Owners and partners often follow different rules from employees, so they need separate review.
Sole proprietors, partners and some S corporation shareholders are generally not treated as employees for these benefits. Reviewing their treatment with counsel and your tax advisor keeps the plan clean.
What to review for owners.
Sole Proprietors
A sole proprietor is generally not an employee of their own business for this purpose.
Partners
Partners in a partnership are generally treated the same way. Their coverage is handled separately.
Two-Percent S Corporation Shareholders
Shareholders who own more than two percent of an S corporation are generally treated like partners for benefits.
Family Members
Spouses and relatives of owners can have different tax treatment. Review them separately.
What They Have Today
Find out how owners are covered now before deciding whether they stay outside the ICHRA.
Keep the Plan Clean
Treating owners differently without a clear basis can create problems for the whole plan. Document the reasoning.
Who Counts as an Employee: Owners, Partners and Family
Owners are the people most likely to ask whether they can take the allowance. The answer depends on two separate rules, one for counting employees and one for how owner health benefits are taxed.
Who is excluded from the employee count
For the large employer count, an employee is a common-law employee. The regulation excludes leased employees, sole proprietors, partners and 2-percent S corporation shareholders from that definition. A family member who works in the business and is an employee under the common-law test is not on the excluded list.
| Person | Counted as a common-law employee for the large employer test? |
|---|---|
| Sole proprietor | No |
| Partner in a partnership | No |
| 2-percent S corporation shareholder | No |
| Non-owner employee | Yes, if common-law employee |
| Family member who is a common-law employee | Yes |
Source: 26 CFR 54.4980H-1(a)(15). Counting rules for the large employer test are separate from who may receive a tax-free reimbursement.
How the IRS treats a 2-percent shareholder
Under Notice 2008-1, a 2-percent shareholder of an S corporation is treated as a partner for employee fringe benefit purposes. Health premiums the corporation pays or reimburses on proof of payment are included in the shareholder’s wages on Form W-2 for income tax withholding. They are not excluded under section 106, because a 2-percent shareholder is not an employee for that section. The shareholder may deduct the premiums under section 162(l), subject to limits. The notice describes premium payments and reimbursements for individual policies and does not address health reimbursement arrangements.
Source: IRS Notice 2008-1. Because the notice does not address HRAs, whether and how an owner takes part in an ICHRA is a question for the company’s CPA and counsel before the plan document is written.
Decisions to make before the plan is written
- Which owners, partners and family members are common-law employees, and which are not.
- Whether any owner will take part, and how that will be reported for tax purposes.
- Whether the allowance rules for owners match the class they would otherwise sit in, since everyone in a class must be treated alike.
- Whether the large employer count changes once owners are excluded and other workers are added.
The questions employers ask about owners and an ICHRA.
Can owners get the same ICHRA as employees?
Often not. Owners may follow different tax rules, so counsel and your tax advisor should review them first.
How are partners covered?
Partners usually buy coverage separately, and the treatment is set with your tax advisor.
What about owner family members?
Family members who are bona fide employees may be treated differently. Review each case.
Does leaving owners out affect the plan?
It can affect how the plan is tested, so we model it before you decide.
Should owners be in a separate class?
Only if a permitted class fits. Counsel should confirm.
Who handles the tax side?
Your tax advisor does, and we coordinate with them.
Does this apply to professional firms?
Yes. Partners and owners are common there, so our professional services page covers it.
General information about individual coverage HRAs, not legal or tax advice. Plan-specific questions belong with ERISA counsel and your tax advisor, and we will bring them in.
Where these details come from.
This page summarizes public guidance reviewed in October 2026. Rules change, so confirm current requirements with counsel.
CMS: Individual Coverage HRAs →
U.S. Department of Labor: Employee Benefits Security Administration →
More ICHRA questions and the industries they affect.
Shared Ownership and Employee Counts
Counting employees across related entities.
Employee or Contractor
Who is eligible for an allowance.
Affordability by Class
Test the ACA affordability rule class by class.
ICHRA for Professional Services
Partners, associates and support staff.
ICHRA for Medical and Dental Practices
Clinical staff, owners and associates.
ICHRA for Real Estate and Property Management
Agents, managers and on-site staff.
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