Key Takeaways
- HRAs like QSEHRA and ICHRA are for employees, not self-employed owners who report income on a K-1.
- K-1 owners of partnerships, LLCs, and S-corps can’t use an HRA because they already qualify for the self-employed health insurance deduction.
- The self-employed health insurance deduction lets the business pay your premiums while you deduct them on your personal return — making them tax-free through a different process.
- C-Corp owners are the exception since they’re W-2 employees and can fully participate in HRAs.
If you own your business, you’ve probably wondered why you can’t join your company’s QSEHRA or ICHRA. It might seem unfair since you’re paying for health insurance too. The reason comes down to how the IRS classifies you for tax purposes. If you receive a Schedule K-1, you already have the ability to run your health insurance premiums through your company tax-free, just under a different rule.
HRAs Are for Employees
A Health Reimbursement Arrangement (HRA) — whether a QSEHRA or an ICHRA — is an employer-funded benefit that reimburses employees for health insurance premiums and medical expenses tax-free.
The key word is employees. HRAs were created under IRS rules for employer-employee relationships, not for business owners or self-employed individuals.
If you earn business income reported on a Schedule K-1, the IRS considers you self-employed. Because of that classification, you can’t participate in an HRA sponsored by your own company.
Why the K-1 Matters
A K-1 reports your share of the business’s income, deductions, and distributions. Since that income flows to your personal tax return (Form 1040), you’re eligible to deduct your health insurance premiums as an adjustment to income under IRC §162(l) — the self-employed health insurance deduction.
This deduction gives you the same tax advantage that an HRA provides to employees, just handled differently.
How Owners Can Pay for Health Insurance Through the Company
While owners of partnerships, LLCs, and S-corps can’t participate in an HRA, they can still have their company pay their health insurance premiums and keep those payments tax-free.
For Partnerships and LLCs taxed as Partnerships
- Purchase the health insurance policy in the name of either the owner or the business. The IRS allows both, as long as the business pays.
- Have the partnership or LLC pay the premiums directly or reimburse the owner.
- Record the payment as a guaranteed payment on the owner’s Schedule K-1.
- On the owner’s personal return (Form 1040), claim the self-employed health insurance deduction for those premiums.
Because the income inclusion and deduction offset each other, the result is effectively tax-free coverage.
For S-Corporation Owners (More than 2% Shareholders)
- The S-Corp pays the owner’s health insurance premiums directly or reimburses them.
- The premiums are included in W-2 wages (Box 1 only), not subject to Social Security or Medicare taxes.
- The owner then claims the self-employed health insurance deduction on their personal return for the same amount.
This allows the S-Corp to deduct the premiums as a business expense while the owner avoids paying federal income tax on them.
For C-Corporation Owners
C-corporations are different.
Because a C-Corp is a separate legal entity, its owners are treated as W-2 employees. That means C-Corp owners can fully participate in HRAs like QSEHRA or ICHRA, and their reimbursements are completely tax-free for both the company and the owner.
Why It’s Structured This Way
The IRS limits HRA eligibility to employees to prevent double tax benefits. Self-employed individuals already receive tax relief through the self-employed health insurance deduction, so also allowing HRA reimbursements would exclude the same expense twice.
By separating the two systems, the IRS ensures everyone gets one form of tax-free coverage — employees through HRAs, and owners through direct deductions.
Final Thoughts
If you receive a K-1, you’re not missing out on HRA benefits — you’re just accessing them through another section of the tax code. Your company can still pay your health insurance premiums, and you’ll still receive the same tax-free treatment, simply reported in a different way.
Understanding this distinction helps business owners stay compliant while maximizing available tax advantages.
