A health reimbursement arrangement (HRA) is a flexible health benefit that allows employers to offer a tax-free allowance to their employees to spend on qualifying medical expenses and individual insurance premiums.
A common question we get a lot from business owners is: “Can I participate in my organization’s HRA as the owner?”
While offering an HRA should primarily be about assisting employees with their healthcare needs, some business owners may be eligible to participate, too.
The answer depends on your tax filing status and what type of organization you’re running. An owner must be considered an employee of their organization in order to be eligible to participate in their HRA. However, not all business entities consider their owners employees.
This article reviews HRA owner participation for the following owner types and entities:
- C-corporation owners
- S-corporation owners
- Sole proprietors
A C-corporation (C-corp) is any corporation that, under U.S. federal income tax law, is taxed separately from its owner or owners. 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.
Using an HRA allows C-corps to take advantage of tax benefits for their employees, their organization, themselves, and even their family members.
An S-corporation (S-corp) is a special type of corporation created through an IRS tax election. S-corporations aren’t subject to corporate income tax. Instead, shareholders that own more than 2% of the company's shares are taxed individually. That means S-corp owners aren’t considered employees, but self-employed, so they aren’t eligible to receive reimbursements through an HRA.
Due to attribution rules, even if family members are W-2 employees or are on the same insurance policy as the owner, they and the owner are still ineligible.
The good news is, if you’re an S-corp owner, there are other ways you can write off your medical expenses. For example, you can take a personal income tax deduction for health insurance premiums paid for by the business.
A partnership is a single business where two or more people share ownership. A partnership is not subject to income tax. Instead, the partners are directly taxed. That means partners are considered self-employed, not employees, and aren't eligible to participate in an HRA.
However, unlike S-corp owners, partners can receive tax-free reimbursements if they’re married and their spouse is a regular W-2 employee of the organization (not a partner). In this case, the HRA is simply set up in the spouse's name and the partner can receive tax-free reimbursements as a dependent.
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.
But again, just like with partnerships, if an owner of a sole proprietorship has a spouse who’s a W-2 employee of the business, they can be added as a dependent on their spouse’s HRA and receive tax-free reimbursements through their allowance.
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 organization hire and keep its people, because your employees are free to purchase the healthcare products and services they want most.
This article was originally published on July 13, 2020. It was last updated August 5, 2021.