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.