chart 1 may participate in the benefits sponsored by the employer, the question often arises concerning owners and their family members.
Individual Health Insurance Premiums
Whether individual health insurance premiums may be paid through an FSA or HRA is another common question. Generally, premiums for individually owned policies may be paid through a premium reimbursement account or HRA. However, if an employer intends to begin such a practice, it is recommended that he notify the carrier of the individual health insurance plan and consult with legal counsel. It is unclear if HIPAA requirements are met by individual insurance plans or what COBRA obligations might be triggered.
If employers are not able to contribute to the actual premium of individually owned policies for their employees, employers can make non-taxable contributions to HSAs established by employees when employees purchase qualifying high-deductible health plans.
No information contained herein is intended to be legal, accounting or other professional advice. We assume no liability whatsoever in connection with your use or reliance upon this information. This information does not address specific situations. If you have questions about your specific situation, we recommend that you obtain independent professional advice.
