Can business owners participate in an HRA?

The core principle

An ICHRA and a QSEHRA are both ways to reimburse employees, tax-free, for health coverage. That word does the work: the tax benefit flows to common-law employees, and owners who aren’t employees in the eyes of the tax code generally can’t take it. Whether you can participate comes down to one thing — how your business is taxed — not the size of your stake or how much you work in the business.

Sole proprietors

A sole proprietor is the business, not an employee of it. So a sole proprietor can’t reimburse themselves tax-free through their own ICHRA or QSEHRA, and the same is true of a single-member LLC taxed as a sole proprietorship. You can still set up the HRA for any W-2 employees you have — you just can’t be a participant yourself.

Partners and LLC members

Partners in a partnership — and members of a multi-member LLC taxed as a partnership — are likewise not employees. Their compensation comes as distributions or guaranteed payments rather than W-2 wages, so they can’t participate in the firm’s HRA on a tax-free basis either.

S-corporation owners

This one surprises people. A shareholder who owns more than 2% of an S corporation is treated, for health-benefit purposes, as if they were a partner — that is, as self-employed — and so can’t receive tax-free HRA reimbursements. The rule reaches further than the owner: under the tax code’s attribution rules, ownership is generally attributed to the owner’s spouse, children, parents, and grandparents, so a more-than-2% shareholder’s family members working in the business are usually excluded too. Putting a spouse on the payroll doesn’t get around it.

C-corporation owners

Here’s the exception that proves the rule. An owner who works in a C corporation is a common-law employee of it, so a C-corp owner-employee can generally participate in the company’s ICHRA or QSEHRA tax-free, like any other employee. The tax treatment of owner health benefits is one of the real differences between a C corp and a pass-through entity.

The self-employed alternative

An owner who can’t use the HRA usually isn’t left without a tax break. Sole proprietors, partners, and more-than-2% S-corp shareholders can typically claim the self-employed health insurance deduction — an above-the-line deduction for their own health, dental, and qualifying long-term-care premiums — subject to the usual limits, broadly that you can’t deduct more than your earned income from the business and can’t be eligible for subsidized coverage through a spouse’s employer. For an S-corp owner, the mechanics typically run through the W-2: the corporation includes the premiums in the shareholder’s wages, and the shareholder deducts them. It’s a different route to a similar place.

The bottom line

Structure decides eligibility. C-corporation owner-employees can generally take a tax-free ICHRA or QSEHRA; sole proprietors, partners, and more-than-2% S-corporation shareholders, along with their close family, generally can’t — but can often deduct their own premiums instead. Because the attribution rules and the self-employed deduction limits are fact-specific, confirm your own situation with a tax professional before you set up an arrangement. This is general information, not tax, legal, or benefits advice.