Fringe Benefits and S-Corps

Fringe Benefits and S-Corps

January 7, 2025

As the IRS explains, a 2% shareholder is someone who directly or indirectly owns more than 2% of the corporation's stock or stock with more than 2% of the voting power. The business must treat a 2% shareholder as a a partner in a partnership for fringe benefit purposes. What does this mean for life insurance? 

Generally, life insurance isn't group-term life insurance unless you provide it at some time during the calendar year to at least 10 full-time employees.

Basically, according to the IRS, businesses must count employees who choose not to receive the insurance as if they do receive insurance, unless, to receive it, they must contribute to the cost of benefits other than the group-term life insurance. For example, businesses must count an employee who could receive insurance by paying part of the cost, even if that employee chooses not to receive it. However, they could not count an employee who chooses not to receive insurance if the employee must pay part or all of the cost of permanent benefits in order to obtain group-term life insurance.

Even businesses that don't meet the 10-employee rule may fall under one of two exceptions that allow them to treat insurance as group-term life insurance.

Under the first exception, they don't have to meet the 10-employee rule if all the following conditions are met.

1. If evidence that the employee is insurable is required, it is limited to a medical questionnaire (completed by the employee) that doesn't require a physical.
2. The company provides the insurance to all full-time employees or, if the insurer requires the evidence mentioned in (1), to all full-time employees who provide evidence the insurer accepts.
3. The company figures the coverage based on either a uniform percentage of pay or the insurer's coverage brackets that meet certain requirements.

Under the second exception, companies don't have to meet the 10-employee rule if all the following conditions are met.

• They provide the insurance under a common plan covering your employees and the employees of at least one other employer who isn't related.
• The insurance is restricted to, but mandatory for, all employees who belong to, or are represented by, an organization (such as a union) that carries on substantial activities besides obtaining insurance.
• Evidence of whether an employee is insurable doesn't affect an employee's eligibility for insurance or the amount of insurance that employee gets.

These are just the basics. Consult a professional for further details.

Exclusion from wages

Companies can generally exclude the cost of up to $50,000 of group-term life insurance coverage from the wages of an insured employee. They can exclude the same amount from the employee's wages when figuring social security and Medicare taxes. In addition, they don't have to withhold federal income tax or pay FUTA tax on any group-term life insurance provided to an employee.

Coverage over the limit 

Companies must include in employees' wages the cost of group-term life insurance beyond $50,000 worth of coverage, reduced by the amount an employee paid toward the insurance. They must report it as wages in boxes 1, 3, and 5 of the employee's Form W-2. Also, they should show it in box 12 with code C. The amount is subject to Social Security and Medicare taxes, and employers may, at their option, withhold federal income tax.

Companies should figure the monthly cost of the insurance to include in the employee's wages by multiplying the number of thousands of dollars of all insurance coverage over $50,000 (figured to the nearest $100) by the cost shown in the table blow For all coverage provided within the calendar year, employers should use the employee's age on the last day of the employee's tax year. They must prorate the cost from the table if less than a full month of coverage is involved.

Cost Per $1,000 of Protection for 1 Month

Companies should figure the total cost to include in the employee's wages by multiplying the monthly cost by the number of months' coverage at that cost.

The IRS provides an example: Tom's employer provides Tom with group-term life insurance coverage of $200,000. Tom is 45 years old, isn't a key employee, and pays $100 per year toward the cost of the insurance. Tom's employer must include $170 in Tom’s wages. The $200,000 of insurance coverage is reduced by $50,000. The yearly cost of $150,000 of coverage is $270 ($0.15 x 150 x 12), and is reduced by the $100 Tom pays for the insurance. The employer includes $170 in boxes 1, 3, and 5 of Tom's Form W-2. The employer also enters $170 in box 12 with code C.

Again, this is a complicated situation, and companies are urged to get professional advice.  Contact us today with any questions you might have.  Larson and Company has developed a suite of services specifically to serve the needs of companies of all sizes in a wide range of industries.

Source:  Industry Newsletters ©2025