HRA not allowed for owners and spouse/employees of S corporation

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April 30, 2015 by Tony Novak

I ran into another case where an S corporation owner wants to set up a Health Reimbursement Arrangement (HRA) for himself and his wife, the only employees, but is prohibited from doing so due to the ownership attribution rules.

In this case a Health Savings Account may be the best option.


An accountant shared this explanatory resource but I do not know the source:


Self-Employed Individuals and Individuals Who Are Not Spouses, Children Under Age 27,or Tax Dependents

Self-employed individuals (e.g., sole proprietors, partners, and more-than-2% Subchapter S corporation shareholders) may not participate in an HRA on a tax-favored basis. As stated in the 2002 IRS guidance, “The term ’employee’ does not include a self-employed individual as defined in [Code] § 401(c). See [Code] § 105(g).” 45

*      See Code § 1372(b) (Code § 318 attribution rules apply when determining who is a more-than-2% Subchapter S corporation shareholder) and Code § 318(a)(1). Note that the definition of “children, grandchildren, and parents”

does not impose any age restriction. Consequently, a 50-year-old man would be deemed to own an interest held by his 28-year-old daughter and his 75-year-old mother.


The fact that self-employed individuals cannot be participants does not appear to prevent them from being beneficiaries of another individual’s HRA if they happen to also be the spouse, child under age 27, or tax dependent of an individual that can and does participate in an HRA. This should be equally true of individuals who are treated as self-employed because of the family member attribution rules noted above.


*    See Code § 318(a)(5) (precluding re-attribution).

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