🌿 How Partnerships & Multi-Member LLCs Can Use Health Insurance to Reduce Taxes and Increase Retirement Contributions

Partnerships and multi-member LLCs have some of the most misunderstood health insurance rules in the entire tax code. This creates two outcomes:

1. Many partners miss tax deductions they rightfully qualify for
2. Many partnerships structure health benefits incorrectly, exposing themselves to IRS issues

But when set up properly, health insurance for partners becomes a strategic tool — directly reducing taxable income and often increasing retirement plan contribution limits.

If you’re a partner in a business, here’s exactly how your health insurance should work and how to leverage it for maximum tax benefit.

1. The IRS Treats Partners Differently Than Employees

Unlike employees of a corporation, partners are not considered employees for the purposes of employer-provided health insurance. This affects how health insurance is paid, reported, and deducted.

Here is the correct structure:

Step 1: The partnership must pay the premiums

Either directly or by reimbursing the partner.

Step 2: The premiums must be included in the partner’s income

Specifically as Guaranteed Payments (GPs).

Step 3: The partner deducts premiums as SEHI (Self-Employed Health Insurance)**

On their Form 1040, above the line.

This structure provides:

✔ A deduction to the partnership

✔ Taxable income to the partner (as GPs)

✔ A personal SEHI deduction for the partner

✔ Correct handling for IRS and K-1 reporting

This is the only IRS-compliant way to handle partner health insurance.

2. The Most Overlooked Benefit: Guaranteed Payments Increase Retirement Contribution Capacity

This is where partnerships have a unique advantage compared to S-Corporations.

Because Guaranteed Payments increase self-employment income, they:

• Increase the base used to calculate Solo 401(k) contributions
• Increase the base for Defined Benefit or Cash Balance Plan contributions
• Expand the partner’s deduction limits

For high-income partnerships, this can dramatically increase retirement contributions.

Example:

• $180,000 share of partnership income
• $15,000 health insurance premiums
• Added to income as Guaranteed Payments
• Increases total compensation for retirement plan calculations
• Results in higher allowable contributions

In many cases, partners can contribute tens of thousands more to tax-deferred retirement plans because of the GP structure.

This interaction makes health insurance a retirement plan amplifier — a point most accountants never explain.

3. How the Partnership Deducts the Premiums

The partnership can deduct premiums as an ordinary business expense as long as the premiums are properly included as Guaranteed Payments.

This is important:

❌ If the partnership pays premiums without reporting them as GP → deduction is lost

❌ If the partner pays personally without reimbursement → deduction is lost

When done correctly:

✔ The partnership gets a clean deduction

✔ The partner gets SEHI

✔ All reporting aligns with IRS requirements

This is the cleanest path.

4. SEHI for Partners: Key Rules You Must Follow

Partners can only take the Self-Employed Health Insurance deduction if:

✔ The partnership paid the premiums

or

✔ The partnership reimbursed the partner

✔ Premiums were included in Guaranteed Payments

✔ The partner has enough earned income

SEHI cannot exceed earned income from the partnership.

✔ The partner was not eligible for subsidized employer coverage through a spouse

✔ The partner reports the deduction personally

This happens on Form 1040, not on Schedule A.

These rules ensure the deduction is available and defensible.

5. HSAs, QSEHRAs, and ICHRAs for Partnerships

Partners have access to specific add-on health strategies — each with its own rules.

HSAs (Health Savings Accounts)

Partners can contribute to HSAs if they are enrolled in a High-Deductible Health Plan (HDHP).

Advantages:

• Pre-tax contributions
• Tax-free investment growth
• Tax-free withdrawals for medical expenses
• Penalty-free after 65

HSAs pair extremely well with partnerships because they reduce overall taxable income and support long-term wealth building.

QSEHRA (Qualified Small Employer HRA)

Partners cannot receive QSEHRA benefits tax-free.

Employees can — but partners and their families cannot unless they are treated as “non-employees” for tax purposes (rare).

ICHRA (Individual Coverage HRA)

Partners cannot receive ICHRA benefits tax-free, but they can still use an ICHRA plan to reimburse employees.

For the partnership itself, the relevance is high only if you have W-2 employees.

6. Example: Partner With $250,000 of Income

Let’s analyze the impact:

• $250,000 K-1 income
• $18,000 health insurance premiums
• Added as Guaranteed Payments
• Eligible for SEHI
• Increases base compensation for retirement plan design

The result:

✔ Higher deductible health insurance

✔ Higher Solo 401(k) contribution room

✔ Potential for six-figure Cash Balance Plan contributions

✔ Clean K-1 and GP reporting

✔ Reduced taxable income across multiple layers

Partnership taxation is one of the few structures where health insurance increases — not decreases — your retirement contribution capacity.

7. When a Partnership Should Consider Changing Entity Types

A multi-member LLC might consider alternative structures if:

• The partners want tax-free health benefits (C-Corp)
• The partnership wants to offer HRAs to owners (C-Corp)
• Partners want W-2 wages for compensation strategy (S-Corp)
• The business anticipates a sale or equity restructuring

However, for most professional practices and small businesses, a partnership remains one of the most flexible structures for health insurance and retirement planning.

Final Word: Partnerships Have a Hidden Advantage When It Comes to Health Insurance

While the health insurance rules for partners seem complex, they offer powerful tax benefits when structured correctly:

• Deductible premiums
• Increased retirement plan contribution limits
• SEHI access
• Clean integration with partnership compensation
• Strong long-term wealth-building synergy

This is one of the few structures where health insurance makes your tax strategy better, not more complicated.

If you want help modeling your tax savings or optimizing your partnership structure, MyPensionTree can walk you through the ideal setup.

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