The individual coverage health reimbursement arrangement (ICHRA) is available as of January 1. This tax-advantaged HRA has a few key elements that make it attractive. Employers can customize a plan, defining which employees are eligible and determining their reimbursement limits. Among the HRA options available, the ICHRA provides a good fit for many employers and businesses, but what if you own a corporation? Are you able to participate in ICHRA? Let’s talk it through.
What is an HRA?
A Health Reimbursement Arrangement allows business owners to reimburse employees for monthly premiums and medical expenses tax-free. It’s gaining popularity as an alternative to the "one size fits all" group plans traditionally offered.
There are three new “flavors” of HRAs that you need to know about.
- ICHRA- Individual Coverage Health Reimbursement Arrangement- based on reimbursing employees for insurance rather than buying it for them.
- QSEHRA- Qualified Small Employer Health Reimbursement Arrangement- allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free.
- EBHRA- Excepted Benefit Health Reimbursement Arrangement- used to cover the cost of copays, deductibles, or other costs not covered by a group plan. They allow for higher levels of employer contributions than flexible spending arrangements (FSAs) and the unused funds can rollover year to year.
Understanding which one is best for your business depends on how your business entity is set up. Today we are talking about corporations and the latest HRA, the individual coverage HRA.
Let’s jump in.
Corporations, HRAs, and Health Insurance Deductions
Corporations are the easiest entity type to handle when it comes to health insurance because owners are considered employees and can benefit from the company’s ICHRA. Their dependents and any W2 employees can benefit as well.
For the sake of this post, corporations include C-Corps, B-Corps, Non-Profits, and LLCs taxed as C-Corps—anything where the entity is separate from ownership. As a corporation, you should be able to get all your insurance premiums and medical expenses counted as a business expense (Schedule C).
Who owns a corporation anyway?
Shareholders are legal owners of a corporation, who are not involved in the day-to-day management of the company. They have the right to vote for members of the board of directors, but it is the board who runs the company for the benefit of shareholders. A single shareholder can control appointments to the board or even appoint himself to the board. As mentioned above, since owners are considered employees, they are able to enjoy the benefits of the company’s HRA.
How other business entity types work with an HRA
- S Corps - an S-Corp owner that owns more than 2% of the company is considered self-employed and not an employee, therefore typically cannot participate in the ICHRA. The good news? Self-Employed individuals can already deduct some health insurance expenses without an ICHRA.
- Sole Proprietors - these unincorporated businesses are owned and operated by one individual with no distinction between the business and owner. In a nutshell: The sole proprietor is not an employee and will not qualify for ICHRA.
We always recommend speaking with your CPA about your best HRA tax strategy. In the meantime, check out our ICHRA FAQ guide or chat with us online. We are around and ready to help answer your questions.