Insurance
Can a Small Business Owner Participate in an HRA?
It depends…keep reading to learn how small business owners are unlocking cost-effective and flexible healthcare solutions through HRAs.
August 18, 2023
Depending on the way your business is set up, a Health Reimbursement Arrangement (HRA) could be a great solution for beginning to offer health insurance to cover yourself and your employees. But an HRA cannot be utilized to offer health insurance to business owners in some cases. In this post, we will dive into the specific business owners should know before opening up an HRA for their business.
A small business owner can participate in an HRA, depending on the legal entity type of the business. See below for details on each business entity type.
A C-corporation (C-corp) is a legal entity separate from its owners. C-corporation owners are considered employees of the corporation, which means they can participate in the organization's HRA. Being treated as employees allows C-corporation owners to receive reimbursements for eligible healthcare expenses through the HRA, providing them with valuable healthcare benefits.
An S-corporation (S-corp) provides pass-through taxation, meaning the corporation is not subject to income tax. Shareholders report their share of the corporation's income on their tax returns. S-corporation owners are not employees but are classified as self-employed individuals. This distinction stems from the tax treatment of S-corporations, which does not allow S-corp owners to receive tax-free reimbursements.
A partnership is a business structure in which two or more individuals share ownership and responsibility. The business is not subject to income tax in a partnership, but the partners are directly taxed on their share of the partnership's income. Similar to S-corporation owners, partners are considered self-employed individuals and are typically ineligible to participate in an HRA.
However, a unique scenario exists for partners where, if their spouse is a regular W-2 employee, they can be added as a dependent on their spouse's HRA. In this case, the HRA would be set up in the spouse's name, and the partner could receive tax-free reimbursements as a dependent.
A sole proprietorship is an unincorporated business owned and operated by a single individual. This business structure has no legal distinction between the business and the owner. As a sole proprietor, you are not considered an employee, which means you typically cannot participate in an HRA.
Similar to partnerships, if a sole proprietor has a spouse who is a regular W-2 employee, they can be added as a dependent on their spouse's HRA. This allows the sole proprietor to receive tax-free reimbursements through their spouse's HRA.
Certain HRAs have specific requirements that small business owners need to consider. Let's explore common types of HRAs:
To be eligible for a QSEHRA, a business owner must have fewer than 50 full-time employees, maintain uniform terms for each full-time employee, and not offer a group health plan.
QSEHRA comes with specific reimbursement limits, capping at $6,150 for individual and $12,450 for family coverage in 2024.
The ICHRA stands out by having no size restrictions or maximum reimbursement limits, making it accessible to business owners of all sizes, depending on their legal entity type.
With the EBHRA, there are no size restrictions, employees must be part of the group health plan, certain health insurance premiums cannot be reimbursed, and uniform terms must be provided to all similarly situated employees.
EBHRA sets a maximum reimbursement limit of $2,100 for 2024 (adjusted annually for inflation).
A notable advantage of the Standard HRA is that employers can contribute any amount they desire without minimum or maximum limits, tailoring employee support based on budget and preferences.
Participating in an HRA can offer several benefits to small business owners. Some of the key advantages include:
Before offering an HRA, small business owners must establish a formal plan by creating legal plan documents. These documents define the HRA's structure, eligibility, allowances, and claim procedures. A summary plan description (SPD) should also be created to provide participating employees with a simplified version of the plan's details.
Liferaft is an affordable HRA administrator and offers a user-friendly platform to simplify HRA administration for small business owners. With Liferaft, setting up and managing an HRA is simple. Some key features and benefits of Liferaft include:
No, as a sole proprietor, you are not considered an employee and, therefore, cannot participate in an HRA. However, if you have a spouse who is a regular W-2 employee of your business, you can be added as a dependent on their HRA and receive tax-free reimbursements.
Yes, certain HRAs have contribution limits. For example, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) has maximum reimbursement limits that vary based on family size and coverage type. It's essential to review the specific guidelines and limits of the chosen HRA to ensure compliance.
Yes, small business owners can customize their HRA plans and provide different allowances to different employees. However, it's essential to ensure that any variations in allowances are based on bona fide employment classifications, such as job positions or full-time versus part-time status. Consistency and fairness in administering the HRA plan are crucial to avoid potential discrimination issues.
Participating in an HRA can offer tax benefits for small business owners. Contributions to the HRA are tax-deductible for the business, and reimbursements to employees are typically tax-free, reducing the overall tax burden for both the employer and employees.
Small business owners can customize their HRA plan to meet their needs and budget. They can determine the reimbursement amount, eligible expenses, and other plan details to ensure it aligns with their business goals and employee needs.
Our team knows the ins and outs of the health insurance marketplace and will guide you towards the solution that make the most sense for your business and your team. Come with questions! Our experts are happy to dig into the details to get you the clarity you need.
During the call, Liferaft will run a cost-benefit analysis on your company's current healthcare spending and show you different ways you can save—without sacrificing plan quality. After your consult, Liferaft will design a unique plan for your employee's health insurance, including suggested plans and accounts, plan policy documents, and the annual budget.
