We’re taxed as an S-Corporation. How does a Medical Expense Reimbursement Plan or Health Reimbursement Arrangement affect us? : FAQ/Blog/Solutions
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We’re taxed as an S-Corporation. How does a Medical Expense Reimbursement Plan or Health Reimbursement Arrangement affect us?

by Tom Luker on 05/01/15

In a small way “S” stands for “screwed” or “short-changed” because an employee who owns 2% of stock or more, must “recapture” the EE benefits [including Term Life Insurance and corporately-paid direct Health Insurance premiums (which don’t need a full MERP)] on the front of his/her Form 1040.

  • Attribution rules radiate that treatment of “rich corporate owners” [otherwise known as “highly compensated employees”] to all relatives, up or down and sideways.
  • Therefore, even the spouse of the 100% corporate owner can’t JUST be hired for the benefits of the MERP.
    • Some consolation is available, however, because FICA would be saved on the business and personal side and not just health and term life premiums, but would also include out-of-pocket [OOP] medical costs.
    • Also, the benefit package would enhance the total “W-2 type” compensation to the owner. Thus this helps to protect that person from the increasing IRS scrutiny of paying the executive less than they “should be” as an S-Corp which usually tries to pass as much income/profits to the owners in the form of a “dividend” free of FICA.
    • The other consolation is that the health insurance premiums might qualify for the “self-employed” personal deduction on the front of the 1040, and the OOP expenses might be used on Schedule A if they qualify.
    • Also, HSA deposits would additionally be an “above the line” deduction on the 1040, as well as saving FICA on the business and personal side.
  • Another solution would be to use another business relationship that might by operated by the members of the family.
    • In this case, there is another “catch,” in that for “controlled” businesses, comparable benefits must be offered in each of the “controlled” operations.
    • However, there is no disadvantage to the business owner to offer similar benefits in other controlled entities, because the bottom line of these types of benefits [Sec. 105 MERPs (Medical Expense Reimbursement Plan)/HRAs (Health Reimbursement Arrangement), Sec. 125 “Flex” Plans/”Cafeteria” Plans] are that they should never increase the overhead expenses since payroll taxes and income taxes saved should always exceed the admin costs of providing benefits for employees.

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