Supporting team members who aren't eligible for CHOICE
Some people on your team may not be eligible to participate in your CHOICE. Thatch makes it easy to support them alongside your CHOICE-eligible employees, all on one platform.
Who isn't eligible for CHOICE?
Under IRS rules, certain individuals can't participate in an CHOICE or receive pre-tax health benefits through a Section 125 cafeteria plan. These include:
2%+ owners of S Corps, partners in Partnerships, and certain LLC members
Family members of the above (spouses, children, parents, and grandchildren, under IRC §318 constructive ownership rules)
Contractors
Determining who on your team falls into these categories is the employer's responsibility. If you're not sure, we recommend checking with your accountant or tax advisor. Once you've identified who's affected, Thatch handles the rest.
How it works on Thatch
Team members that aren’t eligible for CHOICE may still be able to use Thatch to access healthcare, with a few key differences:
No CHOICE allowance. They won't see allowance or reimbursement language in their dashboard
No automatic payroll deductions. You’ll be billed upfront for their health insurance premiums, and we will indicate on payroll deduction files that these are for non-CHOICE eligible spend. We expand further on how this works below.
Same platform access. They still get a Thatch account, can browse plans, and connect with a licensed advisor, just like your CHOICE-eligible team members
Same invoice. Their premiums appear on your Thatch invoice alongside your CHOICE costs, with no separate billing to manage
🚨Important: non-CHOICE individuals may only enroll in a new plan midyear if they've recently experienced a Qualifying Life Event (QLE).
Unlike CHOICE-eligible members, non-eligible individuals must be in a Special Enrollment Period (SEP) independent from their joining the Thatch platform. If the individual is not in an SEP, they must wait until Open Enrollment in November to choose a new plan for the next calendar year.
How payroll deductions work for CHOICE-ineligible individuals
If you have automated payroll deductions set up through Thatch, those will continue to run as normal for your CHOICE-eligible employees. However, Thatch does not automatically write payroll deductions for individuals who aren't CHOICE-eligible. Their premium payments are flagged separately in your deduction reports, and it's up to you to determine how to handle them in your payroll system.
What shows up in your deduction reports
Your Thatch deduction reports will include premium payment amounts for all individuals on your account, including those who aren't CHOICE-eligible. These are clearly flagged so you can distinguish between:
CHOICE deductions (pre-tax or post-tax): for employees participating in your CHOICE plan. These are written automatically if you have automated deductions enabled
Fringe benefits: for individuals who aren't eligible to participate in the CHOICE. These are not written automatically and require you to determine the appropriate tax treatment outside of Thatch
Why we don't automate deductions for ineligible individuals
Premium payments made on behalf of individuals who aren't CHOICE-eligible are considered fringe benefits under IRS Publication 15-B. By default, all fringe benefits are taxable unless they fall under specific exemptions outlined by the IRS. The fair market value of non-exempt fringe benefits should be included in the individual's taxable income each year.
Because the correct tax treatment depends on your specific situation and business structure, we leave this determination to you and your tax advisor rather than making assumptions on your behalf.
What you need to do
When you receive your deduction report from Thatch, review any line items flagged as CHOICE-ineligible fringe benefits and work with your payroll provider or tax advisor to determine how to process them. Evaluating how to record them is a two-step process: Firstly, determine if the fringe benefits are taxable or tax-exempt based on the IRS regulations. For taxable fringe benefits determine a company policy for how you treat them. Common approaches include:
Running the amount as a post-tax payroll deduction (the employee covers the cost)
Including the premium amount in the individual's taxable wages without a payroll deduction (if the business is covering the benefit cost but not the taxes thereon)
Including the premium in the individual’s taxable wages and increasing the individual's compensation to offset the additional tax liability on the premium amount (if the business is both covering the cost and the tax liability on the fringe benefit - the “tax gross up” approach)
Your accountant or tax advisor can help you determine which approach is right for each individual based on their role, ownership stake, and your business structure.
How to flag someone as not CHOICE-eligible
When adding or inviting a new team member, you will have the option to indicate that an individual is not eligible for CHOICE.
FAQ
Can Thatch advise on the exact tax rules or eligibility? Thatch cannot advise as to who on your team is ineligible or answer tax questions. Your accountant or tax advisor can help you determine who this applies to, and how the fringe benefits you offer should be treated for tax purposes.
What if someone's ownership changes mid-year? If someone becomes a 2%+ owner (or stops being one) during the year, let us know and we'll update their status. There may be tax implications for the transition, so your tax advisor can walk you through the specifics.
What about 1099 contractors? Contractors typically can't participate in an CHOICE, so would also be considered ineligible members.
Can an ineligible individual still get health insurance through Thatch if they're not on the CHOICE? Absolutely. They get the same plan browsing, advisor access, and premium payment facilitation as any other team member on Thatch. The differences are tax treatment, no CHOICE allowance, and that they may not sign up for a new plan outside of Open Enrollment without a Qualifying Life Event (QLE).
What if I'm not sure whether someone on my team is affected? Check with your accountant or tax advisor. They can review your ownership structure and let you know who should be flagged. If you need help on the Thatch side, reach out to support@thatch.com.
Does this affect my CHOICE plan for everyone else? No. Your CHOICE plan continues to work the same way for all eligible employees. Flagging business owners or 1099 contractors as not CHOICE-eligible is a separate setting that doesn't change anything for the rest of your team.
Are ineligible members eligible for COBRA if they leave the company? No. Only CHOICE-eligible employees are eligible to participate in COBRA.