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Article | Insider

Since you asked: Can an employer offer health insurance to its board’s directors?

By Maureen Gammon , Anu Gogna , Benjamin Lupin and Kathleen Rosenow | December 21, 2022

Companies considering covering non-employees, such as directors, board members or owners, under their benefit programs need to assess certain compliance-related concerns.
Benefits Administration and Outsourcing Solutions|Health and Benefits

Employers often have questions on practical considerations related to healthcare, retirement and other employee benefit regulations. In this “Since you asked” feature, we discuss the provision of health insurance to board members and their dependents.


Can our company provide benefits under our group health plan to members of the company’s board of directors who are not employees? We would like to provide coverage for retention and recruiting purposes.


Possibly, but various compliance concerns need to be addressed.

Multiple Employer Welfare Arrangement considerations

Covering non-employees (whether directors, board members or owners) under a company's benefit programs is likely to raise compliance concerns (assuming the written plan eligibility rules allow non-employees to enroll in coverage). For one, it is unclear whether a Multiple Employer Welfare Arrangement (MEWA) is created when health or other welfare benefits are provided to non-employee directors.

  • A MEWA is defined as an employee welfare benefit plan providing benefits to the employees of two or more employers (including one or more self-employed individuals). If the board of directors consists of members who are not current employees of the company, this would technically classify the benefit plan as a MEWA, as the non-employees would be considered self-employed individuals.
  • From a federal reporting standpoint, MEWAs are generally required to file an annual report with the federal government (Form M-1); however, the plan may qualify for an exemption to filing the annual Form M-1. More specifically, a group health plan is exempt if less than 1% of participants are non-employee directors, and the plan would not be a MEWA “but for” coverage of non-employee directors. This does not mean that the arrangement is not a MEWA but only that no Form M-1 filing is required.
  • MEWAs do not qualify for ERISA preemption from a state regulatory perspective, so the plan potentially would be subject to state laws specifically regulating MEWAs, including any filing and licensing requirements similar to rules imposed on insurers licensed to operate in the state. For example, California law requires self-funded MEWAs to obtain a certificate of compliance from the Department of Insurance in order to operate within the state. But under California law, the Department of Insurance ceased providing such certificates in 1995, effectively preventing the formation of any new MEWAs. In addition, since state law would likely apply, state mandated benefit rules may apply to the arrangement (e.g., requiring the plan to cover medical procedures it would not otherwise cover).

Tax considerations

Generally, the coverage for the non-employee director cannot be pre-tax under the cafeteria plan rules, although there is a special rule for certain "dual status" individuals (i.e., directors who are also employees).

  • If non-employees are permitted to participate in employer-sponsored benefits, they cannot participate on a tax-favored basis in the same way as employees.
  • Under the general rule, directors who are not employees of the company (“outside directors”) cannot participate in the company's cafeteria plan. This is the case whether or not the directors receive fees for their services as directors. The 2007 proposed cafeteria plan regulations expressly provide that the term “employee” does not include a “self-employed individual.” The regulations list examples of self-employed individuals: a sole proprietor, a partner in a partnership, and a director serving on a corporation's board of directors who does not otherwise provide services to the corporation as an employee. Contributions made by non-employees should be made on an after-tax basis, and contributions made by the employer should be treated as additional taxable compensation.
  • The regulations also provide a special rule for certain “dual status” individuals. Under the dual status rule, an individual who is an employee and provides services to his or her employer as a director or independent contractor (e.g., an individual who is both an employee and a director of a C corporation) is eligible to participate in the employer’s cafeteria plan, although solely in his or her capacity as an employee. For example, assume one of the company's employees also serves on the company's board of directors. Her annual compensation as an employee of the company is $80,000; she also receives $5,000 in directors' fees each year. She can participate in the company's cafeteria plan in her capacity as an employee and can elect to make salary reductions from her employee compensation for benefits under the plan; however, she cannot elect to reduce her directors' fees for benefits under the plan. Note that if the company is an S corporation, the dual-status rule will not apply to any employee-directors who are also shareholders owning more than 2% of company stock at any time during a year.
  • In addition, directors who are not employees cannot participate in a health reimbursement arrangement or health flexible spending account. Note: Non-employees may make contributions to health savings accounts (HSAs) as long as they are otherwise eligible (i.e., enrolled in a qualifying high-deductible health plan, have no other disqualifying coverage and cannot be claimed as a tax dependent). Any contributions made by the non-employee to an HSA should be made on an after-tax basis, which then may qualify for an above-the-line deduction on his or her individual tax return (Form 1040).


  • Companies offering coverage to directors and their dependents under their group health plan need to make sure they (or their third-party administrators) have the ability to do so on an after-tax basis.
  • MEWA considerations must be discussed with legal counsel, as such an arrangement may need to be registered in various states (assuming it is permitted by state law).
  • A possible alternative for directors would be the company paying taxable cash (with or without a gross-up) and helping them find individual health insurance coverage.
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Insider December 2022 PDF .1 MB

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

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