Can a Corporation Pay for Medical Expenses?

Corporations can pay for employee medical expenses, a benefit that provides significant value. With careful structuring, this arrangement can result in tax advantages for both the company and its workforce. To achieve this, a business must understand the rules for its corporate structure and adhere to the formal requirements for establishing and administering a health benefit plan. This ensures employer contributions are deductible and employee benefits are not considered taxable income.

Medical Expense Options for C Corporations

C Corporations have several pathways to fund employee medical costs, with each method carrying its own set of rules for tax-advantaged treatment. The most traditional approach is sponsoring a group health insurance plan. Premiums paid by the C-Corp for these plans are a standard business expense, fully deductible to the corporation, while the coverage received by employees is a tax-free fringe benefit.

A more flexible alternative is a Health Reimbursement Arrangement (HRA), which allows employers to reimburse employees for individual health insurance premiums and other qualified medical expenses. One type is the Qualified Small Employer HRA (QSEHRA), limited to employers with fewer than 50 full-time employees. For 2025, its annual contribution caps are $6,350 for self-only coverage and $12,800 for family coverage.

The Individual Coverage HRA (ICHRA) is available to companies of any size and has no federally mandated contribution limits. This allows employers to set their own reimbursement amounts and create different classes of employees with varying benefit levels. For reimbursements from either an ICHRA or QSEHRA to be tax-free, the employee must maintain minimum essential health coverage.

A C-Corp can also contribute to an employee’s Health Savings Account (HSA). This option is available only to employees enrolled in a high-deductible health plan (HDHP). Employer contributions to an HSA are deductible for the business and are not counted as taxable income to the employee, providing a triple tax advantage: tax-free contributions, growth, and withdrawals for qualified medical expenses.

Special Rules for S Corporation Shareholders

The tax treatment of health benefits for S Corporation shareholders owning more than 2% of the company’s stock is different from that of regular employees. These unique rules affect both the corporation and the shareholder and must be followed for compliance.

The S-Corp can pay the health insurance premiums for its greater-than-2% shareholders and deduct the cost as a business expense. However, the full amount of the premium paid must be included in the shareholder-employee’s taxable wages on their Form W-2. These wages are subject to federal and state income tax withholding.

While the premium amount is added to the shareholder’s taxable income, it is not subject to Social Security, Medicare (FICA), or federal unemployment (FUTA) taxes, provided the benefit is offered under a plan established by the S-Corp.

After reporting the premiums as wages, the shareholder-employee may be eligible for the self-employed health insurance deduction on their personal tax return. This “above-the-line” deduction subtracts the premium costs from their adjusted gross income. This is only available if the shareholder is not eligible to participate in another subsidized health plan, such as one offered by a spouse’s employer.

A restriction for these shareholders is their ineligibility to participate in company-sponsored HRAs on a tax-free basis. Any reimbursements received from an HRA, such as an ICHRA or QSEHRA, would be treated as taxable income. This prevents S-Corp owners from using these arrangements to reimburse their own medical expenses without tax consequences.

Key Requirements for a Formal Plan

For medical reimbursements to be tax-deductible for the corporation and tax-free to employees, the benefit must be offered through a formal, written plan. This is a legal requirement under federal regulations like the Employee Retirement Income Security Act (ERISA).

First, the business must establish the plan’s core terms. This includes defining which employees are eligible, setting annual or monthly reimbursement limits, and specifying which medical expenses qualify for reimbursement. Eligible expenses can include insurance premiums, deductibles, and co-pays.

This information must be compiled into a formal written plan document. The document must include:

• The names of the plan administrator and any fiduciaries
• Detailed eligibility requirements and the effective date of participation
• The specific benefits provided
• Procedures for submitting and appealing claims
• The rights of participants under federal laws like COBRA

The plan document must also include language to comply with the Health Insurance Portability and Accountability Act (HIPAA). Because the employer will handle protected health information (PHI), the document must detail the privacy procedures for safeguarding this data. Without a comprehensive, written plan document, the IRS could disqualify the plan, rendering all reimbursements taxable to the employees.

Administering the Reimbursement Process

Once a formal plan is documented, the focus shifts to administering the reimbursement process. This requires clear procedures for employees to submit claims and for the corporation to verify and pay them compliantly.

The process begins when an employee incurs a qualified medical expense and submits a claim with adequate proof. This documentation must substantiate the medical expense, who incurred it, the date, and the amount. An Explanation of Benefits (EOB) from an insurance company or a detailed invoice from a provider is required.

Upon receiving a claim, the corporation or its administrator must review it against the formal plan document. This includes confirming the employee’s eligibility, checking that the expense is a covered service, and ensuring the request does not exceed the employee’s available balance. This review helps prevent improper payments and maintains compliance.

After verification, the corporation issues the reimbursement payment to the employee. These payments are made on a tax-free basis and are not subject to income or payroll taxes.

The corporation must maintain records of all plan transactions, including claim submissions, proof of expense, and reimbursement payments. These records are needed to substantiate the plan’s compliant operation during an IRS or Department of Labor audit.