Health Reimbursement Arrangements (HRAs) offer employers a modern, flexible way to support employees’ healthcare costs. They’ve grown in popularity as businesses search for alternatives to traditional group health insurance, offering employees more choice while giving employers more control over costs. But here’s one common and important question we often hear: Is an HRA for business owners too? 

The answer isn’t always straightforward and depends on several factors, including the business’s legal structure, how the IRS classifies the owner’s tax status, and whether the individual is considered a true employee. Getting this right is critical, as mistakes can lead to disqualified benefits and tax penalties.

This guide breaks down the rules concerning HRAs for business owners and helps to clarify who can and cannot participate in an HRA, whether it’s an ICHRA, QSEHRA, or traditional group-integrated HRA.

HRA for Business Owners: The Key Rule

Only W-2 employees are eligible to participate in an HRA and receive tax-free reimbursements. This means owners must be classified as employees by the IRS to qualify. Unfortunately, in many business structures, owners are considered self-employed and not eligible to participate in tax-free employee benefits.

Quick Reference: Who Can Participate in an HRA?

Complete the form below to download our Owner Participation Summary (PDF) – a one-page chart showing HRA eligibility by business type:

Download the Summary Chart

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HRA Eligibility by Business Type

C-Corporation Owners

  • Eligibility: Yes. C-Corp owners are considered W-2 employees because a C-Corp is a separate legal entity.
  • Family Participation: Yes. Spouses and dependents are also eligible.
  • Caution: Section 105(h) nondiscrimination rules apply. You cannot design the plan in a way that unfairly favors highly compensated employees (HCEs), including owners.

Example: Jessica owns a C-Corp with four employees. She is on payroll as a W-2 employee. She can participate in the HRA along with her staff. However, her benefit must be comparable to what her employees receive to remain compliant.

S-Corporation Owners (2% or Greater)

  • Eligibility: No. The IRS considers 2%+ shareholders in an S-Corp to be self-employed.
  • Family Participation: No. Constructive ownership rules apply under IRC Section 318, meaning family members are also disqualified.
  • Alternative: Health insurance premiums may be deductible on your personal return under IRC §162(l), but you can’t participate in an HRA.

Example: Dan owns 100% of an S-Corp and pays himself a W-2 salary. Despite that, he cannot participate in the company’s HRA because he’s considered self-employed for this purpose. His wife, also on payroll, is treated as a constructive owner and is also disqualified.

Partnerships

  • Eligibility: No. Partners are considered self-employed.
  • Family Participation: No, unless the family member is a legitimate W-2 employee and not an owner or tax dependent.
  • Exception: If a spouse is a bona fide W-2 employee (not a partner), the owner may participate as a dependent under their spouse’s HRA.

Example: Lydia is a partner in a design firm. Her husband works full time in the business as a W-2 employee. The business offers a QSEHRA, and he participates. Lydia is covered under her husband’s plan as a dependent.

Sole Proprietors

  • Eligibility: No. A sole proprietor is not a W-2 employee.
  • Family Participation: Same rules as partnerships.
  • Exception: A legal spouse who is a W-2 employee can sponsor an HRA that covers the sole proprietor as a dependent.

Example: Mike runs a small landscaping business as a sole proprietor. His wife handles scheduling and payroll and is a W-2 employee. The business offers a QSEHRA to her, and she can use the benefit to reimburse qualified expenses for herself, Mike, and their children.

LLCs

  • Eligibility: Depends on tax election (e.g., S-Corp, C-Corp, Partnership).
  • Follow the rules based on how the LLC is taxed, not simply the LLC designation.

Understanding 105(h) Nondiscrimination Testing

If you’re a C-Corp owner or offering an HRA to a mixed group of employees (owners, managers, staff), you must ensure your HRA doesn’t favor highly compensated individuals (HCEs).

The IRS defines HCEs as employees who:

  • Own more than 5% of the company, or
  • Earn more than $155,000 (2024 threshold)

Plans that favor HCEs by offering them higher allowances, or making non-HCEs wait longer to enroll, can fail nondiscrimination testing. This can result in:

  • Taxable benefits for HCEs
  • Back taxes and penalties for the entire plan

Pro Tip: Uniform benefit design by class (as in ICHRA) helps reduce risk.

Constructive Ownership Rules: IRC Section 318

Even if your spouse or child works for the business, the IRS may treat them as owners due to “constructive ownership” attribution rules.

  • Applies to S-Corps and C-Corps.
  • Affects spouses, children, grandchildren, and parents.
  • If they “constructively own” shares, they are subject to the same HRA restrictions as the primary owner.

This can block participation even when family members are legitimate employees on payroll.

HRA Compliance Tips for Business Owners

  • Confirm your entity type and tax status
  • Classify yourself properly for IRS purposes
  • Don’t assume W-2 status = HRA eligibility (especially in S-Corps)
  • Use a consistent plan design across employee classes
  • Have a qualified spouse-employee if trying the indirect route
  • Run nondiscrimination testing annually

What If the Owner Can’t Participate?

Even if you’re not eligible, HRAs can still be a powerful tool for your employees:

  • Predictable budgeting: You set the allowance amount.
  • Tax savings: Reimbursements are tax-free to employees.
  • Talent retention: Offering personalized benefits helps attract and keep great people.
  • Flexibility: Employees can choose the health plan that works for them.

Final Thoughts

HRA for business owners is a nuanced issue, based largely on IRS rules and the structure of your business. If you’re unsure whether you qualify, always consult with your tax advisor or legal counsel.

And don’t forget:
Download our Owner Eligibility Summary above for a one-page snapshot you can reference anytime.

If you need assistance understanding how an HRA for business owners works, Flyte HCM can help. We administer compliant HRA plans that work for both you and your team, whether you use an ICHRA, QSEHRA, or traditional group-integrated HRA.

Need help designing the right HRA strategy for your business? Let’s talk. We work with employers and brokers nationwide to simplify benefit design and administration.