Owners, partners and S-corporation shareholders: how their own health coverage is treated.
Why owners are not treated like employees, how a corporation reports an S-corporation shareholder’s premiums, what a cafeteria plan can and cannot do for them and what it takes to have a group plan at all. Written for the owner.
Owners Are Often Not Employees for Benefits Purposes
The tax and benefits rules sort people by legal relationship to the business, and owners land in different buckets than their staff.
Sole Proprietors and Partners
They are self-employed, not employees. Their own health coverage is treated through the self-employed health insurance deduction, not through the company payroll. This surprises many owners who assume they are on payroll like everyone else. Ask your tax adviser how your own coverage should be reported and deducted, and keep the premium records that support it. See the tax treatment for sole proprietors and partners and LLC members.
Two-Percent S-Corporation Shareholders
Owners of more than two percent of an S corporation are treated like partners for fringe benefit purposes, even though they are on payroll. Because the rules treat these shareholders differently, the way the premium flows through payroll and the personal return matters. Confirm the correct treatment with a tax adviser before the first payroll that includes the premium. The full picture is in our guide to S corporation owner health insurance tax treatment.
Everyone Else
Regular employees, including minority shareholders under the threshold and non-owner family members, follow the ordinary employee rules. This group typically includes non-owner relatives and small minority shareholders, though family attribution rules can complicate the picture. Have your adviser confirm who falls into which category before you set up eligibility and payroll. Owner-employees of a C corporation are generally treated like other employees, as explained in our C corporation owner guide.
How the Premiums Flow
The reporting is specific, and mistakes are common.
Company Pays the Premium
The S corporation pays or reimburses the shareholder’s premium and deducts it as a business expense. Keep clear records showing the payment or reimbursement and who it was for. Treatment depends on the plan’s setup and the facts, so a documented process each month helps your accountant reflect it correctly at year end. For how the company side works, see the business tax deduction for employer-paid premiums.
Included in Wages
The premium is reported as taxable wages on the shareholder’s W-2 for income tax purposes. Payroll should report the amount correctly so the shareholder’s year-end form matches the books. Mistakes here are common in the first year, so share the premium details with your payroll provider and your tax adviser early. Bring the CPA Checklist for Owner Health Insurance Reporting to your accountant, and use the Which Owner Tax Guide Fits You to find the right guide.
Owner Deducts It
The shareholder generally claims a self-employed health insurance deduction on their personal return, subject to limits. A tax advisor should confirm the details. Eligibility for the deduction can depend on other coverage available to the owner or spouse, and on the owner’s earned income. Keep premium statements and confirm the approach with a tax advisor before filing. For when a spouse can be covered as an employee, see Hiring a Spouse and Group Health Insurance.
Pre-Tax Premiums Do Not Work the Same Way
A cafeteria plan is built for employees.
Not Eligible for Pre-Tax Elections
Sole proprietors, partners and two-percent shareholders generally cannot make pre-tax salary reductions through a cafeteria plan. Owners in these categories are usually treated differently, so their premium is generally handled outside the pre-tax election. The rules can be technical, so ask your tax adviser how to set up payroll deductions for owners and staff.
Staff Can Still Use It
Regular employees can. The plan can exist for them even when the owner is outside it. A cafeteria plan can still be a valuable benefit for staff who qualify. Keep the owner’s coverage on a separate, documented track and make sure the plan document and payroll settings reflect who is in and who is out.
Key Employee Tests
A cafeteria plan cannot favor key employees. Owners who hold a large share of benefits can cause the plan to fail. Nondiscrimination testing is run each year, so a plan that works today can fail after a change in ownership or participation. Ask your plan document provider or adviser how often the tests are run and what happens if the plan does not pass.
What It Takes To Qualify
Many small business owners ask whether they can get group coverage for themselves and their family.
A Common-Law Employee
A group plan generally needs at least one W-2 employee who is not an owner or an owner’s spouse. In Michigan CFH can set up a group with one W-2 employee, and no employer contribution is required. Ask the carrier what documentation it accepts, such as payroll records showing a W-2 wage. Be ready to show who is on payroll and the hours worked.
Owner-Only Businesses
A business with only an owner and spouse usually cannot get a group plan and uses individual coverage instead. Individual coverage can still be a workable path, and a group plan may open up once you hire a qualifying employee. Talk through timing, cost and coverage needs with an adviser before you hire only to qualify.
Owners Can Participate
Once a group qualifies, owners who are actively working can be covered along with employees, under the same plan terms. Owners generally need to be actively working in the business and meet the same eligibility rules as everyone else. Check how the carrier defines an eligible owner and keep that definition consistent across the plan paperwork.
ERISA, COBRA and the ACA
The federal framework looks different for owner-only plans.
ERISA
A plan that covers only owners and their spouses is generally not an ERISA plan. Once a common-law employee is covered, it is. Once ERISA applies, the plan generally brings reporting, disclosure and plan document duties. Ask counsel or your adviser which of those apply to you, and set up a simple calendar so required notices and filings are not missed.
COBRA
Federal COBRA applies once the employer reaches twenty employees, and whether owners and partners count depends on the entity structure and the plan, so confirm the threshold for your group. Counting rules can be technical, so have counsel or your advisor confirm how they apply.
The Employer Mandate
Owners who work in the business are handled differently from employees when counting full-time employees. Confirm the treatment with advisors. Ownership attribution and family relationships can affect who is counted, and the rules do not always match intuition. Keep your headcount and hours records accurate and have an ACA-aware adviser review the count before filings.
Life, Disability and Accounts
Each line has its own owner rules.
Group Life
Employer-paid group term life above fifty thousand dollars creates taxable income. Owners have special rules on who can be covered. Coverage amounts, who is covered and how an owner fits under the policy all depend on the carrier’s definitions and tax rules. Ask your adviser how employer-paid life coverage should be reported and whether owners can be included.
HSAs
An HSA contribution made for a two-percent shareholder is treated as wages, with the owner deducting it personally. Tax treatment depends on how the HSA is funded and the owner’s situation, so contributions should be tracked and reported with care. Ask your tax adviser how to handle the paperwork and coordinate with payroll before the year starts.
Disability
Group disability coverage for owners follows the policy definitions. Check whether owners are eligible. Read the policy definition of an eligible employee and check whether owners or partners are included, and whether benefits are taxable to them. Ask the carrier or your adviser to confirm these points in writing before enrolling.
The questions owners ask us.
Six questions owners bring us about their own coverage.
Can I put my own premium through payroll pre-tax?
If you are a sole proprietor, partner or two-percent S-corporation shareholder, generally not. The deduction on your personal return is the usual route.
Does my spouse need to work in the business to be covered?
Not necessarily. Coverage for a spouse follows the plan terms and the group requirements.
Can a business with only me and my spouse get group coverage?
Usually not. Group coverage generally needs at least one common-law employee who is not an owner or spouse.
Do I count toward the fifty-employee mandate?
Owners are treated differently for counting. Ask your tax advisor and benefits counsel.
Where does the S-corporation premium go on the W-2?
As taxable wages, with the owner taking a personal deduction. Your tax preparer should handle it.
Can I get better benefits than my employees?
There are limits, especially for self-funded plans and cafeteria plans. Talk to us before you design it.
Ready? Send us your renewal, or talk it through with someone first. No cost, no obligation.
General information about owner health coverage, not tax or legal advice. Your tax treatment depends on your facts, and questions belong with your tax advisor, and we will bring them in.
Related guides.
Agriculture and Farm Employers
Benefits for seasonal, migrant and year-round workers.
Nondiscrimination Testing for Cafeteria and Self-Funded Plans
The annual tests, who is highly compensated or a key employee, and how small employers avoid testing.
Independent Contractors and Leased Workers
Worker status, plan eligibility, the ACA count and what misclassification costs.
Common Ownership and Employee Benefits
Controlled groups and related businesses.
Section 125 Cafeteria Plans
How pre-tax elections work.
Companies With 2 to 50 Employees
What matters for small employers.
Group Health Coverage for Owner and Spouse Only Businesses
Why owner-and-spouse-only businesses generally cannot buy group coverage, and what changes with the first employee.
Send us your renewal.
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The renewal letter
Your current plan summary
Contribution split by tier
Enrolled counts by tier
Four documents — two more if your group is 50 or more. Nothing else; every extra one is a reason to postpone.
Laws and rules referenced
29 C.F.R. § 2510.3-3 — A plan covering only owners and spouses is not an ERISA plan; one covering common-law employees is.
IRS Notice 2008-1 — Treatment of health insurance for 2% shareholder-employees of S corporations.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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