Health Insurance for Law Firm Partners: Losing W-2 Benefits and What to Do

Making equity partner changes your tax status, your retirement accounts, and — often overlooked until it's too late — your health insurance situation. The transition from W-2 associate to K-1 equity partner can disrupt coverage in ways most new partners don't discover until after the partnership agreement is signed. Here's how it actually works, what your options are, and how to use the tax code to your advantage.

What changes on partnership day

As a W-2 associate, your firm employs you. It sponsors a group health plan, contributes to your premium, and withholds your share from your paycheck. The health coverage is unremarkable — you enroll during open enrollment, pay your employee share, and forget about it.

The moment you become an equity partner in the partnership or LLP, you are no longer an employee in the legal sense. You're now an owner — a pass-through owner receiving a K-1, not a W-2. That change creates a coverage question that varies significantly by firm:

AmLaw 100 and 200 firms (most common): Partners can participate in the firm's group health plan, but the firm no longer contributes to your premium. You pay 100% of the applicable premium — employee + employer share combined — as a distribution from your draw. Family coverage at large urban firms typically runs $28,000–$40,000 per year at 2026 premium rates.
Mid-size and boutique firms: Some offer group coverage to partners on the same terms as associates; others exclude equity partners from the plan entirely, requiring you to find individual or marketplace coverage independently.
Firms with partner-specific benefit structures: A minority of firms treat health premiums as a firm expense paid to equity partners alongside their draw, with the premium flowing through as ordinary income (and deductible under §162(l) — see below).

The first question to ask your firm: Before your partnership effective date, contact HR and ask specifically: "As an equity partner in the firm's LLP, am I eligible to remain on the group health plan? If so, what premium amount will I be responsible for, and how is it processed through my draws?" Don't assume the answer — get it in writing before your effective date.

Your four options as an equity partner

1. Stay on the firm's group plan (if eligible)

If your firm allows equity partners to remain on the group plan, this is often the most practical option — the plan is already familiar, in-network providers are established, and administration is handled through the firm. The catch: you're paying the full premium from your draws, which is a significant out-of-pocket increase from associate-level cost-sharing.

The good news: premiums paid this way are deductible under IRC §162(l) as self-employed health insurance (see below), reducing your AGI — though not your SE tax base. Your advisor should confirm the exact mechanics of how your firm processes the premium, since the setup varies.

2. Spouse or domestic partner's employer plan

If your spouse has employer-sponsored health coverage, being added to their plan is typically the most cost-efficient option. Employer group premiums for a working spouse's family plan are heavily subsidized — you may pay $500–$1,200/month in employee contributions vs. $2,300–$3,300/month for the same tier of coverage on the firm's plan.

The important tax caveat: if you are eligible to participate in a subsidized employer health plan — your spouse's plan counts — you cannot claim the §162(l) self-employed health insurance deduction.¹ The deduction is unavailable for any month in which you were eligible to participate in a subsidized plan maintained by your spouse's employer, even if you chose not to enroll. This is a meaningful trade-off at high income levels: forgoing a $30,000 AGI deduction to save $15,000 in premiums may not pencil out, depending on your marginal rate.

3. ACA marketplace plan

Partners who can't access the firm's group plan and don't have a working spouse can purchase individual coverage on the ACA marketplace. At Big Law income levels, you will not qualify for premium tax credits — the credit phases out at 400% of the federal poverty level, well below equity partner income. Marketplace plans are available regardless of income, however, and ACA-compliant plans provide meaningful coverage options including HDHPs that make you HSA-eligible.

For a senior counsel or junior partner in a transition year with compressed income, marketplace coverage with a premium tax credit may briefly apply — worth modeling if income in the year of partnership drops below the threshold during a part-year situation.

4. COBRA as a transition bridge

COBRA allows you to continue your prior employer's group coverage for up to 18 months after a qualifying event (including a change in employment status that reduces your coverage). When you shift from W-2 associate to K-1 equity partner, the change in your employer-contribution eligibility may constitute a qualifying event entitling you to COBRA on the associate-tier group plan.

COBRA premiums are typically 102% of the full premium (employee + employer share + 2% administrative fee), making them expensive — but familiar, and useful for continuity during the enrollment window. COBRA is not a long-term solution at those premium levels, but it protects you during a coverage gap while you evaluate options at a new firm or during a lateral move. You have 60 days from the qualifying event to elect COBRA.²

The §162(l) self-employed health insurance deduction

Partners who pay health insurance premiums — whether for themselves, their spouse, or dependents — can deduct 100% of those premiums as an above-the-line adjustment to gross income under IRC §162(l).¹ This deduction reduces your AGI dollar-for-dollar, which has meaningful downstream effects: lower AGI reduces exposure to the NIIT, affects §199A QBI phase-out calculations, and lowers IRMAA-relevant MAGI for Medicare purposes.

What the §162(l) deduction does and doesn't do:

Reduces AGI — yes. Claimed on Schedule 1 (Form 1040), line 17, via Form 7206.
Reduces self-employment tax base — no. SE tax is computed on net earnings from self-employment before this deduction applies. The deduction saves income tax, not SE tax.
Available if eligible for subsidized employer plan — no. If you or your spouse is eligible to participate in a subsidized group plan maintained by an employer, the deduction is unavailable for the months of that eligibility, even if you didn't enroll.¹
Deduction amount exceeds income from the partnership — capped. The deduction cannot exceed your net self-employment income for the year from the partnership where the health plan is established.

At a 37% federal + 3.8% NIIT marginal rate (on investment income) and a 10%+ state rate in New York or California, a $35,000 health premium deduction is worth $17,000–$18,000 in annual tax savings. That's the real net cost of coverage — roughly half the stated premium for partners in top brackets.

The HSA opportunity: a benefit most new partners miss

If your coverage — whether through the firm's group plan or the ACA marketplace — is a qualifying High-Deductible Health Plan (HDHP), you are eligible to contribute to a Health Savings Account (HSA). Partners who were previously on a traditional low-deductible plan as associates, or on a firm FSA plan (which disqualifies HSA participation), often gain HSA access for the first time at partnership.

2026 HSA limits:

Self-only HDHP coverage: $4,400/year³
Family HDHP coverage: $8,750/year³
Catch-up contribution (age 55+, not yet on Medicare): additional $1,000/year

2026 HDHP qualifying thresholds:

Minimum deductible: $1,700 (self-only) / $3,400 (family)³
Maximum out-of-pocket: $8,500 (self-only) / $17,000 (family)³

The HSA is one of the few triple-tax-advantaged accounts available to high-income earners: contributions are pre-tax, growth is tax-free, and qualified medical withdrawals are tax-free. At equity partner income levels, the §162(l) deduction reduces your AGI, and HSA contributions provide a further above-the-line reduction. A partner age 55+ contributing $9,750 (family + catch-up) gets an immediate federal + state tax deduction on contributions, with the invested balance growing tax-free for future healthcare use in retirement — when healthcare costs will likely be substantial.

Critical timing detail: You cannot contribute to an HSA for any month in which you are also enrolled in Medicare. Equity partners who join Medicare at 65 and are still actively practicing must stop HSA contributions on their Medicare effective date. If you enroll in Medicare mid-year, prorate your HSA contribution for the months of HDHP eligibility — or use the "last-month rule" carefully with guidance from your advisor.

IRMAA planning for senior equity partners

Partners who are 65 or older and enrolled in Medicare face an additional health cost that younger partners don't: IRMAA (Income-Related Monthly Adjustment Amount), the Medicare surcharge applied to high-income beneficiaries.

IRMAA in 2026 is based on your MAGI from your 2024 tax return — a two-year lookback. For equity partners with large K-1 income, NQDC distributions, or large capital gains, MAGI tends to run well into IRMAA territory:

No IRMAA: MAGI ≤ $109,000 (single) / ≤ $218,000 (MFJ) → base Part B premium $202.90/month⁴
First IRMAA tier ($109K–$137,999 single / $218K–$275,999 MFJ): Total Part B premium $284.10/month (+$81.20 surcharge)⁴
Upper tiers: 5 tiers total, reaching $689.90/month total Part B premium at income above $500,000 (single) / $750,000 (MFJ)⁴

For a senior equity partner with $600,000 in K-1 income, IRMAA alone adds roughly $5,800/year in Medicare Part B surcharges — not including Part D surcharges. The IRMAA is assessed per person, so a working couple can face $11,600+/year in combined surcharges.

IRMAA management strategies for senior partners:

NQDC distribution timing: Pulling NQDC in the years before Medicare enrollment, rather than after, avoids stacking NQDC income into Medicare-covered years. Plan your distribution schedule before age 65 with your advisor.
Charitable giving: Qualified Charitable Distributions (QCDs) from IRAs reduce MAGI for IRMAA purposes; Donor-Advised Fund (DAF) contributions reduce AGI but not MAGI as specifically defined for IRMAA (MAGI for IRMAA = AGI + tax-exempt interest).
IRMAA appeals: If your 2026 IRMAA is based on 2024 income that no longer reflects your current situation (e.g., you retired in 2025), you can appeal using SSA Form SSA-44 with documentation of the qualifying life-changing event.⁴

New equity partner health insurance checklist

Before your partnership effective date: Ask HR whether equity partners can participate in the firm's group health plan and at what premium cost.
Compare your options: Firm group plan premium (100% of cost) vs. spouse employer plan vs. ACA marketplace HDHP. Factor in the §162(l) deduction — effective net cost at your marginal rate.
Check FSA vs. HSA transition: If you had a health FSA as an associate and you're switching to an HDHP, be aware of the FSA "run-out period" and ensure you don't carry an FSA balance into your HDHP months (which would disqualify HSA contributions).
Open an HSA if you're on an HDHP: The HSA can be at any bank or custodian — you don't have to use the plan administrator's default. For long-term growth, choose a custodian with investment options (Fidelity HSA is commonly used).
Update Form 7206 planning: The self-employed health insurance deduction is calculated annually on Form 7206. Ask your CPA to confirm your §162(l) eligibility based on your specific coverage structure and whether any months are disqualified by spouse's employer plan eligibility.
Model IRMAA exposure at age 65: If you're within 10 years of Medicare, have your financial advisor project your expected MAGI in years 63–67 under different retirement timing and NQDC distribution scenarios. IRMAA is manageable with advance planning; it's expensive if addressed reactively.

Related guides

Sources

Values verified as of May 2026. HSA limits per IRS Notice 2026-05. IRMAA thresholds per CMS 2026 fact sheet. §162(l) deduction rules are established law (permanent provision); confirm application with a CPA based on your specific coverage arrangement.