A limited liability company’s (LLC’s) health plans may create special issues with respect to LLC member participation. This is because LLCs may be treated as either a partnership or a corporation (depending on how the LLC has elected to be treated), and for tax purposes the IRC treats partnerships and corporations differently. No IRS guidance specifically addresses the status of LLC members for purposes of health plan participation, including participation in a medical or cafeteria plan. But the general rules of Section 125 (also known as the cafeteria plan rules) would likely apply as described below.
LLC Structured as a Partnership
Pre-tax premium payroll deductions are subject to IRC Section 125. Under Section 125, as a general rule only employees are eligible to participate in the cafeteria plan. Partners in a partnership are considered self-employed individuals, not employees. Thus, for LLCs that are taxed as partnerships, members of the LLC generally cannot participate in a cafeteria plan. This means that the LLC members would not be eligible to benefit from the tax advantages of paying premiums on a pre-tax basis. But those LLC members may still be eligible to participate (on an after-tax basis) in the medical policy/plan as an eligible person, depending on the definition of eligibility under the plan.
If, however, the plan is offered on a post-tax basis outside of a cafeteria plan, or on a non-contributory basis (where the employer pays all of the premiums), then the owner may participate in the group health plan. In addition, if they are self-employed as LLC members, the members may be able to take a deduction on their federal income tax returns; this would really be a taxation issue best addressed by an accountant or tax counsel.
LLC Structured as a C Corporation Where LLC Members Are Considered Employees Because They Are Receiving W-2 Reportable Wages
If the LLC has elected to be taxed as a C Corporation, then the LLC member may be considered an employee eligible to participate in the cafeteria plan. That said, the salary reduction under the cafeteria plan may only be from the individual’s compensation as an employee.
Employer HSA Contributions
With respect to an HSA, if the HSA contributions are made through the cafeteria plan, then the same rules as above would apply and the answer would depend on whether the LLC is treated as a partnership or a C Corporation. If the LLC is treated as a partnership, then the employer could not make a pre-tax contribution to the LLC member’s HSA account. However, if the LLC is treated as a corporation, and the LLC member is considered an employee, then the employer could make pre-tax contributions to the LLC member’s HSA accounts (although those members would likely be considered highly compensated, so there may be nondiscrimination issues if non-highly compensated individuals are not also receiving employer HSA contributions).
If the HSA contributions are made on an after-tax basis, then the employer would not be bound by the Section 125 restrictions with respect to the LLC members. However, the comparability rules would then apply. The comparability requirements basically require employees to make comparable contributions for all comparable participating employees. Comparable participating employees are employees who are in the same group with respect to benefits (i.e., self-coverage, self-plus-one coverage, etc.). Thus, so long as the employer satisfies the comparability rules, the employer could contribute to the LLC members’ HSA accounts.
Finally, regardless of the LLC structure, the LLC members could always make their own HSA contributions on a post-tax basis and take the contributed amount as a deduction on their own individual federal income tax return. Again, this may necessitate guidance from the member’s own tax professional.