A popular health insurance option for small employers is the health reimbursement arrangement (HRA). Through an HRA, employers can reimburse their employees tax-free for qualifying medical expenses such as copayments, deductibles, and even individual health insurance premiums.
However, the HRA works a little differently depending on what type of organization you run. In this article, we’ll cover how an HRA works for C-corporations, special perks for C-corporation owners, and the tax benefits C-corporations can receive with an HRA.
What is a C-corporation?
A C-corporation ("C-corp") is any corporation that, under U.S. federal income tax law, is taxed separately from its owner or owners. The profit of a corporation is taxed first to the corporation when earned, and then again to the shareholders when distributed as dividends.
With a C-corp, the corporation itself—not the shareholders that own it—is held legally liable for the actions and debts the business incurs.
So if the business goes bankrupt, the shareholders aren’t personally responsible for the debts and liabilities they would be if the organization was a sole proprietorship or a partnership.
Most major organizations (and some smaller organizations) are treated as C-corps for U.S. federal income tax purposes.
Learn more about the six types of small business owner structures
How does an HRA work for C-corps?
What’s unique about C-corps is that both the employees and the owner of a C-corp can use an HRA to get 100% tax-free reimbursements for medical expenses for themselves as well as their family members.
This is because an owner must be considered an employee of their organization in order to be eligible to participate in an HRA. Because a C-corp is a legal entity separate from its owner, that means the owner is considered an employee, and can participate in their organization’s HRA.
On the other hand, S-corporation owners aren’t considered employees, but self-employed. S-corporations aren’t subject to corporate income tax—instead, shareholders are taxed individually. That means owners are ineligible to receive reimbursements through an HRA.
See if you’re eligible to use an HRA based on the type of organization you own
As a C-corp owner, you not only have the freedom to participate in your organization’s HRA, but also the flexibility to design it however you choose. Depending on the type of HRA you're offering, employers may even be able to set up unique allowance amounts for different types of employees, including the owner.
For example, a full-time owner could have a monthly allowance with their individual coverage HRA (ICHRA) of $1,000 while the part-time employees could have an ICHRA allowance of $500.
However, with the qualified small employer HRA (QSEHRA), different allowances can only be offered to employees by family status, such as single or married, or employees who have dependents.
Learn more about offering different allowances to different employees
What are the tax benefits for C-corps who have an HRA?
Using an HRA allows C-corps to take advantage of tax benefits for themselves, their family, their organization, and their employees.
Reimbursements received are tax-free
Qualifying expenses paid by an HRA are tax-free for employees, so long as they follow these basic requirements:
- The HRA is funded solely by the employer
- An HRA doesn’t qualify for exclusion of benefits from income tax if an employee has the option of receiving cash or some other taxable or non-taxable benefit other than the reimbursement of eligible medical care expenses
- Only substantiated medical expenses are reimbursed
- Qualified medical expenses are those specified in the required HRA plan documents, and are generally those that would qualify for the itemized deduction for medical and dental expenses on Schedule A of Form 1040—these expenses are outlined in IRS Publication 502
Reimbursements paid by the organization are tax-deductible
Not only does the HRA offer tax benefits to the participants, but also for the organization itself. All HRA reimbursements paid are tax-deductible to the organization.
For example, if a C-corp reimburses employees for $285 of their $300 allowance, the real cost to the organization is also $285. That’s because FICA/FUTA payroll taxes don’t apply to HRA reimbursements. And all money not used stays with the organization.
The tax-savings a C-corp can gain simply be setting up an HRA add up over time. Organizations using an HRA save an average of 27% for single plans and 52% for family plans compared to organizations that only use a group health insurance plan.
Conclusion
For C-corporations, the benefits of using an HRA are many. From the benefit of owners being able to join their employees in getting tax-free reimbursements, to the tax advantages and deductions that save the organization money, it’s a no-brainer for C-corp owners to take advantage of the HRA for themselves, the organization, and their employees.
This article was originally published on August 28, 2013. It was last updated April 9, 2021.
- Qualified medical expenses are those specified in the required HRA plan documents, and are generally those that would qualify for the itemized deduction for medical and dental expenses on Schedule A of Form 1040—these expenses are outlined in IRS Publication 502
