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Health Insurance and Medical Reimbursement Plans (MRPs) for Spouses and Children in S-Corps and C-Corps

Oct 05, 2024

A few weeks ago, I received an email from a physician named Dr. Evans. He had recently read my blog post on Micro-corporation Owners and Health Insurance Expenses and reached out to thank me for the insight and clarity it provided. Like many doctors stepping into self-employment and forming their own micro-corporations, Dr. Evans was eager to understand how to navigate the health insurance landscape. But one question stuck with him:

"Tod, I loved your post. But I’m not quite sure how to cover my wife and kids through my micro-corporation. Also, if I employ them for legitimate work, are there any special considerations I should be aware of?"

Dr. Evans' question hit on a crucial topic that many physician-entrepreneurs overlook when structuring their businesses—how to optimize health insurance and Medical Reimbursement Plans (MRPs) for family members. This is especially important if you're considering employing your spouse or children in the micro-corporation, a strategy that can unlock significant tax advantages if done right.

In this post, I’ll dive into the details of how health insurance and MRPs can be applied to spouses and children in both S-corps and C-corps, and the specific rules that govern this important benefit. If, like Dr. Evans, you’re unsure about the finer points, this guide will help clarify how to integrate family coverage into your self-employed life.

The following are some of my other posts on this important subject:

Health Insurance and MRPs for Spouses and Children in S-Corps and C-Corps

When transitioning to self-employment, many physicians worry about securing comprehensive health coverage for their families. The structure of your micro-corporation, whether it’s an S-corp or a C-corp, will influence how you provide health insurance and medical reimbursement benefits to your spouse and children. Let’s break down how this works in both cases.

S-Corps: Health Insurance and MRPs for Spouses and Children

For those of you who own S-corporations, it’s entirely possible to provide health insurance and medical reimbursement plans for family members, but the rules are nuanced, especially if your family members are employed by your business.

Health Insurance for Spouses and Children in an S-Corp

If your spouse works in the business and is on the payroll, the S-corporation can provide health insurance for them as part of their employee benefits. However, because most physician-owned S-corporations involve owners with more than 2% of the company’s shares, certain rules apply.

For spouses of a more-than-2% shareholder, the health insurance premiums paid by the S-corporation will be deducted as a business expense, but those premiums must also be reported as taxable wages on the spouse's W-2. These premiums are not subject to FICA taxes (Social Security and Medicare), but they are subject to federal and state income tax.

For dependent children, the S-corporation can still pay for their health insurance as part of the owner’s family health coverage. Just like for the shareholder-owner, the premiums paid for their coverage will be included as taxable income but exempt from FICA.

Medical Reimbursement Plans (MRPs) for Spouses and Children in an S-Corp

Medical Reimbursement Plans (MRPs) are a powerful way to reduce healthcare costs by reimbursing out-of-pocket medical expenses tax-free. However, for physicians who own more than 2% of their S-corp, the IRS rules state that these reimbursements for the owner’s medical expenses (and those of their family) must be included as taxable wages.

Here’s where things get interesting: If your spouse or children are employees of the S-corp but own less than 2% of the shares, the corporation can reimburse their medical expenses tax-free, just like for any other employee. This presents an opportunity to structure the business in such a way that your spouse or children receive legitimate compensation for work they perform and enjoy tax-free medical reimbursements.

Of course, if they own more than 2% of the company, their medical reimbursements would be taxable, just like yours. But with careful planning, the company can still deduct the expenses as a business cost, providing some tax relief.

The key here is ensuring that any family members you employ are doing legitimate work for the business, and that their wages and benefits are in line with their role. Whether they handle administrative tasks, social media, or bookkeeping, the work must be real, and the pay reasonable for the job they’re doing.

C-Corps: Health Insurance and MRPs for Spouses and Children

If you’re operating as a C-corporation, your options for covering family members with health insurance and MRPs are even more flexible, offering potentially larger tax advantages.

Health Insurance for Spouses and Children in a C-Corp

C-corporations allow for the full deduction of health insurance premiums for all employees, including the owner’s spouse and children. One major advantage of a C-corp is that family members can receive health insurance coverage tax-free, provided they are employed by the business.

Unlike S-corps, where the owner and their family must report the premiums as taxable income, in a C-corp, the premiums are deductible for the corporation and tax-free for the employees—no strings attached. This makes it an appealing option for physicians who want to extend comprehensive health coverage to their spouse and children without triggering additional tax liabilities.

For dependent children who are not employed by the business, they can still be covered under your family’s health plan without any negative tax consequences.

Medical Reimbursement Plans (MRPs) for Spouses and Children in a C-Corp

C-corporations offer even more flexibility when it comes to medical reimbursements. If your spouse and children are employed by the C-corporation, the company can reimburse their out-of-pocket medical expenses on a tax-free basis. This includes costs for medical care, co-pays, dental and vision care, prescriptions, and even over-the-counter medications.

All these reimbursements are tax-free for your spouse and children and fully deductible for the C-corporation, making it one of the most effective tax strategies for physician-owned businesses.

Hiring Your Spouse and Children in Your Micro-Corporation

Now, you may be thinking, "Can I really hire my spouse and kids to work for my micro-corporation?" Absolutely. Many physician-owned businesses employ family members, but there are a few key factors to keep in mind:

Legitimate Work: Your spouse and children must perform real, legitimate work for the corporation. This could be anything from managing the books, marketing, handling administrative duties, or even assisting with website updates. Their work must be aligned with a real business need, and the compensation should be reasonable based on their job role.
Payroll and Employment Taxes: Once employed, your family members should be placed on the company's payroll with appropriate taxes withheld. If you employ children under 18, federal income taxes must be withheld, along with FICA taxes.
Tax-Free Medical Reimbursements: If you own a C-corporation, medical reimbursements for your spouse and children are completely tax-free. If you own an S-corp, the tax treatment depends on their shareholder status.

You can read more about this in my post: Should You Hire Your Spouse in Your Professional Micro-Corporation?

Leverage Family Health Benefits for Your Physician-Owned Micro-Corporation

By leveraging health insurance and MRPs for your spouse and children, you can provide comprehensive benefits while optimizing your tax strategy. Whether you operate as an S-corp or a C-corp, careful planning and structuring of family employment within the business can yield substantial tax savings.

Physicians like Dr. Evans often overlook these benefits, but with the right guidance, you can maximize health coverage for your family and reduce the overall financial burden of healthcare. As always, it’s important to consult with a tax advisor familiar with physician-owned micro-corporations to ensure you’re in compliance with all IRS requirements.

The SimpliMD Advantage

You deserve autonomy over your professional life and your financial well-being, and forming a micro-corporation is a powerful step toward that goal. At SimpliMD, we specialize in helping physicians transition to self-employment, offering personalized guidance to set up your micro-corporation that protects your financial and professional future.

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