Ask the Experts: Tax-Favored Benefits for LLC Owners and the ACA

Question:   We are over 2% owners of an LLC and understand that our health premiums are fully taxed — we cannot have pre-tax health premiums like we provide for our employees.  Is there any provision in the ACA to treat owner-employees like regular employees and allow pre-tax health premiums in the future?

Answer:  At this time, there is nothing in the current health care reform legislation that would change the tax rules for health benefits offered under tax-favored cafeteria plans to allow you to have pre-taxed health benefits.  As we understand it, the rationale for not allowing the cafeteria plan benefits’ tax-favored treatment for LLC owners is because, in general, the IRS does not consider over 2% owners of the LLC to be “employees” of the business due to the tax advantages that they already enjoy as “owners” of the business.  If you need a deeper tax or legal analysis, please consult with your benefits attorney, tax advisor, and benefits broker to design benefits plans that achieve the financial and benefit goals for you and your business.

You are already aware of this, but it does bear repeating:  LLCs may sponsor a cafeteria plan to offer the health benefit on a tax advantaged basis –either on a fully insured or self-insured basis– for their employees.  The LLC owners can participate in the same plans on an after-tax basis only at this time.