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Tax Benefits to Sole Proprietors for Healthcare Reimbursement Arrangement Plans

A Little-Known Benefit for Sole Proprietors - Healthcare & Double Tax Deductions


Filed In: Small Business Tax Information Sole Proprietorships

What is a Healthcare Reimbursement Arrangement Plan?

An often overlooked tax advantage to sole proprietorships relates to Healthcare Reimbursement Arrangements (HRAs). HRAs are also referred to as IRC Section 105(b) plans.

An HRA is a plan offered by employers to reimburse their employees for a wide array of healthcare-related costs including medical and dental insurance, deductibles, co-pay amounts, and other dental and medical costs that are related to healthcare.

A Legal Loophole Allows Sole Proprietors Access to HRA Plans

Sole proprietors, partners in partnerships, and S corporation shareholder-employees are not eligible to participate in HRAs, but the spouse of a sole proprietor can.

The provision that allows spouses to be covered by an HRA also permits the spouse’s family members to be covered. In other words, the HRA plan covers the spouse, and through the spouse, can also cover any children and even the sole proprietor, who, by marriage, is considered “family” of the employee-covered spouse.

It sounds more complicated than it is. In simplest terms, you, the sole proprietor can offer HRA plans to your employees, but cannot be covered under them by yourself. However, if your spouse is an employee, you are able to be covered under their plan. This is only true for sole proprietorships.

Tax Benefits to Sole Proprietors for Offering an HRA

Funds you pay out to employees (and any covered family members) through an HRA Plan are an allowable business deduction for income tax, and if your spouse (and family) is covered, also can be deducted for self-employment tax purposes.

By paying your spouse instead of yourself (if you can only afford to one salary from the business), the money still stays in the family, but offers you a double deduction on taxes.

Restrictions on HRA Plans

To be eligible for benefits from an HRA Plan, your spouse must be employed by the sole proprietorship. But if your healthcare costs are high, it may make sense to hire your spouse – even if it means you forgo taking a salary from the business.

One drawback is that you cannot offer an HRA to just a spouse. If you have other employees, you must offer the same plan to them as well.

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