Can C corp deduct 100%of group health insurance premiums for officers/shareholders if it offers it to all employees but it does charge other employees for their premiums?

[Accountant-Man]

It offers it to all, but gives it free to officers/owners and charges other employees? Is that legal?

[qbteachmt · Accepted solution]

I see two parts to this.

1. The tax reporting for amounts the business pays. Obviously, charging the other employees creates a Net expense for the business.

2. Does it meet the requirements to offer this as differential treatment is a Benefit Management issue, not a tax issue. Health insurance plans and their management must meet ACA guidelines and favorable treatment is often a problem.

[sjrcpa]

Group health premiums for C Corp shareholders are not taxable to them. They are only taxable to S Corp shareholders and Partners/LLC Members.

[qbteachmt]

Oh, thanks. I will fix that answer 🙂

[TaxGuyBill]

For this scenario, I partially disagree with Susan.

This smells like a Discrimination in favor of Highly Compensated Employees situation.  If that is the case, then it *IS* taxable to the officers and shareholders.
https://www.law.cornell.edu/uscode/text/26/125

But in direct answer to the question, yes, it should be deductible to the corporation.  But it is quite possible that this situation is taxable to the officers and shareholders and/or is in violation of ERISA rules and/or is against ACA rules.

[sjrcpa]

Bill, I was disagreeing with qbteach, who subsequently changed her answer. Your cite is to IRC 125. I didn't see Cafeteria Plans mentioned anywhere. I do agree that the discrimination may violate some laws/rules/insurance company contract. The way to fix it may be to tax the shareholders on it.

[qbteachmt]

I changed my answer from stating that it is obviously taxable, to pointing out the issue of whether is Is or Isn't taxable, is separate from whether it is even legal. Once you know it should not, or can, be done, that determines how it should be done. If it shouldn't be done, that sort of changes the entire scenario, for example.

[TaxGuyBill]

I guess I'm not that familiar with how health insurance plans work.  If the employees are paying for it, isn't it part of a cafeteria plan?  I guess I'm not sure how that works, and how things fall under §105/106 versus §125.

[qbteachmt]

"isn't it part of a cafeteria plan"

Unless the person managing all of this is informed on benefits management, you never know what you find when you help them. I like to describe it as, "I am sure you have good intentions, but let's try to follow the rules." Or, they really intend to be selfish and unfair.

[sjrcpa]

@TaxGuyBill If employees are paying part of the cost of their health insurance, the best tax way would be for it to be pretax a la cafeteria plan. Not every employer does this, though.