CCorp Officer Medical Fringe

[BHoffman]

This is a new one for me.

C-Corp with an officer medical fringe benefit plan. No employees. Officer took no compensation. Are the officer's medical costs still able to be deducted? As employee benefit when there were zero W2 wages paid?

The Corp income is just barely sufficient to cover the medical fringe cost.

Thanks for advice.

....and never mind because I did finally find my answer

NO.

From this article on page 6: http://www.allbusiness.com/business-.../231655-1.html

"Shareholder Coverage

As was noted, there are no statutory or regulatory nondiscrimination requirements for insured health and disability plans maintained for employees. However, in the context of closely held corporations, the IRS will scrutinize any plan to determine whether it is maintained for and benefits owners in their roles as shareholders rather than as employees. (18) A plan that does benefit shareholders, instead of employees, is not "for employees" and will be deemed a constructive dividend, in such case, the company will get no deduction for its payments and the shareholder will have to report the full premium cost as dividend income to the extent of the corporation's earnings and profits. (19)"

[BHoffman]

Can anyone add to this? The client argues that the health insurance premiums were compensation because the fringe benefits were paid for services rendered by the shareholder/employee in lieu of salary.

I'm still confused because there were no W2 wages paid and not sure if that makes a difference.

Would like to get input.

Thanks

[ChEAr$]

Can anyone add to this? The client argues that the health insurance premiums were compensation because the fringe benefits were paid for services rendered by the shareholder/employee in lieu of salary.

I'm still confused because there were no W2 wages paid and not sure if that makes a difference.

Would like to get input.

Thanks

There's no doubt the officer is an employee, albeit there are no cash payments made in
the form of wages.

Have you been furnished with a copy of THE PLAN? In writing?

[BHoffman]

Yes - In Writing.

Got the plan, in writing and dated back in 2004. How about they put the fact that the officer performed services but got no salary because of not enough income and still deduct the employee benefit?

What do you think?

[JohnH]

I think you still have a constructive dividend no matter how you look at it. But that isn't so bad - 15% corp tax is roughly the cost of FICA and matching FICA on a salary payment. 15% max income tax on the dividend isn't any higher than income tax - it may be lower. So it's a wash and he doesn't run the risk of a reclassification to payroll with potential associated penalties and interest. (unless state corp income tax is a big factor).

You could try classifying it as a shareholder loan, but that has problems on the shareholder side, especially if it's repaid after 2010 since the personal income tax rate on the earnings used to repay the loan may be higher.

[JON]

Are we talking

about a sole stockholder being covered by health insurance? There is nothing wrong with that, if there was not any money/profits or very little. You do probably need to be an employee - even part time.

If you are talking about a medical reimbursement plan that could be a little different. Most of those were written with a clause that limited reimbursements to a % of salary.

[BHoffman]

John - The article says benefit to the shareholder as a SHAREHOLDER is a dividend, but benefit to shareholder as an EMPLOYEE is not a dividend.

This shareholder acted as an employee by providing services, just didn't get paid.

So there's where I'm at.

My Old Boss says:

1. Deduct the benefit even though no salary was paid, and note in the Corp minutes that shareholder/employee didn't receive salary in 2009 due to lack of funds.

2. Make sure to have a copy of the plan in the file.

If this happens in 2010, I think the client could pay a small salary and lend the net paycheck amount back to the Corp. They have no excess Accumulated Earnings or Assets other than about $50 in the bank.

[BHoffman]

about a sole stockholder being covered by health insurance? There is nothing wrong with that, if there was not any money/profits or very little. You do probably need to be an employee - even part time.

If you are talking about a medical reimbursement plan that could be a little different. Most of those were written with a clause that limited reimbursements to a % of salary.

Jon - the plan is not based on a % of salary. Thanks for advice on that.

[JohnH]

I think an auditor would go after any third-party payment on behalf of a shareholder as a constructive dividend regardless of whether or not the shareholder is also an employee. That's at the top of their checklist with closely held companies. So establishing that he's an uncompensated employee for 2009 is the key.

Given the numbers, it doesn't sound like an audit would be likely and even if there were, the cost of an adverse result would be very much. So how about a note in the minutes that the 2010 salary/wage payment is partially to make up for the salary/wage payment the company was unable to make to the officer/employee in 2009? I definitely agree there should be a 2010 salary/wage payment of some sort, even if the net is lent back to the corp.

[Edsel]

Deduct It

From what you tell me, the only thing "wrong" with this plan is that $0 wages were paid during the tax period.

Apparently, a pattern was established in prior years, and there was nothing "wrong" then. A sole employee has the medical benefit and the corporation deducts just as if the employee was not a shareholder. Nothing wrong with that.

Now all of sudden, the entire character of the medical benefit is changed just because there was no salary?? I don't think so. Not the first time IRS has not collected revenue because of a lousy economy (which is most likely the reason a C corp didn't pay this guy).

[BHoffman]

Thank you all very much for your advice. I'm going to deduct the benefit and have them put the info in the Corp minutes and get this off the "to do" list today

[luke]

Thanks

for this discussion as I have the EXACT situation also! Thanks to all for the input!