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Micro-Corporation Owners and Health Insurance Expenses

Sep 28, 2024

As I meet with physicians from across the country to discuss forming or optimizing their micro-businesses, one of the most frequent questions that comes up is: “What about health insurance?”

This topic is top of mind for many doctors, especially as the landscape of healthcare benefits for self-employed physicians continues to evolve. After publishing my op-ed "Why I Recommend Self-Employment for Doctors" on Doximity earlier this year, this question was raised by a fellow physician who voiced a concern:

"Maybe this is the elephant in the room, but what was done to maintain health insurance and retirement accounts? That's my concern about going solo or contractor-only."

It’s a legitimate concern and one that warrants an in-depth response. In fact, one of the greatest barriers to transitioning into self-employment is the fear of losing health insurance benefits and retirement options that come more easily with traditional employment.

Here’s the good news: as a self-employed doctor, you actually gain more control over both your health insurance options and retirement savings strategies. Let's break down the answers to the question:

Health Insurance for Self-Employed Physicians

For self-employed physicians, health insurance is a significant expense, with average annual household costs for health, dental, and vision insurance ranging from $20,000 to $25,000. While these figures may seem daunting, it's essential to remember that health insurance premiums can be a deductible business expense.

Many doctors who work under a W-2 are already paying a substantial portion of their premiums, often for lackluster plans. By forming a micro-corporation (most commonly as an S-corporation), you can take control of your health insurance costs and quality, while simultaneously benefiting from tax deductions that wouldn’t be available in traditional employment.

Marketplace health plans are available to cover your family’s needs, and while costs vary, the ability to write off those premiums as a business expense makes this a financially viable option.

Here are some of my posts that cover this important topic:

What About Retirement Accounts?

The second part of the question revolves around retirement savings. While many think transitioning to self-employment means sacrificing retirement contributions, the opposite is often true. As a self-employed physician, you can actually save more in tax-advantaged retirement accounts than you can as an employed physician. For example, with a solo 401(k) or a SEP-IRA, self-employed doctors can contribute much more than typical employer-sponsored retirement plans allow. For a deeper dive into why micro-corporations are ideal for building retirement savings, check out this post on retirement for self-employed physicians.

Can S-Corporations Pay for Health Insurance?

One of the key advantages of structuring your micro-corporation as an S-corporation is the ability for the corporation to cover your health insurance premiums. However, this comes with some specific tax implications that are worth exploring.

Owner-Employee Health Insurance for S-Corps

If you're a micro-corporation taxed as an S-corporation owner-employee (owning more than 2% of the company), the premiums paid by your S-corporation for your health insurance are treated as wages for income tax purposes. While these premiums are included in your gross income, the corporation can deduct them as a business expense. The important distinction here is that these premiums are not subject to Social Security and Medicare (FICA) taxes, which provides tax savings compared to other forms of compensation.

However, these premiums will still be subject to federal and state income tax withholding. So, while there are benefits, it’s important to work closely with a tax advisor to maximize your savings and ensure proper reporting.

Health Savings Accounts (HSAs)

For those who qualify, HSAs offer a fantastic opportunity to reduce taxable income while saving for future medical expenses. S-corporation owner-employees can receive contributions to their HSAs directly from the corporation. These contributions are considered employer contributions, which are not included in the employee's gross income, and they are deductible by the S-corporation as a business expense. These contributions also escape FICA taxes, offering additional tax savings for both the corporation and the employee.

However, make sure you’re aware of annual contribution limits set by the IRS, which can vary year to year, to ensure compliance.

Medical Reimbursement Plans (MRPs) for S-Corps

Medical Reimbursement Plans (MRPs) offer additional flexibility for self-employed physicians who want to reduce out-of-pocket healthcare costs while gaining tax benefits. Under an MRP, the business reimburses the owner-employee for medical expenses, but there are some important distinctions for S-corporation owners.

MRPs for 2% Shareholder-Employees of an S-Corp

If you are a 2% shareholder-employee of an S-corporation, medical reimbursements you receive are generally treated as taxable compensation. This means that unlike regular employees whose medical reimbursements are excluded from gross income, as an S-corporation owner, you must include the reimbursements as wages on your personal tax return. These reimbursements are also subject to FICA taxes, which can increase the overall tax burden. Despite this, the S-corporation can still deduct the medical reimbursements as a business expense.

Proper documentation and compliance with IRS regulations are critical when establishing and maintaining an MRP. A written plan outlining eligibility, covered expenses, and reimbursement procedures should be in place to avoid any potential tax issues.

Medical Reimbursement Plans for C-Corps

For those of you considering structuring their micro-business as a C-corporation, Medical Reimbursement Plans (MRPs) offer even greater tax advantages. The distinction here lies in how the reimbursements are treated for tax purposes.

Flexibility in MRPs for C-Corps

C-corporations enjoy more flexibility in designing and implementing MRPs. Unlike S-corporations, where medical reimbursements for 2% shareholders are considered taxable compensation, C-corporations can deduct these expenses at the corporate level. This means that C-corporation owners can structure MRPs to cover a wide range of healthcare costs, including insurance premiums, co-payments, deductibles, dental care, vision care, and even over-the-counter medications, all while enjoying tax-free reimbursement.

Deductibility and Lower Corporate Tax Rates

For C-corporations, medical expenses are deducted as a business expense, potentially reducing the corporation's taxable income and overall tax liability. Additionally, C-corporations benefit from lower corporate tax rates, which can result in significant tax savings compared to pass-through entities like S-corporations.

Furthermore, C-corporations can accumulate retained earnings within the business, which offers the opportunity to set aside funds for future medical expenses or other business needs, providing an additional layer of financial security and flexibility.

Choosing Between an S-Corp and C-Corp for Your Medical Reimbursement Plan

So, which structure is best for your medical reimbursement plan, an S-corp or a C-corp? The answer depends on your specific circumstances and goals. If you're looking for maximum flexibility in medical reimbursements and the ability to keep more of your earnings within the business, a C-corp may be the way to go. However, if you're seeking a simple structure with fewer administrative burdens, an S-corp could offer the right balance of tax benefits and simplicity.

It's critical to work with a knowledgeable CPA or tax professional who understands the nuances of medical reimbursement plans for physician-owned businesses. This will help ensure compliance with tax laws and optimize your overall tax strategy.

One other nuance I would throw out there is the healthshare programs like Medi-Share are not technically insurance and therefore S-Corp owners can’t deduct the expense like you do with insurance. However, C-Corp owners can deduct the expense, when structured properly, in a medical reimbursement plan. That is what I do with my family as my C-corp covers the expenses of the health sharing program that we participate in, along with all out of pocket medical expenses.

Take Control of Your Future with SimpliMD

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 help physicians transition to self-employment, offering personalized guidance to set up your micro-corporation that protects your financial and professional future.

Take the first step with a Personalized Micro-Business Consult for only $99. With this consult, you’ll receive a one-year SimpliMD membership, granting you access to over $2500 worth of business tools and resources designed to help you succeed.

Ready to dive deeper into creating a practice that gives you freedom in the marketplace? Enroll in my course, "Creating A Practice Without Walls," where you'll learn how to build and run your micro-corporation, giving you full control over your career and future.

Don’t miss out on my weekend flash sale, as I am making my course available for only $99 if you follow this link. Act now as this deal is only available this weekend!

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