You might only think about health insurance when you need it, but it’s critical to plan ahead. Roughly half of Americans get their coverage through an employer. However, if you own an S Corp, you’re both the employer and employee. So, how can you get health insurance?
Like any company, your S Corp can offer health coverage as a benefit, but it’s essential to understand how that works and whether it’s the right move before you start looking for an insurance provider.
Health insurance basics for S Corp owners
S Corps can provide health insurance coverage as a benefit to their employees. Companies that offer health insurance typically work with an insurer to set up a plan for their employees, which can also cover eligible family members and dependents. Employees can sign up for the plan, and the employer and the employee split the premiums.
If your S Corp provides health insurance benefits to non-owner employees, it works like any other company offering insurance. The rules change when an owner of the S Corp receives insurance through the company.
S Corp owners and health insurance premiums
Typically, when an employer pays health insurance premiums on behalf of an employee, regardless of if they are full-time or part-time, those premiums are not treated as taxable income to the employee. For S Corp owners, the rules differ.
Under IRS rules, insurance premiums for health and accident insurance paid for someone who is at least a 2-percent shareholder in an S Corp are reportable as wages. The company can deduct the payment, but the employee, S Corporation shareholder or owner must report the income in Box 1 of their Form W-2 and pay income tax.
While these premium payments get treated as additional wages and are subject to income tax, they may not be subject to other FICA payroll taxes, including Social Security, Medicare, or unemployment (FUTA) taxes. S Corp shareholders and owners can avoid these employment taxes if they pay premiums through a system that offers all employees insurance.
In short, you can ensure you don’t incur the cost of those additional payroll taxes if you offer insurance to all employees. If your S Corp only provides insurance for owners, the premiums are subject to both income and payroll taxes.
Health insurance options for S Corp owners
The insurance options available to S Corporation owners will depend on the size of your company and where you live.
Group health insurance plans
Business owners with multiple employees can work with insurance providers to purchase a group health insurance plan. You can also find these plans through the government’s Healthcare.gov website.
By law, employers with 20 or more employees must offer a group health plan to their employees. Smaller employers can offer a group health plan, but it isn’t required.
If you’re an S Corp of one, you may still be allowed to get a group health plan. This can set you up for future expansion and hiring of employees. However, some states have eligibility restrictions that do not allow companies with only one employee to buy group health insurance.
Health reimbursement arrangements
S Corp owners are not eligible for health reimbursement arrangements (HRAs), but S Corps can still offer them as a benefit for employees who don’t have a greater than 2% stake in the business. If an S Corp does offer an HRA, the owners must not use it. An HRA lets employers help their employees pay for certain qualified expenses, such as medical care, medicine, dental care and vision care.
Self-employed health insurance
If you’re an S Corp of one or can’t get a group plan in your state, you can buy an individual insurance plan. Your S Corp can still pay the premiums for this plan. Paying premiums from personal funds forfeits the tax advantages of having your S Corp pay the insurance premiums.
Tax benefits of health insurance for S Corp owners
For tax purposes, the primary benefit of having your S Corp pay your health insurance expenses is that you can avoid some payroll taxes and deduct the cost as a business expense at the end of the tax year.
When your S Corp pays for insurance, it reports those payments as wages on Form 1120-S. These are business expenses that can help reduce any taxes you must pay. You then report those wages on your income tax return, paying regular income tax on the amount paid for the insurance premiums.
While treated as wages, premium payments are not subject to Social Security or Medicare taxes. These taxes total 15.3%. If your company pays $7,000 in health insurance premiums on your behalf, you will save more than $1,000 in payroll taxes.
Pitfalls and mistakes to avoid
One of the main pitfalls to avoid is paying health insurance premiums out of your pocket rather than the company’s. If you purchase health insurance and pay the premiums with personal funds, you can’t take advantage of the tax benefits of having your company pay for insurance.
Simply put, you must have your S Corp pay the premiums on your behalf to be able to tax the tax deductions. Another critical consideration is related to the Affordable Care Act (ACA). Under the ACA, an S Corp must meet minimum standards if it offers a health insurance policy.
For example, if the plan limits payments for essential health benefits, it does not comply with IRS rules. This can lead to the IRS assessing an excise tax of $100 per employee daily. Ensuring that any plan you choose complies with ACA rules is critical.
You should also know that you can’t pay for medical benefits received through COBRA through your S Corp. To be eligible, benefits must be in the name of the S Corp or its owner. COBRA comes from a prior employer, so your S Corp cannot pay COBRA premiums.
Additionally, you can always consult with a CPA or other tax professional to ensure you avoid any pitfalls when providing health insurance to your shareholder-employees.
How to get started with S Corp health insurance
The first thing to do when getting health insurance for your S Corp is to decide on the type of plan you want to buy. If you have multiple employees, you could look for a group plan so that your company can cover all the employees. If you’re the only employee, you can look for a group plan if your state allows it or get an individual plan.
Once you’ve decided on the type of insurance to buy, take the time to shop around. Look at multiple policies and compare their key features. This can include the deductible, out-of-pocket maximum and monthly premium.
After you’ve selected a policy, you need to set up your payroll to make the premium payments. Your payroll provider should have a way to let you add employee benefits, such as medical insurance premiums, to your regular payroll. Set up your payroll to pay the amount of your premium each pay period.
Finally, make the insurance payments using your small business checking or credit card account. This will let you take the tax deductions for paying for health coverage.
Bottom line
Health insurance is essential, but it can be hard to figure out if you’re self-employed and need to find a plan yourself. If you own an S Corp, you can take advantage of payroll tax deductions, helping you save on the cost of premiums.
TJ Porter is a freelance writer based in Boston, Massachusetts. He began covering finance while earning a degree in business at Northeastern University in Boston, Massachusetts and enjoys writing about credit, investing, real estate topics. When he’s not writing, TJ enjoys cooking, sports, and games of the video and board varieties. You can contact him at find more of his work at TJPorterWriting.com