Whether a business owner can participate in a CHOICE Arrangement (ICHRA) depends largely on the business structure, ownership, and how the owner is treated for federal tax purposes.
Whether a business owner can participate in a CHOICE Arrangement (ICHRA) depends largely on the business structure, ownership, and how the owner is treated for federal tax purposes.
A business can establish a CHOICE Arrangement (ICHRA) for eligible employees even when its owner cannot personally participate. For the owner, eligibility depends on the entity's federal tax treatment, ownership structure, and whether the individual is treated as an employee for the relevant HRA rules.
That produces very different answers for C corporation shareholders, S corporation shareholders, partners, LLC members, and sole proprietors.
C Corporation
Bona fide employee-owner → Potentially yes
S Corporation
2% or less → Potentially yes
More than 2% → Generally no
Partnership / LLC Taxed as Partnership
Partner or member → Generally no
Sole Proprietorship / Single-Member LLC Taxed as Sole Proprietorship
Owner → Generally no
LLC with S Corporation Tax Treatment: S corporation rules apply.
An LLC's legal form alone does not answer the question. Its federal tax classification matters.
Yes, potentially.
Suppose an S corporation has a 100% shareholder who works in the business alongside 15 employees. The shareholder's status as a more-than-2% owner generally prevents that individual from participating personally in the HRA.
The corporation can still establish an ICHRA for employees who are eligible under the arrangement.
This distinction also matters for partnerships and sole proprietorships. The tax treatment of an owner does not automatically determine whether the business's common-law employees can participate.
For an overview of employee eligibility and the basic mechanics of the arrangement, see How an ICHRA Works for Employers.
Ownership of a C corporation does not automatically prevent an owner from participating in an ICHRA.
A shareholder who performs services for the corporation may also be a bona fide employee. The IRS explains that a corporate officer is generally an employee. If the owner qualifies as an employee and satisfies the arrangement's eligibility requirements, participation may be possible.
There are important plan-design limits.
ICHRA rules permit employers to distinguish among specified classes of employees, but ownership itself is not one of those permitted classes. The final ICHRA regulations require an ICHRA to be offered on the same terms to all employees within a class, subject to permitted variations such as age and number of dependents.
A C corporation therefore should not simply create an “owners” class to provide a larger ICHRA allowance to shareholder-employees.
Nondiscrimination rules can also matter. Section 105(h) generally applies to self-insured medical reimbursement plans. Treasury and IRS guidance addressing ICHRAs explains that an HRA that reimburses only individual health insurance premiums is not subject to Section 105(h) in the same way as an HRA that also reimburses other medical expenses. See Treasury and IRS guidance under Section 105(h).
For more detail on the classes employers may use, see Employee Classes.
S corporations receive different treatment.
For purposes of employee fringe-benefit rules, IRS Notice 2008-1 explains that Section 1372 treats a shareholder owning more than 2% of an S corporation as a partner rather than an employee. The Notice defines a 2-percent shareholder using both direct ownership and constructive ownership under Section 318. As a result, a more-than-2% shareholder generally cannot participate in an HRA as an ordinary employee.
That does not leave the shareholder without a potential tax treatment for health insurance.
Under IRS Notice 2008-1, an S corporation may pay qualifying health insurance premiums directly or reimburse the shareholder for premiums the shareholder paid. When the applicable requirements are satisfied, the premium amount is included in the shareholder's Form W-2 wages and the shareholder may qualify for the self-employed health insurance deduction under Section 162(l). The IRS's S corporation medical insurance guidance provides the same practical framework.
In other words, the mechanism for covering the owner's premiums is different from participating in the employees' ICHRA.
A shareholder owning 2% or less is not automatically subject to the special more-than-2% shareholder treatment.
If that shareholder is a bona fide employee and otherwise meets the ICHRA's eligibility requirements, participation may be possible.
But direct ownership is not the whole calculation.
IRS Notice 2008-1 states that the more-than-2% test includes stock a person is considered to own under Section 318. Those constructive ownership rules can therefore affect whether a shareholder falls within Section 1372.
That becomes particularly important when spouses or other family members work for the same S corporation.
For an S corporation, family attribution can change the answer even when a family member owns no shares directly.
Section 1372 incorporates Section 318 constructive ownership into the more-than-2% shareholder test. Under the applicable family-attribution rules, ownership can be attributed among a shareholder's spouse, children, grandchildren, and parents. See IRS Notice 2008-1 and the statutory provisions it applies. If attribution causes the family member to be treated as a more-than-2% shareholder, the same special fringe-benefit treatment applies.
So, for example, the spouse of a 100% S corporation shareholder cannot simply be placed in the company's ICHRA on the theory that the spouse personally owns no stock.
The result can be different in a sole proprietorship. The IRS's guidance for married couples in business states that when a sole proprietorship is owned by one spouse, the other spouse can work in the business as an employee. If the spouses jointly own and operate the business, partnership or qualified-joint-venture rules may apply instead.
The specific ownership and employment arrangement therefore needs to be established before determining ICHRA eligibility.
The IRS expressly states that partners, including members of an LLC treated as a partnership for federal tax purposes, are self-employed rather than employees when performing services for the partnership.
Those owners therefore generally cannot participate personally in the partnership's ICHRA as employees.
A sole proprietor is self-employed and cannot be an employee of the same sole proprietorship.
The owner therefore generally cannot establish an ICHRA and participate personally as an employee.
Instead, a self-employed individual may qualify for the self-employed health insurance deduction when the applicable requirements are met. See the IRS small-business guidance for federal tax treatment of sole proprietors and self-employed individuals.
Business owners should establish the ownership and tax facts before enrollment.
Start with the entity's federal tax classification. Then determine direct and attributed ownership, whether the individual is treated as an employee or self-employed for the relevant benefit rules, and whether the individual satisfies the ICHRA's eligibility provisions.
For owners and family members, seemingly small differences can change the result: a C corporation versus an S corporation, 2% ownership versus more than 2%, direct ownership versus attributed ownership, or an LLC taxed as a partnership versus one with an S corporation election.
“Can the owner participate?” is a question to answer before enrollment and reimbursement begin.
Employers with ownership structures that create uncertainty should coordinate with their tax or benefits counsel before determining an owner's eligibility.
Talk with a Lirvion expert about your workforce, benefits strategy, and approach to CHOICE Arrangement administration.
