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HRA for LLC or S corporation

originally posted: 11/22/2006 reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date. If you notice an error or are in doubt, please send a new question by email or ask for an update. Email asktony@tonynovak.com.

Q: I have a client (an LLC taxed as a partnership) that employees the partner’s spouses. The LLC has a HRA, which is funded to cover 100% of medical insurance and out of pocket medical costs. One LLC member wants to start a S-corp and transfer his membership interest to the S-corp in exchange for stock. His purpose is to lower his self-employment tax. Under the IRC Section 1372 and 318 is his spouse a constructive owner of the LLC and therefore is not allowed to participate in the HRA?

A: Yes, regardless of whether a business is an LLC or an S corporation, the spouse of an owner can not receive tax-free reimbursement of uninsured medical expenses. This applies whether an HRA or other type of qualified health plan. The most likely work-around is to use a Health Savings Account. See www.healthsavingsaccount-hsa.com for more information. In addition to this response to the specific question you asked, it seems appropriate to mention that there are several other potential tax problems in the scenario you described.

HRA for LLC or S corporation

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