Self Insured Medical Plan under Section 105

[flosfur]

Except for Self-Employeds, expenses paid by the employer under a self-insured non-discriminatory Section 105 plan are not taxable to the employees.

Section 105 & the Regs thereto do not say anything about taxability of these employer paid expenses for the owners of S-Corp.

However, instructions to line 18 of Form 1120S state that payments for Employment benefits programs for more than 2% owners should be included on line 7 or 8 (Compensation for officers/Salaries & Wages for others)!? Where does that come from in the Code?

There is no such distinction for similar benefits (line 25) on Form 1120 (for C-Corp).

Is it correct to conclude that S-Corp's 2% or more owners are treated same as Self-Employeds?

Is there a way to provide an S-Corp owner non-taxable medical benefits with a self-insured plan? Can an insured plan provide these benefits?

[Ron Snyder]

"Except for Self-Employeds or discriminatory benefits paid to highly compensated individuals, expenses paid by the employer under a self-insured non-discriminatory Section 105 plan are not taxable to the employees."

Section 105 & the Regs thereto do not say anything about taxability of these employer paid expenses for the owners of S-Corp.

IRS issued Revenue Ruling 91-26 with respect to this issue. If they had been confident that their position was correct, they should have issued proposed regulations or temporary regulations. Their position is not supported in the Code, but their philosophy is that election of S corporation status is a privilege, and that privilege carries conditions. "If you wish to avoid double taxation like the self-employed, your deductions will be limited as though you were actually self-employed".

Is it correct to conclude that S-Corp's 2% or more owners are treated same as Self-Employeds?

In IRS's view it is correct. The Code lends them no support.

Is there a way to provide an S-Corp owner non-taxable medical benefits with a self-insured plan?

Remember that most of the health costs or premiums on behalf of the deemed self-employed person are deductible on the 1040 anyway.

Can an insured plan provide these benefits?

Yes, but the employer will not receive a deduction for the expense, but will pass such payments through to the 2% shareholder-employee.

[Kirk Maldonado]

Section 1372(a) provides as follows:

For purposes of applying the provisions of this subtitle which relate to employee fringe benefits—

(1) the S corporation shall be treated as a partnership, and

(2) any 2-percent shareholder of the S corporation shall be treated as a partner of such partnership.

[Ron Snyder]

The problem with citing Section 1372 is that "fringe benefit" is not defined there. Section 132 deals with fringe benefits (not health or welfare benefits). Regs. section 1.61-21 discuss taxation of fringe benefits and discuss meals, airplanes, automobiles, chauffer services, etc., but not welfare or health benefits. Nothing in either of those sections implies that they apply to health, welfare or retirement plans.