Why can’t S-Corp owners participate in the StretchDollar ICHRA?

S corporations can offer tax-free reimbursement for health insurance premiums to their non-owner employees and deduct the contributions on their business tax return.

However, for S-Corp owners, their spouses, and any dependents with over 2% ownership, the situation differs—they're treated similarly to self-employed individuals by the IRS. This implies that S-Corp owners are ineligible for the ICHRA health benefit policy, as they can already deduct their health insurance premiums on their personal tax return, offering a more tax-advantaged approach.

Also, taking the pre-tax deduction and accepting the ICHRA pre-tax health benefit would be like double dipping. The IRS could flag that and make you pay additional taxes and possibly a penalty.

Here's how you should handle it instead and how it all works on the IRS paperwork side:

Deduct your insurance premiums on your personal tax return

As an S-Corp owner, you are considered self-employed when it comes to health insurance. This means you have the benefit of deducting health insurance premiums for yourself, your spouse, and your dependents on Form 1040. 

As an S-Corp owner you must pay your health insurance costs to get the personal tax deduction. If you pay your premiums with personal money, make sure that your business reimburses you. Even better, you may be able to use business funds to directly pay for your insurance. It’s important to know that any amount your business reimburses you or pays for your health insurance premiums should be reported as taxable income on your W-2 each year.

Here’s some better news. As long as S-corp owners and their spouses are not eligible for health insurance premium tax credits, then the self-employed health insurance deductions are commonly referred to as "above-the-line" deductions. These deductions have the power to reduce your adjusted gross income, leading to the potential for more tax savings.

If you're currently not getting this deduction, reach out to your tax specialist for guidance and assistance! For more information on S-corp owner’s compensation and insurance, check out the IRS’ resources here.

Please note that this information should not be treated as legal or tax advice. StretchDollar does not provide guidance on legal or tax issues. Employers and employees should consult with their tax advisors and/or attorney(s) to confirm tax reporting requirements and obligations for their specific situation.