The individual coverage health reimbursement arrangement, or ICHRA for short, is poised to change life for the better for small business owners and their employees beginning January 1st, 2020. It features an easy setup, increased flexibility in design and classification of employees, and no minimum or maximum contribution limits. If you’re the owner of an S Corporation, you may be wondering if you’re eligible to participate in all the benefits the ICHRA offers, as well. This post should clear that up for you.
If you have employees, an ICHRA can be a great benefits solution and an affordable alternative to traditional group insurance. ICHRA is tax-advantaged: You’ll be able to get all your employees’ eligible expenses recorded as a business expenses (Schedule C), which helps you reduce the self-employment taxes you’ll owe. So it's big win for you and a great benefit for employees!
But can S Corp owners participate in the ICHRA?
S-Corporations and ICHRA: What to know
S- Corps prevent businesses from being taxed by passing any profits and losses through shareholders personal income tax returns. Because of this set-up, an S-Corp owner that owns more than 2% of the company is considered self-employed and not an employee, therefore you typically cannot participate in the ICHRA. The good news? Self-Employed individuals can already deduct some health insurance expenses without an ICHRA. We strongly recommend S-Corp owners talk to their licensed tax professional or CPA.
When it comes to determining whether or not business owners are eligible, here's a good rule to follow: in order for a business owner to be eligible to participate in an ICHRA, they must be considered an employee of the business.
Your best bet: the self-employed health insurance deduction
The self-employed health insurance deduction ensures that self-employed individuals like you get a break on their healthcare costs.
It’s available if you:
- Are self-employed
- Have a net profit from your business
- Are not able to receive health insurance coverage from a spouse or employer
According to the IRS site:
You must be one of the following to qualify for the deduction:
- A self-employed individual
- A partner in a partnership
- A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.
Remember, the insurance plan must be established under your business.
Health insurance deductions for the more than 2% shareholders
For more-than-2-percent shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income.
However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business.
In other words, if you are a S Corporation owner and your insurance plan was established under your business, then you are eligible for the deduction.
How to establish an insurance plan under your S Corporation business
There’s two ways to do this. For shareholders who own more than 2%, the insurance policy can either be in the name of your company or in your name as the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income. Remember, if the policy is set up in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on your W-2 as wages to be included in your gross income. If not, the insurance plan will not be considered to be established under your business, making you ineligible for the self-employed tax deduction for medical expenses.
Take Command Health is here to help
As you can see, the way a business is set up affects if the business owner and their dependents will qualify to participate in the HRA. Take Command Health has a team of experts ready to answer your questions regarding your HRA and health insurance options. Our Small Business Platform and ICHRA administration tool are designed to make tax time a breeze.