The individual coverage HRA (ICHRA) gives employers the freedom to design a plan that’s tailor-made for their company—and it’s been such a game-changer because so many businesses can take advantage of its benefits. The ICHRA is tax-advantaged: You’ll be able to get all your employees’ eligible expenses recorded as a business expense, which helps you reduce the self-employment taxes you’ll owe. But, can owners deduct health expenses with an ICHRA? Owner eligibility for the ICHRA depends on how your business entity is set up. Let’s walk through it.
Corporations 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.
S-Corporations and ICHRA
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, and therefore 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 business owner eligibility, 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.
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.
ICHRA and Sole proprietorships
Sole proprietorships, since they are owned and operated by one individual who is not an employee, cannot create an ICHRA.
Did we clear things up for you?
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 ICHRA administration tool is designed to make tax time a breeze. Our comprehensive ICHRA guide has even more information for you, and our team is always here to answer questions.