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Small Business Employee Benefits and HR Blog

Health Reimbursement Arrangements - HRAs for Sole Proprietors

January 23, 2013

describe the imageHealth Reimbursement Arrangements, or HRAs, are employer-provided plans that reimburse employees for health care expenses. An HRA may reimburse employees for qualified medical expenses such as co-payments, deductibles, and health insurance premiums. Due to IRS restrictions on owner participation, Sole Proprietors are not eligible under federal tax laws to receive benefits directly from an HRA. However, the law provides a "loophole" for a sole proprietor that employs his or her spouse.

What is a Sole Proprietor?

A sole proprietorship is a business operated by a single individual. By default, a business with a single owner that is not established as a corporation or limited liability company (LLC) is recognized as a sole proprietorship. Sole proprietorships are the easiest and most common types of businesses to operate. 

How Sole Proprietors Can Take Advantage of Health Reimbursement Arrangements

While the sole proprietor is not eligible for a Health Reimbursement Arrangement, the spouse of a sole proprietor is eligible if he or she is a W-2 employee of the sole proprietorship.  Here are the basic requirements for a sole proprietor to take advantage of an HRA:

  • The sole proprietor must be married.

  • The sole proprietor's spouse must be a W-2 employee.

Tax Benefits of Health Reimbursement Arrangements

Offering a Health Reimbursement Arrangement to a spouse allows the sole proprietor to indirectly take advantage of the tax benefits associated with the Health Reimbursement Arrangement as a dependent

When setting up an HRA plan, the sole proprietor must establish legal plan documents outlining coverage and must provide these documents to the employees receiving the benefits. If a spouse receives the coverage, an employee agreement detailing the salary and responsibilities of the spouse in the business will need to be documented. The assistance of a professional such as a certified public accountant or your attorney can ensure that the HRA is set up properly.

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