KPM

Payroll Risks Generative AI For Businesses Financial Statements Sec. 179 Tax Deduction Health Care Plan Assessing Customer Credit QBI Deduction Cash Withdrawal Small business retirement Spouse travel expenses Accounting Software Strategic Planning Process Insurance Schemes Enterprise Risk Management Program Account-Based Marketing Wrong Software For Your Organization Operational Review Internal Benchmarking Reports Sales approach Capturing Data Older Workers Pooled Employer Plans Financial Statement Options BOI Reporting Rules Privileged Users Medicare Premiums DOL Business valuation Trust Fund Recovery Penalty Value-Based Sales Fringe Benefits Green Lease Strategic Planning Financial Reporting Marketing Strategy Succession planning health care benefits Cyberinsurance PTO Buying Media Screening Pipeline Management Billing Best Practices Solo 401(k)

Some Business Owners Cannot Participate In Their Own Companies’ HRAs

Many companies now offer Health Reimbursement Arrangements (HRAs) in conjunction with high-deductible health plans (HDHPs). HRAs offer some advantages over the perhaps better-known HDHP companion account, the Health Savings Account (HSA). If you are considering adding an HRA, you might assume that, as a business owner, you can participate in the HRA. But this may not be the case.

Following the rules

Whether an owner can participate in his or her company’s HRA depends on several factors, including how the company is organized and the amount of the business owned by each working owner. Tax-free benefits under an HRA can be provided only to:

  • Current and former employees (including retirees) and their spouses
  • Covered tax dependents
  • Children who have not attained age 27 by the end of the tax year

Owners who are ‘self-employed individuals’ within the meaning of Internal Revenue Code Section (IRC) 401(c) are not considered employees for this purpose and are not allowed to participate in an HRA on a tax-favored basis.

Defining the self-employed

Generally, a self-employed individual is someone who has net earnings from self-employment as defined in IRC Section 1402(a), accounting for only earnings from a trade or business in which the “personal services of the taxpayer are a material income-producing factor.” Ineligible owners include partners, sole proprietors, and more-than-two-percent shareholders in an S corporation. Stock ownership by employees of a C corporation does not preclude their tax-favored HRA participation.

The ownership attribution rules in IRC Section 318 apply when determining who is a more-than-two-percent shareholder of an S corporation, so any employee who is the spouse, child, parent or grandparent of a more-than-two-percent shareholder of an S corporation also would be unable to participate in the S corporation’s HRA on a tax-favored basis. A disqualified individual (whether because of direct or attributed ownership) could, however, be the beneficiary of a qualifying participant’s HRA coverage if he or she is the qualifying participant’s spouse, tax dependent, or child under age 27.

Comparing HRAs to HSAs

Although self-employed individuals cannot receive tax-free HSA contributions through a cafeteria plan, at least they can have HSAs. This relative advantage has led some employers to favor HSA programs over HRAs.

But HRAs have other advantages for employers, including more control over how amounts are spent and typically lower costs relative to the nominal amount of benefits provided. (While the full HSA contribution must be funded with cash, HRAs typically are notional accounts that need only be funded when participants incur expenses, and not all participants will incur expenses up to the limit established by the employer). Thus, the decision can seldom be made based on the participation rules alone.

Going in smart

Controlling costs remains a challenge for most businesses that offer health care benefits. An HRA may be a feasible solution, but make sure you know all the rules going in. Our firm can help you choose health care benefits that suit you and your employees.

Related Articles

Talk with the pros

Our CPAs and advisors are a great resource if you’re ready to learn even more.