A Health Reimbursement Arrangement (HRA) is a flexible tool for small business owners to increase their tax savings and to offer tax-free health benefits. An HRA may reimburse for qualified medical expenses such as co-payments, deductibles, and personal health insurance premiums. HRAs are often used as a small business alternative to group health insurance.
A common question from business owners and one-person nonprofits is "am I eligible to participate in the HRA?"
While offering an HRA should primarily be about assisting employees with their health care needs, some small business owners may be eligible to participate.
This article reviews HRA owner participation for the following owner types and entities:
- C-Corporation Owners
- Sole Proprietors
- S-Corporation Owners
You can also find this information summarized in our Business Owner Eligibility Under a QSEHRA infographic. While this infographic discusses a particular kind of HRA, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), the rules are the same for all HRAs.
HRA Eligibility: C-Corporation Owners
A C-Corporation ("C-Corp") is a legal entity separate from the owners. Therefore, C-Corp owners may participate in an HRA and receive reimbursements 100% tax free. C-Corp owners may use the HRA to reimburse his or her medical expenses, as well as family medical expenses. To summarize:
Full use of HRA; receive reimbursements 100% tax free with no restrictions.
An excellent option for tax-free business-owner health insurance and medical expenses.
HRA Eligibility: Sole Proprietors
A sole proprietorship is an unincorporated business owned and run by one individual, with no distinction between the business and the owner. Therefore, sole proprietors aren't employees and can't participate in an HRA.
However, if the sole proprietor is married and the sole proprietor's spouse is a W-2 employee, then the sole proprietor can receive the benefit tax-free. In this case, the HRA is set up in the spouse's name and the sole-proprietor is listed as a dependent. To summarize:
Full use of the HRA only if spouse is a W-2 employee.
Otherwise, the sole proprietor may not participate in the HRA.
HRA Eligibility: Partners
A partnership is not subject to income tax. Instead, the partners are directly taxed. Therefore, the partner is self-employed, not an employee, and isn't eligible to participate in an HRA.
However, if the partner is married, and the partner's spouse is a W-2 employee (but not a partner), then the partner can receive the benefit tax-free. In this case, the HRA is set up in the spouse's name and the partner is listed as a dependent.
Full use of the HRA only if spouse is a W-2 employee, and spouse is not a business partner.
Otherwise, the partner can't participate in the HRA.
HRA Eligibility: S-Corporation Owners
An S-Corporation ("S-Corp") isn't subject to income tax. Instead, shareholders that own >2% of the company's shares are taxed individually. Therefore, a shareholder is not an employee, and isn't eligible to participate in the HRA. Similarly, the spouses, parents, children, and grandchildren of >2% owners can't use participate in the HRA.
S-Corp owners can't participate in the HRA. Neither can their spouse, parents, children, or grandchildren.
Ineligible Owners Should Still Adopt an HRA
As detailed above, whether or not owners are eligible to receive the full tax benefits of an HRA depends on their tax filing status. If you're one of the owner types that can't participate in the HRA, there are still a lot of reasons to adopt one.
HRAs are a key way to help your business hire and keep its people. Because your employees are free to purchase the products and services they want most, an HRA provides great value to employees and makes it easier to hire people and make your employees happy.