QSEHRA

Can S-corp shareholders participate in an HRA?

by Keely S.

Business owners have more options than ever when it comes to health insurance for themselves and their employees. Gone are the days of the rigid, expensive, one-size-fits-all group plan. With health reimbursement arrangements, or HRAs, you can offer your employees flexible, customizable, tax-free reimbursements for health insurance. In many cases, owners can participate as well. Your eligibility depends on how your business is set up. Can s-corp shareholders participate in an HRA? Let’s find out!

S-Corporations and HRAs: 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 an HRA.

IRS rules extend to family members including: spouse, parents, children, and grandchildren. Even if family members are W-2 employees at your business they are still not able to participate in an HRA.

The good news? Self-Employed individuals can already deduct some health insurance expenses without an HRA.

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 HRA, they must be considered an employee of the business.

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 can s-corp shareholders participate in an HRA?

For S-Corps, 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. You might ask, “Wait, why can’t I hire my spouse and do what proprietors can do with the One-Person 105 HRA thing?” (Our Small business HRA strategy guide goes into detail about this!) The problem for S-Corps is that spouses are attributed ownership of the S-Corp, and the One-Person 105 HRA rules fall apart.

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.

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.

Next steps: Take Command Health can 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.

Hungry for more? Check out our comprehensive ICHRA Guide and our Small Business HRA strategy guide. Or just reach out to someone on our team- we are always happy to help!

Picture of Keely S.

Hi, I'm Keely S.! A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.