We’ve talked before about options founders and small business owners can choose from when setting up their businesses. These include:
- sole proprietorship
- Limited Liability Company (LLC)
- or Corporation (C Corporation, S Corporation, Close Corporation, nonprofit, or cooperative).
Your decision about your organization set-up could affect your options for health insurance. According to Forbes Advisor, an LLC can protect owners’ personal assets from lawsuits and some creditors. It also offers tax benefits.
Health Insurance for LLC Owners
Health Insurance for your LLC may be influenced by the number of employees or LLC owners (if any) that you have.
For example, if you are a sole proprietor or you have few if any employees, you might want to consider Individual Health Insurance. You can get this coverage directly through an insurer or with assistance from a certified enroller or broker. You might also consider the Covered California public exchange.
If you have several employees or owners, you may prefer Group Health Insurance, which you can get:
- Directly through an insurer.
- Directly through a public exchange, like Covered California for Small Business; or
- Through a broker. Your broker will help you shop multiple plans, including coverage through CaliforniaChoice, a private exchange that has been serving small businesses since 1996.
An alternative that some LLCs might consider is a Health Reimbursement Arrangement (HRA). It’s employer-funded and offers employees reimbursement for qualified medical expenses. The annual HRA maximum is determined by the employer. Funds not used can be rolled over and used in other tax years. The employer owns the HRA. An HRA is sometimes also called a Health Reimbursement Account.
An HRA is different from traditional Health Insurance through a job; it is strictly a reimbursement fund for qualified medical expenses. For certain types of HRAs, you and your employees must also enroll in a health plan to use HRA funds. There’s a useful tool on HealthCare.gov to help you understand your options and the potential risks of the wrong decision.
Beginning in 2020, employers can offer employees an individual coverage HRA instead of a traditional job-based health plan. If you want to learn more, visit HealthCare.gov.
Tax Considerations for LLC Health Insurance
If you’re an LLC, the number of “members” determines how the LLC is taxed. The IRS says a single-member LLC is a disregarded entity. That means the LLC’s profits are passed through to the owner’s tax return, and you pay the taxes yourself. (You’ll use Schedule C of Form 1040.)
In a partnership, a Form 1065 U.S. Return of Partnership Income is filed with the IRS to show how the income is reported for each partner.
To choose your business classification for tax purposes, use federal Form 8832, Entry Classification Election. You can be taxed as a sole proprietor, partnership, C-corporation, or S-corporation.
Health Insurance Deductibility
A corporation can provide Health Insurance to employees as a benefit. It can also deduct the cost of health insurance as a normal business expense. Coverage can be for employees individually. Or it can be family coverage – for employees, spouses, dependents, and eligible nondependent children through age 26.
LLCs can write off many expenses that other businesses can deduct to lower taxes. That includes advertising, bank fees, donations, health and disability insurance, and some other expenses.
For non-owner employees, health insurance is considered a tax-free fringe benefit. The employee is not taxed for it.
As with all tax matters, we encourage you to talk with your accountant or tax advisor about what applies to your specific tax situation.