If you are a partner and are reimbursing your employees for their premiums with an ICHRA (Individual Coverage HRA), you’re probably wondering how you can achieve the same tax advantage as your employees now that tax time is upon us.
The short answer is that your participation depends on how your company is set up. If it's set up as a partnership, the reality is you can't participate in the ICHRA because you don't need it. You already have the benefit of being able to deduct medical expenses. Good news, right?
There are a few rules and requirements that you need to know ahead of time, so let’s walk through them.
Partnerships are not subject to income tax.
Partners are directly taxed, making them self-employed and not eligible for participation. The Loophole: if the partner’s spouse is a W-2 employee (and not a partner spouse) then the owner can participate in the HRA as a dependent of the spouse.
In the eyes of the IRS, you are self-employed, even if you give yourself a W2.
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.
Best tax strategy for partnerships
If you’re not a corporation and you’re not a proprietor, you fall into a category we collectively refer to as “Other Pass-Through Entities.” Like proprietors, these are entities where income from your business “passes through” and is reported on your personal tax form. Most of the time, you’re not able to classify yourself as an employee (even if you work for your business full-time) and instead are classified as an owner and required to pay self-employment taxes (talk to your accountant). These entities are typically S-Corps, Partnerships, and LLCs taxed as S-Corps or Partnerships.
Here’s how we suggest Partnerships approach health insurance (please consult with your tax professional):
For Partnerships, there’s not a legal way (that we’re aware of) for owners to get their personal insurance and medical expenses counted as a business expense.
Your best bet is to take the Self-Employed Health Insurance Deduction. The good news is that you can still have your business pay for your health insurance premiums. From the IRS Form 1040 Instructions:
- If you are a partner, the policy can be either in your name or in the name of the partnership. You can either pay the premiums yourself or your partnership can pay them and report them as guaranteed payments. If the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premiums as guaranteed payments.
If you have employees, you’ll want to set up an ICHRA. Although you won’t be able to participate as an owner, 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 still a big win for you and a great benefit for employees!
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 as an alternative to small business health insurance for owners. 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.
Wondering how quickly this ICHRA trend is picking up? We've already run the numbers for the early adopters of the Individual Coverage HRA, including most common industries, reimbursement designs, location, etc.