2025 Year-End Medical Plan Tax Strategies for Small Business Owners

All small-business owners with one to 49 employees should have a medical plan in place for their business.

As you likely know, when you have 49 or fewer employees, you are not legally required to provide a medical plan, but you absolutely should. The tax benefits, employee satisfaction, and cost efficiencies make it one of the easiest wins in small-business planning.

Most health plan tax rules are simple when you have fewer than 50 employees.

And if your spouse is your only employee in a proprietorship, you may be able to use the powerful Section 105-HRA family medical plan that is exempt from the Affordable Care Act rules.

Take a few minutes to review these five medical plan strategies. You may find meaningful money on the table waiting for you.

Big Picture

Here are the five opportunities explained in this article:

1. Reimburse your 2025 Section 105 HRA medical expenses before year-end.
2. Reimburse your qualified small employer HRA (QSEHRA).
3. Reimburse your individual coverage HRA (ICHRA).
4. Ensure you take your S corporation health insurance deduction correctly.
5. Claim the tax credit for providing health insurance to your employees.

1. Reimburse Section 105 Expenses Now

If you are a sole-owner operator, consider the Section 105 medical reimbursement plan described in Updated Blueprint for Employee-Spouse 105-HRA. The Section 105 plan works for:

• Schedule C taxpayers with no employees other than a spouse
• C corporations where you (or you and your spouse) are the only employees

If you have a Section 105 HRA, make sure all reimbursements for 2025 occur before midnight on December 31 to secure your business deduction.

2. Reimburse QSEHRAs before December 31

If the Section 105 plan will not work for your situation and you have fewer than 50 employees, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) may be an excellent option. A QSEHRA allows small employers to reimburse employees for individually purchased health insurance premiums and out-of-pocket medical expenses tax-free, up to annual IRS limits.

The 2025 QSEHRA reimbursement limits are:

• $6,350 for self-only coverage
• $12,800 for family coverage

If you don’t have your 2025 plan in place and want a January 1 start date, remember that the IRS can assess a $50-per-employee penalty for failing to provide written notice at least 90 days before the plan year starts.

(If you face the $50 penalty and still want a January 1 start, just move forward. The penalty is small, and the IRS would need to find the issue during an audit.)

A QSEHRA remains one of the strongest fringe-benefit strategies for small businesses because:

• The business deducts reimbursements without payroll taxes
• Employees receive reimbursements tax-free

3. Reimburse ICHRAs before December 31

The ICHRA, introduced in 2020, is available to employers of all sizes. It allows you to reimburse employees for individual health insurance premiums and other medical costs.

Employees must be covered by individual health plans (either from the Marketplace or private insurance). ICHRAs provide enormous flexibility for small-business owners who want to offer benefits without the cost of group plans.

4. Comply with S Corporation Rules for Health Insurance Deductions

If you own an S corporation, you must meet two requirements before December 31:

1. The S corporation must either pay or reimburse your health insurance premiums.
2. The S corporation must include the cost of your health insurance on your W-2.

If you fail to run your premiums through the S corporation properly, you lose the above-the-line deduction on your personal return and are forced to rely on itemized deductions subject to the 7.5 percent AGI threshold—often resulting in little or no deduction.

Be sure your reimbursement occurs before December 31 and that the amount will appear correctly on your W-2.

5. Claim the Health Insurance Tax Credit

If you provide health insurance to employees, you may qualify for the small-business health care tax credit.

The credit is worth 50 percent of your employee health insurance costs for tax years 2025 and 2026 (limited to two consecutive years).

To qualify:

• You must cover at least 50 percent of the employee-only premium costs
• You earn full credit if you have 10 or fewer full-time-equivalent employees
• Those employees must have average wages below $25,000

You cannot claim the credit for health coverage provided to yourself, your spouse, or certain family members.

Additional planning thoughts:

• If you qualified for the credit in prior years and didn’t claim it, file amended returns.
• If you plan to offer group health insurance in 2026, you may be better off waiting until then to maximize your two years of credits.
• The credit is large, but group plans are costly after the credit period ends—plan carefully.

Takeaways

Here are five insights from this article:

1. If you have a Section 105 plan, reimburse remaining 2025 expenses now and move to a monthly system for 2026.
2. If you want a QSEHRA for 2026, implement it promptly—even with a potential $50-per-employee penalty.
3. If you want more flexibility for your employees, compare the ICHRA to the QSEHRA.
4. If you operate as an S corporation, ensure your health insurance is paid or reimbursed by the corporation and included on your W-2 before December 31.
5. If you offer group health insurance, determine whether you qualify for the 50 percent small-business health care tax credit for 2025 or prior years.

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