The answer largely depends on your business status. As a business owner, navigating the world of healthcare savings plans is sometimes complicated because some plans you can participate in, and some plans you can’t. So, can business owners participate in an FSA, HSA, or HRA? Our notes on each are below:
Flexible Spending Account (FSA)
A FSA (Flexible Spending Account) is a health care savings plan that an employer sponsors for their employees. Its usually considered an employee benefit and is similar to a 401k retirement account. The matching funds you place into the FSA account, along with the interest on the account, are tax-free. The funds are used to help pay for eligible medical expenses not covered under an employee’s health care insurance plan.
As a business owner, the IRS states you cant contribute to an FSA plan if you own 2% or more of the company and are an LLC, PC, sole proprietor, partner, or have a schedule S corporation. If you own a C-corporation, however, you may participate in an FSA plan because the IRS considers you a W-2 common law employee.
Health Savings Account (HSA)
A Health Savings Account (HSA) is similar to a personal savings account, and its typically paired with a HDHP (high deductible healthcare plan). Employers who provide an HDHP to employees often offer this additional plan to help offset the higher deductible of the health insurance plan.
As a business owner, you arent allowed to make a pre-tax contribution to an HSA. However, you are allowed to make contributions with your after-tax dollars. This means you may deduct this expense on your personal income tax, but not as a business deduction.
Health Reimbursement Arrangement (HRA)
A Health Reimbursement Arrangement account is an employer-funded health plan used to reimburse employees for medical expenses not covered through their standard healthcare insurance plan.
As a business owner, you fund the plan by making the distributions, which are tax deductions for your business. Although you can participate in the plan for tracking purposes, unless you operate as a C-corporation, you cant receive your reimbursements tax-free.
There are a lot of nuances around when business owners participate in an FSA, HSA, or HRA. Navigating FSAs, HSAs, and HRAs, can be confusing so be sure to check with a tax professional to make sure you find the plan that works best for your business. Still have questions? Check out our health care glossary for more information.