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Small Business Employee Benefits and HR Blog

HRA Eligibility By Type of Small Business Owner

Health Reimbursement Arrangement (HRA) is a flexible tool for small business owners to increase their tax savings and to offer tax-free health benefits. An HRA may reimburse for qualified medical expenses such as co-payments, deductibles, and personal health insurance premiums. HRAs are often used as a small business alternative to group health insurance.

HRA owner eligible, HRAs owner eligible

A common question from business owners and one-person nonprofits is "am I eligible to participate in the HRA?" This article reviews HRA owner participation for the following owner types and entities:

  • C-Corporation Owners
  • Sole Proprietors
  • S-Corporation Owners
  • Partners
  • LLC's
  • One-Person Nonprofits

HRA Eligibility: C-Corporation Owners

C-Corporation ("C-Corp") owners may participate in an HRA, and receive reimbursements 100% tax free. C-Corp owners may use the HRA to reimburse his or her medical expenses, as well as family medical expenses. To summarize:

  • Full use of HRA; receive reimbursements 100% tax free with no restrictions.

  • An excellent option for tax-free business-owner health insurance and medical expenses.

HRA Eligibility: Sole Proprietors

Sole proprietors may participate in an HRA for tracking purposes, but will not receive reimbursements tax-free. However, if the sole proprietor is married, and the sole proprietor's spouse is a W-2 employee, then the sole proprietor can receive the benefit tax-free. In this case, the HRA is set up in the spouse's name and the sole-proprietor is listed as a dependent. To summarize:

  • Full use of the HRA only if spouse is a W-2 employee.

  • Otherwise, the sole proprietor may use the HRA platform to track medical expenses but reimbursements are not tax-free to the sole proprietor (reimbursements are subject to federal income tax withholding).

HRA Eligibility: Partners

Similar to sole proprietors, partners may participate in an HRA for tracking purposes, but will not receive reimbursements tax-free. However, if the partner is married, and the partner's spouse is a W-2 employee (but not a partner), then the partner can receive the benefit tax-free. In this case, the HRA is set up in the spouse's name and the partner is listed as a dependent. To summarize:

  • Full use of the HRA only if spouse is a W-2 employee, and spouse is not a business partner.

  • Otherwise, the partner may use the HRA platform to track medical expenses but reimbursements are not tax-free to the partner (reimbursements are subject to federal income tax withholding).

HRA Eligibility: S-Corporation Owners

S-Corporation ("S-Corp") owners that own >2% of the company's shares and their spouse, parents, children, and grandchildren, may use the HRA platform to track medical expenses, but will not receive reimbursements tax-free. To summarize:

  • S-Corp owners may use the HRA platform to track medical expenses but reimbursements are not tax-free to the S-Corp owner (reimbursements are subject to federal income tax withholding).

HRA Eligibility: LLC's

If the company is an LLC, owner participation varies based on the way the LLC files taxes (as a partnership, S-Corp, or C-Corp).

HRA Eligibility: One-Person Nonprofits and Churches

One-person nonprofits and churches (such as an Executive Director or a Pastor) may participate in an HRA and receive reimbursements 100% tax free. The HRA may be used to reimburse his or her medical expenses, as well as family medical expenses. To summarize:

  • Full use of HRA; receive reimbursements 100% tax free with no restrictions.

  • An excellent option for nonprofit tax-free health insurance and medical expenses.

"Non-Eligible" Owners Should Still Enroll in the HRA

As detailed above, whether or not owners are eligible to receive the full tax benefits of an HRA depends on their tax filing status. If you are one of the owner types that must report HRA reimbursements as taxable income, there still may be a reason to enroll yourself in the HRA... business savings on FICA/FUTA.

HRA reimbursements are exempt from FICA/FUTA payroll taxes (7.65%), similar to profits passed through to the owner. Further, the cost of the HRA reimbursements is a deductible expense to the business, reducing the taxable income of the business and therefore reducing the taxable income of the owners/partners (because these are flow-through tax entities). 

The Comprehensive Guide to the Small Business HRA

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