Title 26 of IRS Code states that spouses, children, grandchildren, and parents are all considered owners when one person has greater than 2% ownership of an S-Corp.

The Owners specified above may receive reimbursement from their companies for medical expenses, and they may use the HRA platform to receive and track these reimbursements. However, reimbursements made to Owners must be reported on the owners'/partners' wages (on their W-2 and 1040 forms) subject to federal income tax withholding. These reimbursements are exempt from Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA) taxes, similar to profits passed through to the owner. Further, the cost of the reimbursements is a deductible expense to the business, reducing the taxable income of the business and, thus, reducing the taxable income of the owners/partners (because these are flow-through tax entities).

Reimbursements paid to family members of S-Corp owners must be reported as income (on their W-2 and 1040 forms) and are subject to federal income tax withholding. IRS Notice 2008-1 (see http://www.irs.gov/pub/irs-drop/n-08-01.pdf) clarified that S-Corp owners may only take the self-employed health insurance premium tax deduction (on Form 1040) if the S-Corp pays for or reimburses the owner for the premiums.  Thus, S-Corp owners establishing an HRA for their employees will likely want to include themselves and their family members in the HRA platform, although in some cases such owners and their family members may not receive the same amount of tax benefits as non-owner employees.