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HRA Eligibility By Type of Small Business Owner

July 13, 2020
HRA eligibility by type of small business owner

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
  • Partners

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: 

  • C-Corp owners can fully use an HRA, receiving reimbursements for health insurance and medical expenses 100% tax-free, without restrictions.

  • HRAs are an excellent option for owners (and employees) of a C-Corp

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:

  • Sole proprietors can be reimbursed for health insurance and medical expenses through their spouse if their spouse is a W-2 employee.

  • If the sole proprietor is unmarried, or if their spouse is not a W-2 employee, the sole proprietor cannot 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 and 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 can receive tax-free reimbursements as a dependent.

To summarize:

  • A partner in a partnership can be reimbursed through the HRA only if their spouse is a W-2 employee, and the spouse is not a business partner.

  • If the partner is unmarried, or if the partner's spouse is also a partner in the business, then the partner cannot 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 owners who have more than a 2% share of the company cannot participate in the HRA.

To summarize:

  • S-Corp owners cannot participate in the HRA. Neither can their spouse, parents, children, or grandchildren.

  • S-Corp owners can write off their medical expenses through other means, such as a personal income tax deduction for premiums paid for by the business

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.

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