Are Business Owners Eligible for an HRA?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) can be a great tool for employers to provide their employees with an alternative to a traditional group health insurance plan -- as long as they have at least one W-2 (salaried) employee. However, owners and part-owners of a company themselves may not be eligible to participate in an ICHRA, depending on the structure of the company. Generally speaking, to be eligible to participate in an ICHRA, you must be considered an employee of the company. In fact, these rules extend to any type of HRA, including a QSEHRA.
C-Corps are entities that are separate from their owners. Under a C-Corp structure, the business owner(s) and dependents can participate in an ICHRA.
According to the IRS, S-Corp owners and their spouses who own more than 2% of a business cannot participate in an ICHRA. This rule extends to family members, even if those family members are W-2 employees at the business. S-Corps prevent businesses from being taxed by passing any profits and losses through shareholders’ personal income tax returns. Because of this setup, a shareholder is considered self-employed, not an employee, making them ineligible to participate.
Owners of a limited-liability corporation also cannot participate in an ICHRA.
A sole proprietorship, by its nature, represents a single owner-operator. Because they are owned and operated by one individual who is not an employee, the owner of a sole proprietorship cannot create an ICHRA. If the owner’s spouse is a W-2 employee (not an owner) of the business, then the owner can access an ICHRA as a dependent of the spouse.
A business that is set up as a partnership is not subject to income tax. The business partners are directly taxed, making them self-employed and therefore not eligible for participation in an ICHRA.
Section 125 Plans
Any employer with employees who are subject to paying income taxes (pretty much everybody!) can sponsor a Section 125 plan. This includes C-Corps, S-Corps, LLCs, partnerships, governmental entities or sole proprietorships.
A Section 125 Plan, sometimes known as a cafeteria plan, allows employers to offer benefits per Section 125 of the Internal Revenue Code. A Section 125 plan enables employers to reduce employees’ gross income by allowing contributions to certain benefits to be pre-tax. This, in turn, reduces the amount the company pays in payroll taxes (to help fund Social Security and Medicare).
For a much deeper dive into Section 125 Plans from the IRS, click here.