1099 Contractor

When small businesses work with 1099 contractors, health benefits can get confusing fast. Unlike W-2 employees, independent contractors are generally responsible for their own taxes and benefits—including health insurance.

This guide explains:

• What a “1099 contractor” is (and what it is not)
• Why worker classification matters (a lot)
• What businesses can and can’t do when it comes to health coverage support
• Practical, compliant options for both businesses and contractors

Note: This is general information, not legal or tax advice. Worker classification and benefits rules can vary by situation and state.

Who is a 1099 contractor?

A “1099 contractor” usually means an independent contractor—someone who performs services as a self-employed worker rather than as a W-2 employee.

Important: it’s not just about the form

Whether someone is a contractor or an employee depends on the facts of the relationship—especially who controls how the work is performed and the worker’s level of independence. It’s not determined only by what the contract says, what you call the relationship, or which tax form you use.

Form 1099-NEC (when reporting applies)

When reporting is required, businesses typically report certain payments for services to non-employees on Form 1099-NEC. Rules and thresholds can change, so businesses should confirm current requirements each year.

Why classification matters for benefits (and risk)

Misclassifying a worker can create major exposure—back taxes, penalties, wage/hour claims, benefits liability, workers’ compensation issues, and more.

From a benefits standpoint:

• Most employer-sponsored health benefits are designed for employees.
• Contractors typically are not eligible for employee benefit plans because they are not employees.

If you want to support contractors, you generally do it through compensation and resources—not by trying to run an employee health plan for non-employees.

Can 1099 contractors receive employer health benefits?

In general: employer health plans are for W-2 employees

Traditional group health plans and HRAs are generally structured as employer plans for employees (and their dependents). Independent contractors are typically outside that framework.

What about ICHRA?

An Individual Coverage HRA (ICHRA) is an employer health benefit built for employees. A business generally should not offer an ICHRA to true 1099 contractors.

If a worker should be treated as an employee (based on the facts), the compliant path is to hire or reclassify them as W-2 (with counsel support), then offer employee benefits like an ICHRA to the eligible employee class under a proper plan.

Compliant ways to support 1099 contractors with health coverage

Here are practical options that generally avoid creating an employer-sponsored health plan for contractors:

Option 1: Increase compensation (simplest)

Increase the contractor’s hourly/project rate or provide a bonus. The contractor can then purchase coverage that fits their needs (Marketplace or off-Marketplace).

Option 2: Provide resources and education (without choosing a plan for them)

You can share:

• Where to shop (Marketplace vs. off-Marketplace)
• How open enrollment works
• How to find a broker or navigator
• What documents they may need

Avoid positioning this as an employer “benefit plan,” and avoid selecting coverage on their behalf.

Option 3: Convert to W-2 employment (when appropriate)

If someone works like an employee (control, schedule, exclusivity, tools, ongoing duties), consider hiring them as W-2. Then you can offer a compliant employee benefits program, including an ICHRA.

Contractor health insurance options (for the contractor)

Independent contractors typically look at:

Marketplace coverage (ACA)

Contractors can buy individual coverage through the Marketplace and may qualify for premium tax credits based on household income and eligibility rules.

Off-Marketplace individual plans

Some people prefer to buy directly from insurers or through brokers.

HDHP + HSA (if eligible)

If the contractor enrolls in a qualified high-deductible health plan (HDHP), they may be able to contribute to a Health Savings Account (HSA), which can offer tax advantages.

Self-employed health insurance deduction (may apply)

Many self-employed individuals may be able to deduct health insurance premiums if they meet IRS rules. Eligibility depends on the contractor’s tax situation and other coverage availability.

State law considerations (especially in California)

Federal guidance is only part of the picture. Many states apply stricter rules for worker classification.

California example: AB 5 and the “ABC test”

California uses a stricter test in many contexts, which can make it harder to classify workers as contractors unless an exception applies. If you use contractors in California, review classification rules carefully.

Also note: certain gig-work situations have separate rules/exemptions. State rules evolve, so verify current requirements for your category of work.

How SimplyHRA fits

SimplyHRA is built to help employers offer and administer ICHRA plans for W-2 employees:

• Set allowances by employee class
• Collect and manage required substantiation
• Streamline reimbursement workflows and documentation
• Support a cleaner, more compliant administration process

If you’re considering converting long-term contractors into W-2 employees (where appropriate), SimplyHRA can support rolling out an ICHRA for the eligible employee class.

Frequently Asked Questions about 1099 contractors and benefits:

Q: Can a 1099 contractor be offered an ICHRA?

A: Generally, no. ICHRA is an employer benefit intended for employees. True 1099 contractors are typically not eligible.

Q: Can a business reimburse a contractor’s individual premiums tax-free?

A: Usually, businesses support contractors via compensation (rate/bonus) rather than trying to structure it as an employer health plan. Tax treatment depends on structure and facts—get tax counsel before attempting any “reimbursement program” for contractors.

Q: Can 1099 contractors participate in a company 401(k)?

A: Typically no. Contractors can set up their own retirement accounts (e.g., SEP IRA or Solo 401(k)) if eligible.

Q: Do 1099 contractors get workers’ comp coverage?

A: Often they are not covered under the hiring company’s policy, but state rules and contract terms matter. Some states treat misclassified contractors as employees for workers’ comp purposes.

Q: Can a contractor’s spouse or dependents be reimbursed under an ICHRA?

A: For contractors, generally no—because ICHRA is typically for employees. For W-2 employees, employers can design ICHRA terms to permit reimbursements for eligible dependents if plan rules are met.

Q: Can multiple clients “jointly” provide contractor health benefits?

A: They can each pay higher compensation, but coordinating an employer-sponsored benefit plan across multiple clients is uncommon and can create compliance issues.

Q: Are contractors eligible for unemployment benefits?

A: Generally no, but misclassification disputes and state rules can change outcomes.

Bottom line

• “1099 contractor” generally means a self-employed worker, not an employee.
• Classification must be correct—misclassification risk is real and costly.
• ICHRA is generally for W-2 employees, not true independent contractors.
• The most common compliant ways to support contractors are higher compensation and helpful resources—or converting to W-2 when the relationship warrants it.

If you have W-2 employees and want a flexible alternative to group health insurance, SimplyHRA can help you offer an ICHRA the right way.