Wondering if S corp shareholders can participate in an HRA (health reimbursement arrangement) in 2023? If you're looking for options on s corp owner health insurance or s corp health insurance for your company, you're in the right place. Read on for healthcare for business owners in an S-Corporation.
S Corp Owner Health Insurance 2023
Small business owners have more options than ever when it comes to health insurance for themselves and their employees.
Gone are the days of the rigid, expensive, one-size-fits-all group plan.
With health reimbursement arrangements, or HRAs, you can offer your employees flexible, customizable, tax-free reimbursements for health insurance through Qualified Small Employer HRA QSEHRA. In many cases, owners can participate as well. Your eligibility depends on how your business is set up.
So can an S-corp owner be eligible for an HRA? With more than 5 million S-corporations in the US, it's an important question.
Read on to find out.
S-Corps and HRAs: What owners and shareholders to know
S-Corps prevent businesses from being taxed by passing any profits and losses through shareholders personal income tax returns. Because of this set-up, an S-Corp owner that owns more than 2% of the company is considered self-employed and not an employee, therefore you typically cannot participate in an HRA.
IRS rules extend to family members including: spouse, parents, children, and grandchildren. Even if family members are W-2 employees at your business they are still not able to participate in an HRA.
The good news? Self-Employed individuals can already deduct some health insurance expenses without an HRA.
We strongly recommend S-Corp owners talk to their licensed tax professional or CPA.
When it comes to determining whether or not business owners are eligible, here's a good rule to follow: in order for a business owner to be eligible to participate in an HRA, they must be considered an employee of the business.
For more-than-2-percent shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income.
However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages 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 S Corporation owner and your insurance plan was established under your business, then you are eligible for the deduction.
Have HRA eligibility questions?
What about S-Corps and ICHRAs?
S- Corps prevent businesses from being taxed by passing any profits and losses through shareholders personal income tax returns. Because of this set-up, an S-Corp owner that owns more than 2% of the company is considered self-employed and not an employee, therefore you typically cannot participate in the ICHRA. The good news? Self-Employed individuals can already deduct some health insurance expenses without an ICHRA. We strongly recommend S-Corp owners talk to their licensed tax professional or CPA.
When it comes to determining whether or not business owners are eligible, here's a good rule to follow: in order for a business owner to be eligible to participate in an ICHRA, they must be considered an employee of the business.
What about S-Corp and QSEHRAs?
Wondering about S-Corps and QSEHRAs? Because S-Corps allow businesses to avoid taxation by passing profits and losses through shareholders' personal income tax returns, owners who own more than 2% of the company are considered self-employed rather than employees. As a result, they are typically unable to participate in the QSEHRA. However, the good news is that self-employed individuals can already deduct certain health insurance expenses without a QSEHRA. We highly recommend that S-Corp owners consult with their licensed tax professional or CPA for further guidance.
When it comes to determining whether or not business owners are eligible, here's a good rule to follow: in order for a business owner to be eligible to participate in an QSEHRA, they must be considered an employee of the business.
How can s-corp shareholders participate in an HRA in 2023?
For S-Corps, there’s not a legal way (that we’re aware of) for owners to get their personal insurance and medical expenses counted as a business expense in 2023. You might ask, “Wait, why can’t I hire my spouse and do what proprietors can do with the One-Person 105 HRA thing?” (Our Small business HRA strategy guide goes into detail about this!) The problem for S-Corps is that spouses are attributed ownership of the S-Corp, and the One-Person 105 HRA rules fall apart.
Your best bet: the self-employed health insurance deduction
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 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.
Remember, the insurance plan must be established under your business.
Health insurance deductions for more than 2% shareholders
For more-than-2-percent shareholders, the policy can be either in the name of the S corporation or in the name of the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income.
However, if the policy is in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on Form W-2 as wages 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 S Corporation owner and your insurance plan was established under your business, then you are eligible for the deduction.
How does the IRS determine 2% shareholders?
As per the IRS guidelines, a 2 percent shareholder is an individual who possesses direct or indirect ownership of more than 2 percent of the outstanding stock of the S corporation or holds more than 2 percent of the total combined voting power of all stock on any given day during the tax year.
S-corp shareholders cannot circumvent this regulation by hiring their spouse and obtaining coverage through the spouse's involvement in the health plan provided by the company. The IRS views spouses and other family members as S-corp owners for these purposes, regardless of whether or not they possess any stock ownership.
This includes:
- Spouses
- Children
- Grandchildren
- Parents
Fringe benefits
If you're an owner of an S-corp and considering providing a health stipend to your employees, you may be curious about whether you can participate in this attractive benefits option. Stipends, which are taxable fringe benefits, are becoming increasingly popular among businesses of all sizes. Find out more about how you, as an S-corp owner, can take advantage of these relaxed rules and offer a health stipend to your employees.
As an S-corp, you have the opportunity to provide your employees with taxable fringe benefits that can help cover their medical expenses. What's exciting is that as an S-corp owner, you can also take advantage of these taxable health stipend benefits, as long as you include them as additional income. This allows you to enjoy the same benefits as your employees and contribute to your own healthcare needs.
As an S-corp shareholder, it's important to note that health stipends are subject to various taxes, including FICA, FUTA, FITW, and SITW. Additionally, taxable fringe benefits can be deducted as additional wages and salaries on Form 1120S3, but they must be reported as taxable income in order to do so. It's crucial to understand these regulations and consult with a qualified tax advisor or accountant for expert guidance on managing your income tax return as a business owner.
Managing your income tax return as a business owner can be a time-consuming and challenging task. If you require guidance on personal deductions, benefit expenses, or tax obligations, it is advisable to reach out to a qualified tax advisor or accountant for expert tax advice.
Company deductions
Let's discuss company deductions. The company can deduct premium payments for 2 percent shareholders on its Form 1120S income tax return.
Since the premiums are considered additional wages to the shareholder, the deduction appears under Compensation of Officers on Page 1. It reduces the net income (or increases the net loss) that passes through to shareholders on their Schedule K-1. Clear as mud?
We're here to help if this is getting confusing.
Wondering how you could design your HRA?
How to establish an insurance plan under your S Corporation business
There’s two ways to do this. For shareholders who own more than 2%, the insurance policy can either be in the name of your company or in your name as the shareholder. You can either pay the premiums yourself or your S corporation can pay them and report the premium amounts on Form W-2 as wages to be included in your gross income.
Remember, if the policy is set up in your name and you pay the premiums yourself, the S corporation must reimburse you and report the premium amounts on your W-2 as wages to be included in your gross income. If not, the insurance plan will not be considered to be established under your business, making you ineligible for the self-employed tax deduction for medical expenses.
Can S Corp provide health insurance for owners only?
If you're a less than two percent shareholder of an S Corp and considering a traditional group health plan for your team, employers generally have the discretion to exclude certain employees from their health insurance plans, provided they comply with applicable laws and regulations.
Common exclusions may include part-time employees, temporary workers, seasonal employees, and those who haven't met the eligibility criteria outlined in the plan documents. However, employers should be aware of legal requirements, such as those specified in the Affordable Care Act (ACA) in the United States, which may mandate offering coverage to eligible employees who work a certain number of hours.
Employers must ensure that their exclusions are consistent with these regulations to avoid potential legal and compliance issues. It's advisable to consult with legal and HR professionals when making decisions regarding employee health insurance coverage.
If an S Corp is offering an HRA, this cannot be offered solely to the owners. HRA offerings must be offered to all eligible employees.
Next steps: Take Command can 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.
There are many routes you can take to find the best employee insurance for small business. Take Command has a team of experts ready to answer your questions regarding your HRA and health insurance options.
Our Small Business Platform and ICHRA administration tool are designed to make tax time a breeze.
Hungry for more information on health benefits for small business? Check out our comprehensive ICHRA Guide and our Small Business HRA strategy guide. Or just reach out to someone on our team- we are always happy to help!
This post has been updated to reflect the latest regulatory and policy changes in 2023.
Let's talk through your HRA questions
A wife to one and mother to four, Keely does all of the things. She’s also dabbled in personal finance blogging and social media management, contributed to MetroFamily magazine, and is passionate about good food, treasure hunting and upcycling. With a B.S. in Psychology from the University of Oklahoma and a knack for a witty punchline, it’s no surprise that Keely’s social posts are as clever as they get. In her (very little) free time, you’ll find Keely with her nose in a book or trying out a local restaurant with her family.
