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    Employer provided health insurance

    Can an S-corp discriminate in this area? That is, can the S-corp choose to pay the health insurance premiums for only 1 of its 15 employees without violating any discrimintion rules?
    Dave, EA

    #2
    It doesn't violate any Internal Revenue Code section rules. It might violate some ERISA or state regulations.


    On the other hand, if it were a health reimbursement arrangement, then it would violate the code.

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      #3
      Thank you. I'm not sure why I thought it couldn't be done, but I did.
      Dave, EA

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        #4
        I think I should offer more detail.

        The employee is not a s/h. His wife has a great policy through her employer, and she can add him for an additional $400 per month. If his employer (the S-corp) pays the $400 per month to her insurance carrier to cover him, does this have to get included as wages to him?
        Dave, EA

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          #5
          Yes because the spouse of a shareholder is considered a shareholder for purposes of the fringe benefit rules for S corporations. So paying her insurance for his coverage is no different than paying his insurance for his coverage.

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            #6
            Bees Knees,

            There are no S/H's in this picture. She works for a C-corp elsewhere. He works for the S-corp.
            Dave, EA

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              #7
              Sorry, I missed that. The S corp would have to pay the insurance premiums. If the S corp pays the insurance through a reimbursement arrangement, then it cannot discriminate against other employees. So I doubt it would work in your case because the wife's health insurance is not a group policy of the S corp. Section 105(h) prohibits discrimination under these types of reimbursement arrangements.

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                #8
                Again, many thanks. It makes sense now.
                Dave, EA

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                  #9
                  Bringing this up again...

                  Originally posted by Bees Knees
                  It doesn't violate any Internal Revenue Code section rules. It might violate some ERISA or state regulations.


                  On the other hand, if it were a health reimbursement arrangement, then it would violate the code.
                  So, just to make this clear to me, in the light of Health Insurance in the shareholder's name needing to be reimbursed by the S-Corp, in wages, etc. in order to take the full cost as opposed to limited medical deduction.

                  So, if done by a reimbursement from the S Corp to the shareholder then the S Corp needs to provide health insurance for the other employees also?

                  Do you know where I can read more about this subject involving non discrimination. I've been doing some reading today, but the sources did not seem clear enough to me.

                  Thank you,
                  JG

                  Comment


                    #10
                    Nondiscrimination rules are discussed in TTB on page 13-26. According to IRS Pub 15-B, those listed are the only fringe benefits that are subject to the nondiscrimination rules. Self-insured medical reimbursement plans (Section 105(b) plans) are listed, but not employer-provided health insurance plans (Section 106 plans). That means if you provide health insurance to employees, there is no restriction in the IRC on discrimination (although there may be restrictions under other areas of the law - such as state law). Medical reimbursement plans, on the other hand, cannot discriminate.

                    The problem with the S corp issue, is that if it is a Section 106 plan, where the S corporation is providing the health insurance coverage, the health insurance has to be provided through the S corporation. In other words, a group policy purchased and paid for by the S corporation in the name of the S corporation. For a single owner who is the only employee, that might be difficult as the insurance company may not issue a group policy to one person. If that single owner who is the only employee purchases the insurance coverage himself or herself outside of the S corporation, it is not a Section 106 plan, as the S corporation is not the one providing the coverage for the single owner employee.

                    That is why IRS says it does not qualify for the self employed health insurance deduction, as it is simply health insurance purchased individually by a taxpayer, deductible as medical expenses on Schedule A.

                    In contrast, if the S corporation sets up a Section 105(b) plan, whereas the S corporation reimburses medical expenses for ALL employees, then any reimbursements to employees for individual health insurance coverage is considered a part of that plan. The S corporation shareholder can take the self employed health insurance deduction on the front of the 1040, because the insurance is technically being provided under a plan of the S corporation.

                    Section 105(b) plans cannot discriminate against any employee. But that does not mean the reimbursements have to be for the same expense. For example, one employee can submit an insurance bill to the employer for reimbursement, the next can submit a bill for prescription drugs, another can submit a bill for the dentist, etc. etc. Maybe the S corp shareholder is the only one having the insurance coverage reimbursed, while other employees are covered under their spouses plan. In that case, they might only need the deductible portion of their medical bills reimbursed by the S corp.

                    So to answer your question, it is not necessary for every employee to have medical insurance reimbursed under a Section 105(b) plan. Only those employees who actually submit the insurance bill to the employer for reimbursement have to be reimbursed.

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                      #11
                      Well summed up Bees..

                      the whole fringe benefit thing is tricky in S corps.

                      Doug

                      Comment


                        #12
                        Thank you!

                        Originally posted by Bees Knees
                        Nondiscrimination rules are discussed in TTB on page 13-26. employee....
                        So to answer your question, it is not necessary for every employee to have medical insurance reimbursed under a Section 105(b) plan. Only those employees who actually submit the insurance bill to the employer for reimbursement have to be reimbursed.
                        Thank you for explaining this. I did read TTB, but unless things are spelled out (like you do) I need to discuss it with someone.
                        JG
                        JG

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                          #13
                          Same here. I have a hard time reading and understanding things correctly.

                          Thanks so much, Bees, for your great essay.

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