What to know about partnerships, QSEHRA, and tax deductions 

Wondering how QSEHRA works for partnerships? While we strongly recommend partners of partnerships talk to their licensed tax professional or CPA, we can fill you in on the basics.

Partnership Insurance and QSEHRA: What are Your Options?

To effectively manage partnership insurance, it's important to understand how a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) applies. For any business partnership, health insurance premiums can be a significant expense. QSEHRA offers an alternative way to handle these costs effectively. This arrangement enables small businesses, including partnerships, to reimburse employees for tax-free health insurance premiums and medical expenses. For partners, grasping the implications of partnership insurance within a QSEHRA framework is crucial to making informed decisions about their health insurance options.

Partnership Insurance and QSEHRA

Partnership insurance typically covers the health insurance needs of partners within a business, ensuring that all parties involved have access to medical care. It functions similarly to individual health insurance but is tailored to fit the unique structure of partnerships, where multiple individuals share ownership and responsibilities. One of the key features of partnership insurance is that it can cover both the partners and their employees under a collective policy, streamlining the process and potentially lowering costs through group rates.

However, Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) present a flexible alternative to traditional partnership insurance. Unlike standard insurance policies, QSEHRAs allow small businesses, including those operated as partnerships, to reimburse employees tax-free for their health insurance premiums and medical expenses. This model is particularly beneficial for small partnerships that may find traditional group health plans too costly or inflexible. QSEHRAs offer a cost-effective solution by allowing the business to set aside a fixed amount of pre-tax dollars, which employees can use to purchase their insurance or cover health-related expenses. This allows employees to choose plans that best suit their needs and helps partnerships manage and predict healthcare costs more effectively.

Am I eligible to participate in a QSEHRA? Can my family be reimbursed for premiums?

We get a lot of questions about this, and given the layers of policy and tax law that govern this subject, we thought we should break it down for you in plain English. The short answer is that your participation depends on how your company is set up.

Can partners participate in a QSEHRA? 

When considering the inclusion of partners in a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), it's important to understand the IRS guidelines regarding eligibility. Typically, partners in a business are not classified as employees. Instead, they are considered self-employed individuals. This classification excludes them from directly participating in a QSEHRA because the arrangement is designed primarily for employees.

However, there is a pathway for a partner's family to benefit from a QSEHRA. If the partnership officially employs a partner's spouse, that spouse and their dependents could be eligible to receive the benefits of a QSEHRA. This includes reimbursements for premiums and medical expenses on a tax-free basis, providing a valuable financial benefit even though the partners themselves cannot participate directly. In this way, the partner health insurance paid by partnership is a workaround. 

This arrangement allows partnerships to indirectly provide health benefits through a QSEHRA without violating tax laws or IRS regulations. Partners must consult with a tax advisor or a legal expert to navigate these rules effectively and ensure compliance while optimizing the benefits available through a QSEHRA.

Why partners don't need a QSEHRA

As a partner, you already have the benefit of being able to deduct premiums. Unlike your employees, there's no need or additional benefit from a small business HRA.

The reason for this lies in the way your company is set up.

Partnerships also are not subject to income tax. Partners are directly taxed, making them self-employed and not eligible for participation. The Loophole: if the partner’s spouse is a W-2 employee (and not a partner spouse) then the owner can participate in the HRA as a dependent of the spouse.  

In the eyes of the IRS, you are self-employed, even if you give yourself a W2.

It's important to note that your family can participate in QSEHRA. That means your spouse, parents, children, and grandchildren can receive small business HRA reimbursements, even if you can't.

How Can My Family Take Advantage of QSEHRA Without Me?

While partners themselves may not participate in a QSEHRA, there are ways for their families to benefit from this arrangement. If a partner's spouse is an employee of the business, the spouse and any dependents could be covered under the QSEHRA. This setup allows the family to receive reimbursements for medical expenses and premiums through the QSEHRA, providing significant financial benefits even if the partner is excluded due to their status within the partnership. It's essential to consult a knowledgeable advisor to understand the specific rules and potential advantages of enabling family members to participate in a QSEHRA.

The Benefits of HRAs

​​Health Reimbursement Arrangements (HRAs) provide significant advantages, including cost-effectiveness and flexibility. They allow employers to control healthcare spending by reimbursing employees for medical expenses rather than paying insurance premiums. Additionally, HRAs can be tailored to fit the specific needs of both employers and employees, making them a versatile component of employee benefits packages.

Budget Friendly

One of the primary advantages of Health Reimbursement Arrangements (HRAs), including QSEHRAs, is their budget-friendly nature. HRAs allow businesses, including those structured as partnerships, to set aside a fixed amount for health reimbursements, which can help manage and predict partnership health insurance premiums more effectively. This approach provides flexibility and can be a more cost-efficient alternative to traditional health insurance plans.

Easy Administration

HRAs, particularly QSEHRAs, are renowned for their ease of administration. Unlike traditional health insurance plans that can require extensive management, QSEHRAs offer a more straightforward way for small businesses to provide health benefits. This simplicity primarily benefits partnerships needing more resources to manage complex benefit structures. Implementing a QSEHRA can reduce administrative burdens while still providing substantial health insurance benefits.

Self-funded

QSEHRAs are self-funded plans, meaning that the business reimburses employees for incurred medical expenses rather than paying premiums to an insurance provider. This self-funding aspect can be particularly advantageous for partnerships looking to maintain control over their health benefit expenses and avoid the complexities associated with traditional health insurance markets. 

Tax-free

Reimbursements made through a QSEHRA are tax-free for both the employer and the employee, provided that the employee has health coverage that meets minimum essential coverage requirements. This tax advantage makes QSEHRAs an attractive option for partnerships, as it can significantly reduce the overall cost of providing health benefits.

Portability

One significant advantage of HRAs, particularly QSEHRAs, is that they complement the portability of personal health insurance plans. Employees participating in a QSEHRA can choose and maintain their health insurance coverage. This personal policy is portable and remains with the individual even if they leave the company, ensuring continuous coverage without being tied to employment. This flexibility is especially valuable in today's dynamic job market, helping attract and retain talent by providing them with the security of sustained health benefits. 

Customization

HRAs provide a high level of customization for employers looking to offer health benefits. Employers have the flexibility to set specific budgets for reimbursements and can define which types of medical expenses are eligible. This allows them to tailor the health benefits plan to better align with the business's needs and their employees' personal circumstances. Such customization can be particularly beneficial in diverse workforces where employee needs vary widely, enabling a more personalized approach to health benefits.

Employee Satisfaction

Offering an HRA can significantly enhance employee satisfaction and loyalty. This arrangement empowers employees by allowing them to choose health insurance plans that best suit their personal or family needs rather than being limited to the options available under a standard group plan. The ability to select an individualized plan not only meets diverse healthcare needs but also fosters a sense of appreciation and value among employees, contributing to higher job satisfaction and retention rates.

How Deducting Insurance Premiums Works with QSEHRA

Understanding how insurance premiums are deducted is crucial for employers and employees regarding a qualified small employer health reimbursement arrangement (QSEHRA). Under a QSEHRA, small employers who do not offer a group health plan can reimburse employees tax-free for their health insurance premiums and qualified medical expenses up to a maximum dollar amount set annually by the IRS.

For employers, the amount they reimburse employees for health insurance premiums under a QSEHRA is deductible as a business expense. This means the reimbursements can reduce the business's taxable income, leading to potential tax savings.

The benefit is also significant for employees. Reimbursements they receive for their premiums are not included in their taxable income, provided they have minimum essential coverage (MEC). This arrangement not only helps to reduce their overall tax burden but also makes healthcare more affordable, as they effectively receive a subsidy from their employer to cover health insurance costs.

The process involves employees paying their health insurance premiums and submitting proof of their expenses to their employer. The employer then reimburses the employee up to the allowed limit. Both parties benefit from tax advantages, which makes QSEHRA a valuable tool for small businesses aiming to provide health benefits without the complexities and higher costs associated with group health plans.

Eligibility requirements for deducting insurance premiums (without a QSEHRA) 

Good news, partners! The IRS categorizes you as self-employed, meaning you can claim monthly premiums as tax deductions on your tax return. The self-employed health insurance deduction ensures that self-employed individuals like you get a break on their healthcare costs.

It’s available if you:

• Are self-employed 
• Have a net profit from your business
• Are not able to receive health insurance coverage from a spouse or employer 

According to the IRS site:

You must be one of the following to qualify for the deduction:

• A self-employed individual
• A partner in a partnership (A partner with net earnings from self-employment reported on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc., box 14, code A.)
• A shareholder owning more than 2 percent of the outstanding stock of an S corporation with wages from the corporation reported on Form W-2, Wage and Tax Statement.

The insurance plan must be established under your business.

For partners, the policy can be either in the partnership's or the partner's name. You can either pay the premiums yourself or your partnership can pay them and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. However, if the policy is in your name and you pay the premiums yourself, the partnership must reimburse you and report the premium amounts on Schedule K-1 (Form 1065) as guaranteed payments to be included in your gross income. Otherwise, the insurance plan will not be considered to be established under your business. 

In other words, if you are a partner and your insurance plan was established under your business, you are eligible.

How much you can deduct depends on how much you make

Partners who meet all of these requirements can deduct what they pay for health insurance premiums up until the limit of their net business income (after business expenses). 

For most everyone else, the IRS allows them to deduct qualified medical expenses that exceed 7.5% of your adjusted gross income for 2017 and 2018. And starting next year, all taxpayers may only deduct the amount of the total unreimbursed allowable medical care expenses for the year that exceeds 10% of their adjusted gross income. 

It also means that if your net business profit for the year is lower than the total yearly cost of your health insurance premiums, then you can only deduct the amount equal to your business profit.

Where to pencil this in on your tax return 

The total healthcare premium spending goes on Form 1040, Line 29. There is no need to itemize it.

Remember: If you have purchased your plan through the Exchange and receive a subsidy on your monthly payments, you can only deduct the cost of your payment each month, not the original price of the plan.

Any Other Partnership Insurance to Be Aware Of?

In addition to general liability and health reimbursement arrangements like QSEHRA, businesses operating as partnerships should consider several other types of insurance to protect against potential risks fully:

1. Professional Liability Insurance: Also known as errors and omissions insurance, this coverage is essential for businesses that provide services or advice. It protects against claims of negligence or harm caused by missteps or failure to perform.
2. Property Insurance covers the physical assets of the business, such as buildings, equipment, and inventory, against fire, theft, and other damages. For partnerships, this coverage is crucial to protect the shared investments in physical resources.
3. Workers' Compensation Insurance: Required in most states, this insurance covers medical expenses and a portion of lost wages for employees who get injured or sick from their job. Even in a partnership, taking care of employees' welfare is mandatory and helps maintain morale and productivity.
4. Business Interruption Insurance: This type of insurance compensates the business for lost income during events that disrupt normal business operations, such as natural disasters. It's an essential safeguard for ensuring business continuity.
5. Cyber Liability Insurance: With the increasing reliance on digital technologies, partnerships must protect themselves against cyber threats. This insurance covers losses related to data breaches or other cybersecurity issues.

Each of these insurance types addresses specific areas of risk that partnerships may face. Evaluating the business's particular needs and risks is crucial to determining the right mix of insurance products to maintain comprehensive protection and resilience.

Take Command is here to help

As you can see, the way a business is set up affects if the business owner and their dependents will qualify to participate in the HRA. Take Command has a team of experts ready to answer your questions regarding your HRA and health insurance options.  Our Small Business Platform and QSEHRA administration tool are designed to make tax time a breeze. 

Hungry for more? Take a dive into the QSEHRA requirements chapter in our handy new QSEHRA Guide!