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This Web site contains a compilation of more than a thousand consumer finance  columns written by Tony Novak from the 1980s through 2006, updated and reformatted for maximum usefulness today.  New material was added after 2010.

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HRA scams?

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posted: 11/22/2006  reposted: 2/18/2011 This post has not been recently reviewed or revised by the author and may be out of date.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

Q: You wrote that S corporation owners are not eligible for Health Reimbursement Arrangements but other Web sites like and say it can be done. Why the different opinion?

A: This is not a different opinion on tax treatment, but different underlying facts that are assumed. A closer look at the sites you mention shows that they only apply when the owner's spouse works for the business. That is a great legal work-around to the limitations placed on self-employed S corporation owners but the fact is that few S corporation owners actually have their spouse in the business. When a spouse is actually an employee of the business, the spouse may qualify for full tax-free family health benefits (including coverage on the other owner/spouse) in the same manner as any other ordinary employee so this is an excellent way to provide health benefits. It is important to know that having a spouse help with the books or occasional work in not enough. IRS requires that the spouse be "bona fide employee of the business under the common law rules". The spouse working for an S corporation must actually be paid and have wage taxes (at least FICA and Medicare potions) withheld. The wage tax filing (usually Form 941) is the physical evidence needed to allow this strategy to work. But without meeting this qualification, the entire concept is just a sales scheme Note that some of the information on these other Web sites is worded in a misleading way. For example on page says: "Qualifying for an Individual HRA is simple! - Are you self-employed? - Does your spouse currently help with the business? - Do you pay for your own medical expenses? If you answered 'yes' to any of the above questions, click here or call (xxx) xxx-xxxx and have a 105 Concepts representative get you started today!". What is should say is that if you answered yes to ALL THREE of those questions AND your spouse is on payroll as evidenced by wage tax withholding, then you can qualify for the spousal benefits. But it seems clear that the Web site is designed to drive sales rather than provide accurate tax advice. I also noticed that the tax example listed in s-corporation guide is just plain wrong! I am surprised to see such inaccurate tax advice published, but it just goes to show that you cannot believe everything you read on the Web. Three of the most reliable sources of information on this topic are: 1) the IRS Instructions for Form 1120s, line 7 that confirm that all employee benefits paid to an owner of more than 2% of the S corporation are reported as taxable earned income; as well as instructions for line 18 saying that these expenses are not deductible by the s-corporation. 2) IRS Publication 969 that clearly states that self-employed people including s-corporation owners cannot participate in an HRA, and 3) IRS Publication 15 dealing with family members as employees stating the requirements for wage tax withholding. The sites mentioned will inevitably cause some users to have tax problems later. We have received complaints in the past from others who have fallen victim to similar "Section 105" services. It might not be fair to call them scams but certainly they are misleading. Business owners want to believe that there are easy ways to cut health care costs. They must also be aware of the limitations of each tax strategy. In general, Health Savings Accounts (HSA) are a better health plan for an s-corporation owner. HRAs, FSAs and cafeteria plans are not available to s-corporation owners. Considering all of this, I think you will conclude that the language used at and in my publications is designed to plainly communicate the tax rules in a format that business owners can understand. That is really the best service we can provide, even if the benefits do not sound as "juicy".


More resources: Form 1120S instructions Publication E Employer Tax Guide IRS Publication 969