Health benefits have long been challenging for business owners, especially those seeking cost-effective, flexible solutions. The Individual Coverage Health Reimbursement Arrangement (ICHRA) is changing the game, offering businesses a tax-advantaged way to reimburse employees for individual health insurance premiums and medical expenses. However, not all business owners can participate in an ICHRA—eligibility depends mainly on the business’s legal structure.
Understanding ICHRA business owner eligibility is crucial, as C Corporations, S Corporations, Partnerships, Sole Proprietorships, and LLCs have different rules. While some owners can take full advantage of ICHRA tax benefits, others may need to explore alternative health benefits for business owners, such as Qualified Small Employer HRAs (QSEHRAs), Health Savings Accounts (HSAs), or spousal health plans.
In this article, you’ll learn:
Let’s dive into ICHRA eligibility rules and how business owners can maximize their health benefit options.
The Individual Coverage Health Reimbursement Arrangement (ICHRA) is a flexible and tax-efficient way for businesses to provide health benefits without the complexities of traditional group health insurance. Instead of offering a one-size-fits-all plan, employers set a customized reimbursement budget. Employees then purchase their health insurance plans, and the HRA can cover qualifying medical expenses, including insurance premiums.
Introduced in 2020 under new federal regulations, ICHRAs have quickly gained popularity among businesses of all sizes. They offer greater flexibility, cost control, and tax advantages, making them attractive for employers who want to provide health benefits without managing a group insurance policy.
Related: ICHRA Tax Benefits for 2025
An ICHRA works as a reimbursement model, meaning the employer does not directly pay for health insurance premiums or medical costs. Instead, the process typically follows these steps:
Unlike traditional group health plans, ICHRA business owner eligibility varies based on the company’s legal structure, which affects whether owners can participate alongside employees.
Benefits for Employers
Benefits for Employees
An ICHRA offers a win-win solution: It gives businesses a cost-effective way to provide health benefits while offering employees greater choice and flexibility. However, business owners must carefully consider their eligibility before assuming they can also participate, which we’ll cover next.
One of the most important factors in determining whether a business owner can participate in an ICHRA is their business structure. While some owners qualify to receive reimbursements tax-free, others are considered self-employed and cannot participate in the same way their employees can.
Below, we break down ICHRA eligibility rules by business type, including C corporations, S corporations, partnerships, sole proprietorships, and LLCs.
Owners of a C Corporation (C Corp) are considered separate legal entities from their business, meaning they are treated as W-2 employees. Because of this distinction, C Corp owners:
Example: A C Corp owner sets up an ICHRA for their employees and includes themselves in the plan. The company reimburses the owner for their individual health insurance premiums tax-free, and the business deducts these reimbursements as a legitimate expense.
Key Takeaway: C Corp owners receive the full benefits of an ICHRA, making it an attractive health benefits solution for corporations.
Owners of an S Corporation (S Corp) face stricter restrictions on ICHRA participation. If they hold more than 2% ownership, they are considered self-employed, not employees, making them ineligible for tax-free ICHRA reimbursements.
Example: An S Corp owner offers an ICHRA to employees but cannot participate themselves. Instead, they pay for their health insurance directly and deduct it as a self-employed health insurance deduction on their personal tax return.
Key Takeaway: Although S corporation owners are not allowed to participate in ICHRA, they can still receive some tax benefits by deducting health insurance costs personally.
Partners in a Partnership (or Limited Partnership, LP) are classified as self-employed, not employees, making them ineligible for ICHRA participation. However, there is a workaround:
Example: A business partnership provides an ICHRA for employees, but the partners themselves cannot participate. However, one of the partners employs their spouse as a W-2 employee, allowing the spouse to receive ICHRA benefits, indirectly benefiting the partner.
Key Takeaway: Partners cannot participate in an ICHRA but can explore spousal participation or self-employed health insurance deductions.
A Sole Proprietorship is not legally separate from its owner, meaning the business owner is considered self-employed rather than an employee. Because of this:
Example: A sole proprietor hires their spouse to work for the business. The business provides the spouse with an ICHRA, allowing them to receive tax-free health reimbursements—which the owner can use indirectly to cover the family’s health insurance.
Key Takeaway: Sole proprietors cannot participate in an ICHRA, but a strategic approach involving a spouse can help them benefit from the plan.
A Limited Liability Company (LLC) can be taxed differently, directly impacting ICHRA eligibility. Here’s how it breaks down:
Example: If an LLC is taxed as a C Corporation, its owner can participate in an ICHRA because they are classified as W-2 employees. However, if the LLC is taxed as a Partnership or Sole Proprietorship, the owner is not considered an employee and cannot participate.
Key Takeaway: LLC owner eligibility for an ICHRA depends on tax classification—LLCs taxed as C Corps can participate, while those taxed as S Corps, sole proprietors, or partnerships cannot.
ICHRA offers significant tax advantages for businesses and employees. Though tax benefits vary depending on the business structure and how the IRS classifies business owners. While C Corporation owners can fully deduct reimbursements, S Corporation owners and self-employed individuals must consider alternative tax strategies.
Understanding the tax implications of ICHRAs can help business owners maximize deductions, reduce taxable income, and stay compliant with IRS rules. Below is a breakdown of how different business structures can benefit from ICHRA reimbursements or explore other tax-saving options.
A C Corporation (C Corp) is a separate legal entity from its owners, meaning the corporation employs its owner as a W-2 employee. This classification allows C Corp owners to fully participate in an ICHRA and receive the same tax advantages as their employees.
S Corporation (S Corp) owners of more than 2% of the company are classified as self-employed rather than W-2 employees. This means they cannot receive tax-free ICHRA reimbursements, but they can still take advantage of other tax deductions for health insurance.
Tax Implications for S Corp Owners:
Self-employed individuals, including sole proprietors, partners in a partnership, and more than 2% S Corp owners, cannot participate in an ICHRA because they are not considered employees. However, they can still reduce their tax liability through other health insurance deductions.
Tax Deduction Options for Self-Employed Business Owners:
ICHRA reimbursements are tax-free for eligible employees and C Corp owners, but there are a few important considerations regarding how reimbursements interact with ACA premium tax credits and employee wages.
Tax-Free Reimbursements:
Impact on ACA Premium Tax Credits:
If you’re a self-employed business owner or an ineligible S Corp owner, you may need to explore other health benefit solutions beyond an ICHRA. While an ICHRA offers flexibility, different options can still provide tax advantages and cost-effective coverage.
A Qualified Small Employer HRA (QSEHRA) is a great option for businesses with fewer than 50 employees. It allows owners to reimburse employees for health insurance on a tax-free basis. However, self-employed individuals cannot participate unless they qualify through a spouse’s W-2 employment.
Traditional group health insurance offers predictability but higher costs and administrative burdens. An ICHRA provides more flexibility, allowing employees to choose their own plans while still being reimbursed. A group plan may be better for business owners who want coverage.
A Health Savings Account (HSA) allows self-employed individuals to save pre-tax dollars for medical expenses. You must enroll in a high-deductible health plan (HDHP) to qualify. HSAs provide triple tax benefits: tax-deductible contributions, tax-free growth, and tax-free withdrawals for medical expenses.
If a business owner cannot participate in an ICHRA, but their spouse is employed elsewhere, they may be able to join their spouse’s employer-sponsored health plan. This is often a cost-effective way to get coverage while offering employees an ICHRA or QSEHRA.
Even if you’re not eligible for an ICHRA, alternative health benefit solutions exist to help business owners and self-employed individuals find affordable and tax-efficient coverage.
Understanding ICHRA business owner eligibility can be complex, especially regarding spousal participation, reimbursement amounts, ACA subsidies, and business structure changes. Below are answers to some of the most common questions about ICHRA eligibility.
Yes, but it depends on your business structure.
Employers can set different reimbursement rates based on employee classes, such as full-time, part-time, salaried, hourly, or remote employees. However, the IRS prohibits discrimination—you must offer consistent reimbursements within each class.
A common approach is to base reimbursement amounts on:
Yes. Employees cannot use both ICHRA and ACA premium tax credits simultaneously.
Employers should run affordability calculations to ensure compliance and provide clear guidance to employees.
If your business structure changes, it may impact ICHRA eligibility for you as the owner.
To avoid compliance issues, it’s important to reassess ICHRA participation when changing your business structure.
ICHRA rules can be nuanced, so it is recommended that you consult with a tax professional or benefits advisor when determining eligibility.
Choosing the right health benefits for your business depends on your business structure, tax strategy, and employee needs. While an Individual Coverage Health Reimbursement Arrangement (ICHRA) offers flexibility and tax advantages, not all business owners qualify. Understanding eligibility rules and alternative health benefit options can help you make the best decision for your business and employees.
Need help choosing the right health benefits coverage? Talk to one of our experts today!