Health Insurance Professional’s Comment

Great article last month on the self-employed health insurance deduction.

However, I am not sure whether you were aware of this: if a sole proprietor or one-person company buys an individual medical policy, on or off the marketplace, the fine print in the insurance carrier’s application says that this is not an employer-sponsored policy and that owner will not deduct the premiums on their tax return.

Our Take

Thank you for writing, and you are describing something real. That language is on the applications. But it is an insurance rule about who sponsors the coverage, not a tax rule about who may deduct the premiums.

You Will Like this Answer

Let’s start with the self-employed (sole proprietors and partners). We’ll get to S corporation owners later.

The tax code allows a self-employed individual to deduct premiums paid for medical insurance covering the taxpayer, spouse, dependents, and children under age 27, so long as the plan is established under the trade or business.

“Established under the business” is the phrase that worries people who notice the language denying the health insurance application tax deduction.

Sole proprietors who buy health insurance in their own name may treat it as insurance purchased in the name of the business. The policy does not have to name the business. This was never a requirement.

And if the proprietor purchased the policy in their business name (their DBA), that is an individual policy purchased by a sole proprietor.

Here is the detail that dissolves the conflict: This is not an employer-sponsored deduction. It is not an employee benefit expense on Schedule C. The individual pays the premium personally and takes a deduction in arriving at adjusted gross income on Schedule 1 of Form 1040, computed on Form 7206.

Key point. The sole proprietor is not an employee of the business.

Nothing about buying coverage or claiming it as a deduction makes the policy employer-sponsored. The owner buys individual coverage as an individual and then takes an individual deduction that Congress wrote specifically for such a person.

What That Attestation Is Doing

The insurance company language exists because of the Affordable Care Act (ACA) market reforms.

An employer generally may not pay or reimburse an employee’s individual market premiums. An arrangement that does so is treated as a group health plan that cannot satisfy the market reforms, which exposes the employer to an excise tax of $100 per day per affected employee, or $36,500 per employee per year.

That is why insurance companies make the applicant attest that the individual policy is not employer-sponsored. They are keeping the policy in the individual risk pool and keeping themselves out of group plan status.

The attestation is about the source of the premium dollars and the identity of the sponsor. The Form 1040 is not in its field of view, and in any event an insurance company’s application cannot override the Internal Revenue Code.

The group health plan requirements do not apply to a plan with fewer than two participants who are current employees (remember, you are not an employee).6 A one-person proprietorship business has no employees.

When your proprietorship does have employees, you (the owner) are not an employee, and the tax code treats you separately from the rank and file.

S Corporations

A shareholder owning more than 2 percent is taxed under separate rules: The corporation pays or reimburses the premium, then reports it in Box 1 wages. The shareholder takes the deduction above the line.

If the S corporation purchases the policy in the corporate name, it is not purchasing an employer-sponsored policy, because the S corporation owner is not an employee for health insurance purposes. The tax code treats the S corporation owner as a self-employed partner for purposes of health insurance.

The market reform provisions that generate the $100-a-day penalty do not apply to a plan with fewer than two participants who are current employees, so an owner-only arrangement sits outside Chapter 100 by statute.

The IRS has separately confirmed that it will not assert the $100-a-day penalty tax against an arrangement involving a shareholder-employee who owns more than 2 percent—a position unchanged since 2015.

Two Employees or More

When a second employee appears, the analysis shifts. The business has three compliant routes to choose from, not one.

1. The business can adopt a qualified small-employer HRA (QSEHRA) for the rank-and-file employees. This plan is available to an employer with fewer than 50 full-time employees that offers no other group health plan.

2. The business can adopt an individual coverage HRA (ICHRA) for the rank-and-file employees. This plan has no size limit and reimburses individual-market premiums for employees enrolled in individual coverage.

3. The business can sponsor a traditional group health plan, which satisfies the market reforms directly and raises no Section 4980D ($100-a-day penalty) question at all.

Exposure to the $100-a-day-per-employee penalty arises only from reimbursing individual premiums to S corporation rank-and-file employees outside all three routes described above.

Planning note. For the third route described above, a shareholder who owns more than 2 percent is treated as a partner (not an employee) for fringe benefit purposes, so the S corporation owner cannot participate in the corporation’s QSEHRA or ICHRA.

In an S corporation, a group plan can cover both the shareholder-employee who owns more than 2 percent and the employee staff under a single group health plan structure, with the owner’s premiums continuing to run through Box 1 under Notice 2008-1. Alternatively, you can cover these same owner-employees with health insurance outside of the group plan.

The Limits That Disqualify People

For what it is worth, the restrictions that trip up self-employed taxpayers claiming the self-employed health insurance deduction on Form 1040 are elsewhere in the statute, and they are worth more of your attention than the application’s fine print seems to indicate.

Earned income cap. The self-employed health insurance deduction cannot exceed net earned ·      income from the business under which the plan is established. A loss year means no deduction at all. A zero S-corporation cash wage salary means no deduction at all. The amounts lost here move to Schedule A, where they are deductible as possible itemized deductions once above the 7.5 percent floor.

Subsidized employer plan disallowance. There is no self-employed health insurance deduction ·        for any month the taxpayer, the taxpayer’s spouse, the taxpayer’s dependent, or the taxpayer’s child under age 27 is eligible to participate in a subsidized health plan of any employer.15 Eligibility is enough. Declining the coverage does not help.

No self-employment tax relief. The Form 1040 self-employed health insurance deduction reduces ·      income tax but not net earnings from self-employment.

One 2026 note on premium tax credits: The enhanced premium tax credits expired at the end of 2025. The 400 percent of the federal poverty level cliff is back. That makes the interaction between this deduction and the tax credit far more consequential starting this year, because if you exceed the cliff, you lose the entire credit.

Takeaways

The health insurance carrier’s warning is a real rule, but it doesn’t apply in the situations described in this article.

• If you are the owner-operator buying an individual health insurance policy, there is  nothing to fix. Your S corporation can pay or reimburse your individually purchased premium, and report it in Box 1; then you, the shareholder-employee deduct it personally above the line on your Form 1040. The ACA market reforms do not reach a plan with fewer than two participants who are current employees, so no $100-a-day penalty tax can attach. As a solo owner-employee of an S corporation, you are not an employee for health insurance purposes. You are a partner. The IRS forbearance for arrangements around shareholders who own more than 2 percent is a third, independent protection.

• Sole proprietors and partners never reach this question. Neither is an employee of the  business, so a plan covering only the owner or only the partners has no current-employee participants, and the market reforms never apply. There is no W-2 step: the sole proprietor deducts directly on the Form 1040, and the partner deducts a K-1 guaranteed payment for health insurance on Form 1040.

• Hiring employees changes the question, not the answer. With two or more employees, you  have three potential routes for compliance: (1) a QSEHRA, (2) an ICHRA, or (3) an ordinary group health plan. Each one avoids the $100-a-day penalty.

• The $100-a-day penalty tax punishes only one thing. It applies when you reimburse a rank-  and-file employee for an individual policy outside all three routes described above. The penalty is up to $36,500 per year per employee.

• Your coverage does not mingle with employee coverage. Sole proprietors and partners are not  employees. Section 1372 treats a shareholder who owns more than 2 percent as a partner for fringe benefit purposes, so you are not an employee and cannot participate in your own corporation’s QSEHRA or ICHRA on a tax-favored basis. A group plan covers everyone under one structure, with your share still running through the three-step process outlined in Notice 2008-1: (1) the corporation buys or reimburses the coverage, (2) the corporation reports it as W-2 compensation, and (3) you deduct it on your Form 1040.