Companies are generally permitted to offer employer-sponsored group benefits to owners, and some plans even extend benefits to board members, but when doing so, employers should keep in mind certain eligibility, taxation, and broader compliance considerations.  

Owners Defined 

The following individuals are generally considered "owners" and not common law employees:

• Sole proprietor
  
  
• Partner in a partnership
  
  
• >2% shareholder in an S-Corp (including family members)
  
  
• C-Corp shareholder

Status as an owner or board member (i.e., a non-employee) can impact their ability to participate in employer-sponsored benefits and affect the taxation of any benefits received. Under §4980H (the “employer mandate”), §125 (cafeteria plan), and §105 rules, sole proprietors, partners in a partnership, and >2% S-corporation shareholders generally are not treated as employees. Likewise, C-corporation shareholders, directors, and board members who do not perform services as employees (i.e., do not receive Form W-2 wages) generally are not treated as employees for these purposes. 

Limited liability companies (LLCs) can take different organizational forms. When there is an LLC involved, it’s important to understand how the entity has chosen to be taxed – as a sole owner, partnership, S-Corp, or C-Corp – to determine eligibility and taxation of any benefits.

Eligibility

Plan eligibility rules typically recognize “employees” and their family members as eligible participants. As discussed above, owners, board members, and directors are not often common law employees. Therefore, to include such non-employees, the plan eligibility rules should be written to explicitly permit "owners" or non-employees to participate in the benefit plans, subject to carrier approval. Covering them without the carrier’s approval risks the carrier’s refusal to provide claim coverage for such individuals.

While plan eligibility rules may include owners, board members, and directors, covering non-employees may create a multiple employer welfare arrangement (MEWA). Under a fully-insured plan, that may be okay as long as the carrier is aware and agrees to it, plan documents recognize the MEWA status, and required government filings (e.g., Forms 5500 and M-1) are handled correctly. For a self-funded plan, it can be more complicated because self-funded MEWAs are subject to applicable state law. Some state laws completely prohibit self-funded MEWAs, whereas others have varying requirements for financing, reporting and participation. 

MEWA Exception?

While allowing non-employees to participate in the plan does technically form a MEWA, there is informal DOL guidance indicating that partners who are actually working can participate in the employer’s benefits without forming a MEWA. It is possible this exception might extend to other owners as well, and there is little to no enforcement by the DOL for plans allowing other owners or non-employee directors to participate. Further, even if a MEWA is formed, an exception to M-1 filings will often apply as the owner(s) will make up less than 1% of the eligible population.

Taxation 

If non-employees (e.g., owners, board members, or directors) are permitted to participate in employer-sponsored benefits, they cannot participate on a tax-favored basis in the same way that regular employees do. In addition, those who are not common law employees cannot participate in a cafeteria plan, HRA, or health FSA. 

In general, contributions made by non-employees should be made on an after-tax basis, and contributions made by the employer should be treated as taxable compensation to the non-employee. It is then up to the owner, board member, or director to work with their tax advisors to determine any tax deductions that may apply because it can vary depending on the structure of the organization and the nature of the contributions. 

Non-employees are permitted to make contributions to HSAs as long as they are otherwise eligible (i.e., enrolled in a qualifying HDHP, no other disqualifying coverage, and not claimed as a tax dependent). Any contributions made by the non-employee should be made on an after-tax basis and then may qualify as a deduction when filing a personal tax return. The tax treatment of employer HSA contributions varies depending on the individual's ownership status and the entity's tax structure. See more detail in IRS Notice 2005-8 – https://www.irs.gov/pub/irs-drop/n-05-08.pdf.

If an owner’s family members are also employees of the company, they may generally participate in benefits on a tax-favored basis (subject to the plan eligibility rules). However, in the case of a >2% S-Corp shareholder, the owner's spouse, children, grandchildren, and parents are attributed ownership under §318 rules and therefore the same restrictions regarding participating on a tax-favored basis in the employer's benefits apply.

ACA Employer Mandate and Employer Reporting 

Owners, board members, and directors who are not common law employees do not count toward applicable large employer status (50 or more FTEs) and do not require an offer of coverage under §4980H rules. For the same reason, applicable large employers are not required to report on offers of coverage for such individuals in Part II of a Form 1095-C (offer of coverage reporting is required only for full-time employees). However, reporting is required on a Form 1095 for any non-employees who enrolled in a self-funded group health plan (i.e., on a Form 1095-B or in Part III of a Form 1095-C).

Benefit Nondiscrimination Rules

Benefit nondiscrimination rules restrict an employer’s ability to offer benefits on a tax-favored basis in a manner that discriminates in favor of highly compensated and key employees. However, because owners, board members, and directors are not permitted to participate in employer-sponsored benefits on the same tax-favored basis as other employees, they can generally be ignored for purposes of benefit discrimination testing. As a result, employers generally have greater flexibility to provide different benefit levels or contribution amounts to these individuals without running afoul of benefit nondiscrimination rules (e.g., §125, §105(h), §79).