Deductibility of Employer-Paid Premiums
For purposes of determining tax liabilities with regards to S-Corporations, the tax code looks to the individual’s ownership rights in the company. An employee who owns 2% or more of the S-Corporation is deemed to be an Employee/Owner, while one who owns less than 2% is treated as only an employee.
On Behalf of an Employee (Less than 2% Shareholder)
Tax-Qualified Long-Term Care Insurance premiums paid by a S-Corporation on behalf of an employee are fully deductible providing the S-Corporation retains no interest in the policy. This would also apply to premiums paid on behalf of the employee’s spouse and other tax dependents.
On Behalf of an Employee/Owner (Shareholder of 2% or greater)
Tax-Qualified Long-Term Care Insurance premiums paid by an S-Corporation on behalf of a 2%+ shareholder are deductible by the S-Corporation providing the S-Corporation retains no interest in the policy. This would also apply to premiums paid on behalf of the employee’s spouse and other tax dependents.
Tax Consequences of Employer-Paid Premiums
For an Employee
Employer-paid Long-Term Care Insurance premiums would not be included in the Employee’s gross income (IRC Sec. 106). This would also apply to premiums paid on behalf of the employee’s spouse and other tax dependents.
For an Employee/Owner (Shareholder of 2% or greater)
The entire amount of the Tax-Qualified Long-Term Care Insurance premiums paid by the S-Corporation is includable in the employee/owner’s gross income. The same holds true for S-Corporation -paid Tax-Qualified Long-Term Care Insurance premiums paid on behalf of the employee/owner’s spouse or other tax dependents.
In this case, the employee/owner is treated as a self-employed individual for tax purposes and the Tax-Qualified Long-Term Care Insurance premiums received would be subject to the same tax rules as apply to Sole Proprietors.
We do not provide tax or legal advice. Any decisions whether to implement these ideas should be made by the client in consultation with professional financial, tax, and legal counsel.