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What to know about self employed health insurance

Wondering about your options for self employed health insurance? You may have more than you realize, and they may be more affordable than you think! Many small business owners like you are opting out of traditional health insurance in favor of the reimbursement model, which helps with budget control, is more predictable, and boasts other benefits as well. Let’s walk through what you need to know about health reimbursement arrangements for the self employed.

If you own a business that brings in income, but you have no employees, you’re considered self-employed. You're likely either a sole proprietor or a single-member LLC. Sole Proprietorships can get a little tricky because there’s no separation between you and your business in the eyes of the IRS (i.e., you’re a “pass-through entity” or “disregard entity”) and owners are generally not considered to be employees even if you’re working for your company full-time.

Self employed health insurance: the small group plan

Small group insurance: Small-group insurance has been the primary option for many small employers who are looking to offer health benefits. There are lots of options out there; you can choose between managed care (HMO, PPO, and POS), indemnity fee-for-service, and high-deductible health plans.

You can buy small-group plans directly from an insurance company, via a broker or private exchange, or from their state’s SHOP Exchange. You can sign up for this anytime, not just during open enrollment.

While these plans are well known, tax-free, and solid product options, they are also expensive, one-size-fits-all. They have unpredictable premium increases year over year,  and participation rate requirements.

But remember, only certain states guarantee self-employed individuals the ability to elect a group plan. Check out this post for more information on which states allow the self employed to purchase group insurance.

Self employed health insurance: the HRA plan

A health reimbursement arrangement is an affordable, tax-advantaged alternative to traditional insurance where employers reimburse their employees for individual insurance premiums and medical expenses (if applicable) on a pre-tax basis.

The use of new reimbursement models like QSEHRA and ICHRA puts the employer's reimbursements on nearly the same tax playing field as traditional small group plans, but without all the hassles and requirements.

QSEHRA:  The Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, 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. This means employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want. Reimbursement amounts can vary based on age and family size.

ICHRA:  The Individual Coverage Health Reimbursement Arrangement has all the same benefits as QSEHRA, but with no maximum contribution limits and no company size limit. In addition to the flexibility of varying rates based on age and family size like QSEHRA, the hallmark feature of ICHRA is that benefits can be scaled across different classes of employees. An ICHRA can also be integrated with a group plan, which is another distinction.

Does a self employed person qualify for an HRA?

Whether or not self-employed owners can participate in an HRA depends on how the plan and business are set up. In order for a business owner to participate in an HRA, they must be considered an employee of the business.

  • C- Corps are legal entities separate from the owners. Under a C-corporation the business owner and dependents can utilize an HRA!
  • 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. The bad news? Since S-Corp owners are not employees, they typically cannot participate in an HRA. The good news? Self-Employed individuals can already deduct some health insurance expenses without an HRA.
  • Partnerships also 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.
  • Sole-Proprietorships are unincorporated businesses owned and operated by one individual with no distinction between the business and owner. The owner is not an employee and will not qualify for the HRA unless their spouse is a W-2 employee, then the owner can access the HRA as a dependent of the spouse (for QSEHRA only).

We strongly recommend S-Corp owners talk to their licensed tax professional or CPA.

If you’re self-employed with no employees and you’re married, this post walks you through the steps you can take to participate in an HRA.

Still have questions? 

Hopefully we've been able to shed some light on your options. We have a ton of excellent resources available to you, including FAQ pages for the ICHRAand QSEHRA and many informational posts available on our blog. You can also chat with one of our team of experts anytime!

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