What is a C Corporation?
A C corporation, commonly known as a C corp, is a business structure where owners and shareholders are taxed separately from their entity. C corp business models are common among small, growing companies, offering liability protection, tax advantages, plentiful funding options, perpetuity, and more.
C corps endure what is known as double taxation. C corps are subject to corporate taxes before distributing dividends to their shareholders. However, individual shareholders must also pay personal income taxes on their dividend profits. Double taxation is typically considered a significant drawback for C corps; however, owners have the advantage of reinvesting profits in the business at a lower corporate tax rate.
How Does Health Insurance Work for C Corps?
A health reimbursement arrangement, or HRA, is a standard health insurance option adopted by C corps. An HRA is an employer-funded health spending account that reimburses employees for their medical expenses tax-free. However, under a C corp, HRAs can compensate both the employer and the employees, including employee dependents.
Because business owners are considered separate legal entities from their company under a C corp, the owner technically qualifies as an employee of the corporation. Therefore, the owner can partake in the C corp’s HRA and reap its tax-free medical reimbursements. Not to mention, C corp owners also can customize their company’s HRA and set unique allowance amounts for themselves and their employees. For example, a business owner should set their monthly individual coverage HRA, or ICHRA, to a $2,000 allowance while capping their employees’ budgets at $1,000.
What are the Tax Benefits for a C Corp Under an HRA?
C corps using HRAs for their business’ medical coverage reap several tax benefits for owners, shareholders, employees, and the organization as a whole. When it comes to monetarily reimbursing health care expenses, HRAs offer C corps the following taxation benefits:
Tax-free Reimbursements for Recipients
Under specific qualifications, reimbursed healthcare expenses are 100% tax-free. IRS
Publication 502 outlines a list of over 200 qualified medical expenses eligible for
reimbursement. If the expense in question is IRS-approved and the employer solely
funds the HRA, C corp owners and employees will receive tax-free reimbursements.
Tax-deductible Reimbursements for the Organization
HRAs benefit both participants and the C corp itself, as all HRA reimbursements are
tax-deductible for the business. As a result, C corps can save a lot on taxes over time. For example, if a C corp reimburses employees for $200 of their $300
allowance, the real cost for the C corp is $200.
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