Jane Dotson
Private health insurance for company directors can be a complex issue. While it is generally permissible for companies to offer employer-sponsored group health benefits to owners, some plans also extend benefits to board members and directors. However, it's important to distinguish between employees and non-employees, as this can impact eligibility and taxation. Non-employee directors may be covered under a company's benefit program, but this could create a Multiple Employer Welfare Arrangement (MEWA), with specific compliance and tax implications. In the US, for example, MEWAs are generally required to file an annual report with the federal government (Form M-1), but state regulations may also apply. In the UK, health insurance premiums are an allowable business expense, but HMRC treats health coverage as a benefit-in-kind, requiring additional income tax and National Insurance contributions.
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What You'll Learn
Compliance concerns
Under the general rule, "outside directors" who are not employees of the company cannot participate in the company's cafeteria plan. This includes directors who receive fees for their services but do not otherwise provide services as employees. However, there is a ""dual status" rule that applies to individuals who are both employees and directors of a C corporation. In this case, they can participate in the employer's cafeteria plan but solely in their capacity as employees. Their contributions as employees can be made on a pre-tax basis, while contributions as directors must be made on an after-tax basis.
For S corporations, there are additional considerations. While S corporations must pay reasonable compensation to shareholder-employees for services provided, this compensation cannot exceed the amount received by the shareholder directly or indirectly. If a shareholder purchases health insurance with their own funds, they are not allowed an above-the-line deduction. However, if the S corporation obtains and pays for health insurance, covers the shareholder, and reports the premiums as W-2 wages, then the shareholder is allowed an above-the-line deduction.
From a federal reporting standpoint, there are specific requirements for group health plans that cover non-employee directors. If less than 1% of participants are non-employee directors, the plan is exempt from filing an annual Form M-1. Additionally, certain state laws, such as in California, require self-funded plans to obtain a certificate of compliance from the Department of Insurance to operate within the state.
Furthermore, employers must comply with the Affordable Care Act (ACA) and offer health insurance that is affordable and provides minimum value to 95% of their full-time employees. Employers with 50 or more full-time employees are subject to penalties if they do not comply. Employers must also provide employees with a "Summary of Benefits and Coverage" (SBC) form, explaining the health plan's coverage and costs, and ensure that insurance companies spend at least 80% of premium dollars on medical care.
In conclusion, corporations must navigate a complex landscape of state and federal regulations when considering providing major medical insurance to its directors. Compliance concerns depend on the specific circumstances, including the type of corporation, the status of the directors as employees or non-employees, and the applicable state and federal laws and regulations.
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Group health plans
A Group Health Plan (GHP) is health insurance offered by an employer, union, or association to its members while they are still working. Employers with 20 or more employees are required by law to offer current workers and their spouses aged 65 or older the same GHP health benefits as younger employees.
In the US, companies can provide group health insurance to non-employees such as directors, board members, or owners. However, this is likely to raise compliance concerns, and the plan may be subject to state laws. For example, California law requires self-funded Multiple Employer Welfare Arrangements (MEWAs) to obtain a certificate of compliance from the Department of Insurance to operate within the state.
Under the general rule, "outside directors" who are not employees of the company cannot participate in the company's cafeteria plan, even if they receive fees for their services. However, there is a “dual-status” rule that allows individuals who are both employees and directors of a C corporation to participate in the employer's cafeteria plan, but only in their capacity as an employee.
In the UK, company directors can choose to buy health insurance personally or have their company pay for it out of pre-tax income. Medical insurance premiums are an allowable business expense, but health coverage is also treated as a benefit in kind, meaning income tax must also be paid on its value.
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Non-employee directors
If a company wishes to cover non-employees under its benefit programs, it must address several compliance concerns. One such concern is the creation of a Multiple Employer Welfare Arrangement (MEWA). Covering non-employees, such as owners, board members, or directors, likely creates a MEWA, although there is an exception for partners of a partnership. A fully-insured plan may be acceptable if the carrier is aware and agrees to it, the plan documents recognize the MEWA status, and the required government filings (e.g. Forms 5500 and M-1) are handled correctly. For a self-funded plan, it can be more complicated, as self-funded MEWAs are subject to state law, and some states completely prohibit them.
Another compliance concern is taxation. Non-employees cannot participate in the group health plan on a pre-tax basis through the company. They are usually taxed differently from typical employees, and most business owners cannot pay for their group health insurance coverage on a pre-tax basis through the corporation's cafeteria plan. However, self-employed people can take a tax deduction for their health insurance premiums when they file their personal tax returns.
In the context of S corporations, the dual-status rule does not apply to employee-directors who are also more-than-2% shareholders. This is because more-than-2% shareholders in an S corporation are expressly excluded from cafeteria plan participation by regulations.
It is important to note that insurance laws in some states do not allow a corporation to buy group health insurance when it only has one employee. Therefore, if the non-employee director is the sole employee, they would have to purchase health insurance in their own name.
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Dual-status rule
A corporation can provide major medical insurance to its directors, but there are some considerations to keep in mind. Firstly, it's important to distinguish between employee-directors and non-employee directors. Non-employee directors, such as outside directors or independent contractors, are typically not eligible to participate in the company's cafeteria plan or employee-sponsored benefits. However, employee-directors who provide services to the company beyond their role as directors can be considered dual-status individuals.
The dual-status rule allows an individual who is both an employee and a director of a corporation to participate in the employer's cafeteria plan, but solely in their capacity as an employee. For example, if an employee also serves on the company's board of directors, they can participate in the company's cafeteria plan and elect to make salary reductions from their employee compensation for benefits. However, they cannot reduce their directors' fees for benefits under the plan. It's important to note that the dual-status rule does not apply to employee-directors who are also shareholders owning more than 2% of the company stock in an S corporation.
When offering health insurance to directors, companies must assess certain compliance-related concerns, especially when covering non-employees. Including non-employees in a company's benefit programs can create a multiple employer welfare arrangement (MEWA), which may be subject to additional regulations and compliance requirements. Plan eligibility rules often include only employees and their family members, but they can be written to include non-employees if the insurance carrier is willing to insure them. In such cases, the employer must handle the taxation of such benefits appropriately based on the type of entity involved.
Having dual health insurance coverage, either through two individual plans or a combination of employer-sponsored and private insurance, can provide more comprehensive coverage and greater protection from loss of coverage. However, it can also lead to complex claim processing and coordination of benefits. It is important to understand the coordination of benefits (COB) rules to ensure that medical expenses are covered compliantly. While dual coverage can help with medical bills and provide added financial protection, it also means managing multiple premiums, deductibles, and out-of-pocket costs.
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Taxation
In the US, companies are generally permitted to offer employer-sponsored group benefits to owners, and some plans even extend benefits to board members and directors. However, it's important to note that covering non-employees, such as owners, board members, or directors, may create a multiple employer welfare arrangement (MEWA). This can get complicated because self-funded MEWAs are subject to applicable state law, and some state laws completely prohibit them.
From a federal reporting standpoint, MEWAs are generally required to file an annual report with the federal government (Form M-1). However, a group health plan is exempt if less than 1% of participants are non-employee directors.
Under the general rule, directors who are not employees of the company ("outside directors") cannot participate in the company's cafeteria plan, even if they receive fees for their services. However, there is a "'dual status' rule" that applies to individuals who are employees and directors of a C corporation, allowing them to participate in the employer's cafeteria plan but only in their capacity as employees.
For S corporations, shareholders owning more than 2% of the company's stock must include any health insurance costs paid through the company as income and are subject to income tax. However, S corporations can provide health insurance as a tax-free benefit to their non-owner employees and deduct the cost as a business expense. S-corp owners can also offer taxable fringe benefits to cover medical expenses to their employees as taxable income, and they can participate in this benefit as well.
In the UK, if a company pays for a company director's health insurance, it is considered a tax-deductible expense. However, the director will be liable for benefit-in-kind taxation and Class 1A National Insurance contributions on the premium value. Medical insurance premiums are an allowable business expense, so when a limited company pays for coverage, they can claim them against their corporation tax bill.
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Frequently asked questions
Yes, a corporation can provide major medical insurance to its directors. However, it is important to note that there are different rules for employees and non-employees. Non-employees cannot participate in the company's cafeteria plan and their participation in the insurance plan may create a multiple employer welfare arrangement (MEWA).
Group insurance is provided by the company, whereas individual insurance is purchased by the director themselves. Group policies often include services to help manage the policy and employees' health needs, as well as information to educate employees about their coverage.
Medical insurance premiums are an allowable business expense, so when a company pays for coverage, they can claim them against their corporation tax bill. However, the company must also report the health coverage as a benefit-in-kind and pay income tax on the value of the benefit. It is recommended to seek professional advice on the tax implications of company-paid health insurance.
A cafeteria plan is a type of employee benefit plan that allows employees to choose from a variety of benefits, such as health insurance, on a pre-tax basis. The term "employee" does not include "self-employed individuals", such as outside directors.
Yes, a small corporation can provide medical insurance to its directors by establishing a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA). This is an arrangement where the employer reimburses the employee after they incur a medical expense and submit documentation.
