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CGCPA
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Experience:  over 40 years experience in tax matters
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for a c corp to deduct health insurance for a shareholder,

Resolved Question:

for a c corp to deduct health insurance for a shareholder, how much must the shareholder work? Do they have to work full time? No other employees currently exist.
Submitted: 2 years ago.
Category: Tax
Expert:  CGCPA replied 2 years ago.

Welcome to Just Answer. I am here to help you resolve your tax and finance concerns. Please feel free to ask anytime you need extra help.

There are no specific rules prohibiting or limiting the ability for a C Corp to pay and deduct as a business expense the cost of medical insurance. There are, however, tax implications to "highly compensated" employees and since you are the only employee those rules will apply to you. The benefit will be taxable income to you but the tqax produced will still far exceed the medical expense itemized deduction on your personal return. Here is a piece from the IRS about thyis. It contains links to other information you may also find useful:




Publication 15-B - Main Content







Table of Contents






1. Fringe Benefit
Overview



A fringe benefit is a form of pay for the performance of services. For
example, you provide an employee with a fringe benefit when you allow the
employee to use a business vehicle to commute to and from work.


Performance of services. A person who performs services for you does
not have to be your employee. A person may perform services for you as an
independent contractor, partner, or director. Also, for fringe benefit purposes,
treat a person who agrees not to perform services (such as under a covenant not
to compete) as performing services.


Provider of benefit. You are the provider of a fringe benefit if it is provided
for services performed for you. You are the provider of a fringe benefit even if
your client or customer provides the benefit to your employee for services the
employee performs for you. For example, you are the provider of a fringe benefit
for day care even if the day care is provided by a third party.


Recipient of benefit. The person who performs services for you is
the recipient of a fringe benefit provided for those services. That person may
be the recipient even if the benefit is provided to someone who did not perform
services for you. For example, your employee may be the recipient of a fringe
benefit you provide to a member of the employee's family.






Are Fringe Benefits
Taxable?



Any fringe benefit you provide is taxable and must be included in the
recipient's pay unless the law specifically excludes it. Section 2 discusses the
exclusions that apply to certain fringe benefits. Any benefit not excluded under
the rules discussed in section 2 is taxable.


Including taxable benefits in pay.
You must include in a recipient's pay the amount by which the value of a
fringe benefit is more than the sum of the following amounts.



  • Any amount the law excludes from pay.



  • Any amount the recipient paid for the benefit.

The rules
used to determine the value of a fringe benefit are discussed in section 3.

If the recipient of a taxable fringe benefit is your employee, the
benefit is subject to employment taxes and must be reported on Form W-2, Wage
and Tax Statement. However, you can use special rules to withhold, deposit, and
report the employment taxes. These rules are discussed in section 4.

If the recipient of a taxable fringe benefit is not your employee, the
benefit is not subject to employment taxes. However, you may have to report the
benefit on one of the following information returns.












If the recipient
receives the benefit
as:
Use:
An independent contractorForm
1099-MISC
A partnerSchedule K-1 (Form
1065)

For more information, see the instructions
for the forms listed above.






Cafeteria
Plans



A cafeteria plan, including a flexible spending arrangement, is a written
plan that allows your employees to choose between receiving cash or taxable
benefits instead of certain qualified benefits for which the law provides an
exclusion from wages. If an employee chooses to receive a qualified benefit
under the plan, the fact that the employee could have received cash or a taxable
benefit instead will not make the qualified benefit taxable.

Generally, a cafeteria plan does not include any plan that offers a benefit
that defers pay. However, a cafeteria plan can include a qualified 401(k) plan
as a benefit. Also, certain life insurance plans maintained by educational
institutions can be offered as a benefit even though they defer pay.


Qualified benefits. A cafeteria plan
can include the following benefits discussed in section 2.



  • Accident and health benefits (but not Archer medical savings accounts (Archer
    MSAs) or long-term care insurance).



  • Adoption assistance.



  • Dependent care assistance.



  • Group-term life insurance coverage (including costs that cannot be excluded
    from wages).



  • Health savings accounts (HSAs). Distributions
    from an HSA may be used to pay eligible long-term care insurance premiums or
    qualified long-term care services.


Benefits not allowed. A cafeteria
plan cannot include the following benefits
discussed in section 2.



  • Archer MSAs. (See Accident and Health Benefits .)



  • Athletic facilities.



  • De minimis (minimal) benefits.



  • Educational assistance.



  • Employee discounts.



  • Lodging on your business premises.



  • Meals.



  • Moving expense reimbursements.



  • No-additional-cost services.



  • Transportation (commuting) benefits.



  • Tuition reduction.



  • Volunteer firefighter and emergency medical responder benefits.



  • Working condition benefits.

It also cannot include scholarships or fellowships (discussed in Publication
970, Tax Benefits for Education).


Employee. For these plans, treat the
following individuals as employees.



  • A current common-law employee (see section 2 in Publication 15 (Circular E)
    for more information).



  • A full-time life insurance agent who is a current statutory employee.



  • A leased employee who has provided services to you on a substantially
    full-time basis for at least a year if the services are performed under your
    primary direction or control.


Exception for S corporation
shareholders.
Do not treat a 2% shareholder of an S corporation as an
employee of the corporation for this purpose. A 2% shareholder for this purpose
is someone who directly or indirectly owns (at any time during the year) more
than 2% of the corporation's stock or stock with more than 2% of the voting
power. Treat a 2% shareholder as you would a partner in a partnership for fringe
benefit purposes, but do not treat the benefit as a reduction in distributions
to the 2% shareholder.


Plans that favor highly compensated
employees.
If your plan favors highly compensated employees as to
eligibility to participate, contributions, or benefits, you must include in
their wages the value of taxable benefits they could have selected. A plan you
maintain under a collective bargaining agreement does not favor highly
compensated employees.

A highly compensated employee for this purpose is any of the following
employees.



  1. An officer.



  2. A shareholder who owns more than 5% of the voting power or value of all
    classes of the employer's stock.



  3. An employee who is highly compensated based on the facts and
    circumstances.



  4. A spouse or dependent of a person described in (1), (2), or
    (3).


Plans that favor key employees. If
your plan favors key employees, you must include in their wages the value of
taxable benefits they could have selected. A plan favors key employees if more
than 25% of the total of the nontaxable benefits you provide for all employees
under the plan go to key employees. However, a plan you maintain under a
collective bargaining agreement does not favor key employees.

A key employee during 2011 is generally an employee who is either of
the following.



  1. An officer having annual pay of more than $160,000.



  2. An employee who for 2011 is either of the following.





    1. A 5% owner of your business.



    2. A 1% owner of your business whose annual pay was more than
      $150,000.






Simple Cafeteria
Plans



After December 31, 2010, eligible employers meeting contribution requirements
and eligibility and participation requirements can establish a simple cafeteria
plan. Simple cafeteria plans are treated as meeting the nondiscrimination
requirements of a cafeteria plan and certain benefits under a cafeteria plan.


Eligible employer. You are an
eligible employer if you employ an average of 100 or fewer employees during
either of the 2 preceding years. If your business was not in existence
throughout the preceding year, you are eligible if you reasonably expect to
employ an average of 100 or fewer employees in the current year. If you
establish a simple cafeteria plan in a year that you employ an average of 100 or
fewer employees, you are considered an eligible employer for any subsequent year
as long as you do not employ an average of 200 or more employees in a subsequent
year.


Eligibility and participation
requirements.
These requirements are met if all employees who had at least
1,000 hours of service for the preceding plan year are eligible to participate
and each employee eligible to participate in the plan may elect any benefit
available under the plan. You may elect to exclude from the plan employees who:



  1. Are under age 21 before the close of the plan year,



  2. Have less than 1 year of service with you as of any day during the plan
    year,



  3. Are covered under a collective bargaining agreement, or



  4. Are nonresident aliens working outside the United States whose income did not
    come from a U.S. source.


Contribution requirements. You must
make a contribution to provide qualified benefits on behalf of each qualified
employee in an amount equal to:



  1. A uniform percentage (not less than 2%) of the employee's compensation for
    the plan year, or



  2. An amount which is at least 6% of the employee's compensation for the plan
    year or twice the amount of the salary reduction contributions of each qualified
    employee, whichever is less.

If the contribution
requirements are met using option (2) above, the rate of contribution to any
salary reduction contribution of a highly compensated or key employee can not be
greater than the rate of contribution to any other employee.


More information. For more
information about cafeteria plans, see section 125 of the Internal Revenue Code
and its regulations.






2. Fringe Benefit
Exclusion Rules



This section discusses the exclusion rules that apply to fringe benefits.
These rules exclude all or part of the value of certain benefits from the
recipient's pay.

The excluded benefits are not subject to federal income tax withholding.
Also, in most cases, they are not subject to social security, Medicare, or
federal unemployment (FUTA) tax and are not reported on Form W-2.

This section discusses the exclusion rules for the following fringe
benefits.





  • Accident and health benefits.



  • Achievement awards.



  • Adoption assistance.



  • Athletic facilities.



  • De minimis (minimal) benefits.



  • Dependent care assistance.



  • Educational assistance.



  • Employee discounts.



  • Employee stock options.



  • Group-term life insurance coverage.



  • Health savings accounts (HSAs).



  • Lodging on your business premises.



  • Meals.



  • Moving expense reimbursements.



  • No-additional-cost services.



  • Retirement planning services.



  • Transportation (commuting) benefits.



  • Tuition reduction.



  • Volunteer firefighter and emergency medical responder benefits.



  • Working condition benefits.

See Table 2-1 on page 6 for an overview of the employment tax treatment of
these benefits.







Table 2-1. Special Rules for Various
Types of Fringe Benefits (For more information, see the full discussion in this
section.)








































































































Treatment Under Employment Taxes
Type of Fringe BenefitIncome Tax WithholdingSocial Security and MedicareFederal
Unemployment (FUTA)
Accident and health benefitsExempt1,2,
except for long-term care benefits provided through a flexible spending or
similar arrangement.
Exempt, except
for certain payments to S corporation employees who are 2% shareholders.
Exempt
Achievement
awards
Exempt1 up to $1,600
for qualified plan awards ($400 for nonqualified awards).
Adoption
assistance
Exempt1,3TaxableTaxable
Athletic facilitiesExempt if substantially all use
during the calendar year is by employees, their spouses, and their dependent
children and the facility is operated by the employer on premises owned or
leased by the employer.
De minimis (minimal) benefits ExemptExemptExempt
Dependent care
assistance
Exempt3 up to
certain limits, $5,000 ($2,500 for married employee filing separate return).
Educational
assistance
Exempt up to $5,250 of benefits
each year. (See Educational Assistance , later.)
Employee
discounts
Exempt3 up to
certain limits. (See Employee Discounts , later.)
Employee stock
options
See Employee Stock Options , later.
Group-term life insurance coverageExemptExempt1,4
up to cost of $50,000 of coverage. (Special rules apply to former employees.)
Exempt
Health savings
accounts (HSAs)
Exempt for qualified
individuals up to the HSA contribution limits. (See Health Savings Accounts , later.)
Lodging on
your business premises
Exempt1 if furnished
for your convenience as a condition of employment.
MealsExempt if furnished on your
business premises for your convenience.
Exempt if de minimis.
Moving expense
reimbursements
Exempt1 if expenses
would be deductible if the employee had paid them.
No-additional-cost
services
Exempt3Exempt3Exempt3
Retirement
planning
services
Exempt5Exempt5Exempt5
Transportation (commuting) benefitsExempt1 up to
certain limits if for rides in a commuter highway vehicle and/or transit passes
($120, but see the Caution on page 1),
qualified parking ($230), or qualified bicycle commuting
reimbursement6 ($20). (See Transportation (Commuting) Benefits
, later.)
Exempt if de minimis.
Tuition
reduction
Exempt3 if for
undergraduate education (or graduate education if the employee performs teaching
or research activities).
Volunteer
firefighter and emergency medical responder benefits
ExemptExemptExempt
Working
condition benefits
ExemptExemptExempt
1 Exemption does not
apply to S corporation employees who are 2% shareholders.
2 Exemption does not
apply to certain highly compensated employees under a self-insured plan that
favors those employees.
3 Exemption does not
apply to certain highly compensated employees under a program that favors those
employees.
4 Exemption does not
apply to certain key employees under a plan that favors those employees.
5 Exemption does not
apply to services for tax preparation, accounting, legal, or brokerage services.
6 If the employee receives a qualified bicycle
commuting reimbursement in a qualified bicycle commuting month, the employee
cannot receive commuter highway vehicle, transit pass, or qualified parking
benefits in that same month.






Accident and Health
Benefits



This exclusion applies to contributions you make to an accident or health
plan for an employee, including the following.





  • Contributions to the cost of accident or health insurance including qualified
    long-term care insurance.



  • Contributions to a separate trust or fund that directly or through insurance
    provides accident or health benefits.



  • Contributions to Archer MSAs or health savings accounts (discussed in
    Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans).

This exclusion also applies to payments you directly or indirectly make to an
employee under an accident or health plan for employees that are either of the
following.





  • Payments or reimbursements of medical expenses.



  • Payments for specific injuries or illnesses (such as the loss of the use of
    an arm or leg). The payments must be figured without regard to any period of
    absence from work.


Accident or health plan. This is an
arrangement that provides benefits for your employees, their spouses, their
dependents, and their children (under age 27) in the event of personal injury or
sickness. The plan may be insured or noninsured and does not need to be in
writing.


Employee. For this exclusion, treat
the following individuals as employees.



  • A current common-law employee.



  • A full-time life insurance agent who is a current statutory employee.



  • A retired employee.



  • A former employee you maintain coverage for based on the employment
    relationship.



  • A widow or widower of an individual who died while an employee.



  • A widow or widower of a retired employee.



  • For the exclusion of contributions to an accident or health plan, a leased
    employee who has provided services to you on a substantially full-time basis for
    at least a year if the services are performed under your primary direction or
    control.


Special rule for certain government
plans.
For certain government accident and health plans, payments to
a deceased plan participant's beneficiary may qualify for the exclusion from
gross income if the other requirements for exclusion are met. See section 105(j)
for details.


Exception for S corporation
shareholders.
Do not treat a 2% shareholder of an S corporation as an
employee of the corporation for this purpose. A 2% shareholder is someone who
directly or indirectly owns (at any time during the year) more than 2% of the
corporation's stock or stock with more than 2% of the voting power. Treat a 2%
shareholder as you would a partner in a partnership for fringe benefit purposes,
but do not treat the benefit as a reduction in distributions to the 2%
shareholder.


Exclusion from wages. You can
generally exclude the value of accident or health benefits you provide to an
employee from the employee's wages.


Exception for certain long-term care
benefits.
You cannot exclude contributions to the cost of long-term
care insurance from an employee's wages subject to federal income tax
withholding if the coverage is provided through a flexible spending or similar
arrangement. This is a benefit program that reimburses specified expenses up to
a maximum amount that is reasonably available to the employee and is less than
five times the total cost of the insurance. However, you can exclude these
contributions from the employee's wages subject to social security, Medicare,
and federal unemployment (FUTA) taxes.


S corporation shareholders.
Because you cannot treat a 2% shareholder of an S corporation as an employee
for this exclusion, you must include the value of accident or health benefits
you provide to the employee in the employee's wages subject to federal income
tax withholding. However, you can exclude the value of these benefits (other
than payments for specific injuries or illnesses) from the employee's wages
subject to social security, Medicare, and FUTA taxes.


Exception for highly compensated
employees.
If your plan is a self-insured medical reimbursement plan
that favors highly compensated employees, you must include all or part of the
amounts you pay to these employees in their wages subject to federal income tax
withholding. However, you can exclude these amounts (other than payments for
specific injuries or illnesses) from the employee's wages subject to social
security, Medicare, and FUTA taxes.

A self-insured plan is a plan that reimburses your employees for
medical expenses not covered by an accident or health insurance policy.

A highly compensated employee for this exception is any of the
following individuals.



  • One of the five highest paid officers.



  • An employee who owns (directly or indirectly) more than 10% in value of the
    employer's stock.



  • An employee who is among the highest paid 25% of all employees (other than
    those who can be excluded from the plan).

For more information on this exception, see section 105(h) of the
Internal Revenue Code and its regulations.

There are also tax benefits for which you should qualify. Here is some information concerning that, again with additional links:










Affordable Care Act Tax Provisions






Información en Español: Disposiciones del Acta del
Cuidado de Salud de Bajo Precio


The Affordable Care Act was
enacted on March 23, 2010. It contains some tax provisions that became effective
in 2010 or 2011, and more that will be implemented during the next several
years. The following is a list of provisions now in effect; additional
information will be added to this page as it becomes available.


Health Insurance Premium Tax Credit


Starting in 2014, individuals and families can take a new premium tax credit
to help them afford health insurance coverage purchased through an Affordable
Insurance Exchange. Exchanges will operate in every state and the District of
Columbia. The premium tax credit is refundable so taxpayers who have little or
no income tax liability can still benefit. The credit also can be paid in
advance to a taxpayer's insurance company to help cover the cost of premiums. On
Aug.12, 2011, the IRS issued proposed
regulations
that describe who will be eligible to receive the premium tax
credit and how to compute the credit. The proposed regulations also describe how
to reconcile any advance credit payments for health benefits purchased through
an Exchange with the final credit amount. The proposed regulations provide
numerous examples, solicit written comments and provide a notice of public
hearing. Comments must be submitted by Oct. 31, 2011.


The portion
of the law
that will allow eligible individuals to use tax credits to
purchase health coverage through an Exchange is not effective until 2014.


Exchanges will offer individuals a choice of health plans that meet certain
benefit and cost standards. The Department of Health and Human Services (HHS)
administers the requirements for the Exchanges and the health plans they offer.
Additional information about the Exchange can be found at <a href="http://www.healthcare.gov/" mce_href="http://www.healthcare.gov/" title="blocked::http://www.healthcare.gov/ </body>

CGCPA, CPA
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