2025 Last-minute year-end medical plan strategies

If you are a small business with less than 50 employees, then the tax law does not require you to have a medical plan for employees, but you should.

Though the tax rules that apply to medical plans are straightforward when you have fewer than 50 employees.

When you have your spouse as your only employee in proprietorship, there’s a great rule that enables the 105-HRA family medical plan that’s exempt from the Affordable Care Act.

Review the five medical plan strategies in this post. You could find some big money waiting for you.

Big picture

Here are the five opportunities we will explain in this article:

Reimburse you 2025 Section 105 health reimbursement arrangement (HRA) medical expenses now.
Reimburse your qualified small employer health reimbursement arrangement (QSEHRA).
Reimburse your individual coverage health reimbursement arrangement (ICHRA).
Ensure that you take your S corporation health insurance deduction correctly.
Claim the tax credit for the health insurance you give your employees.

1. Reimburse Section 105 Expenses Now

If you are the sole owner-operator of your business, you should consider the Section 105 medical reimbursement plan we describe in the Updated Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement).

The Section 105 plan described in the article linked above works for

The Schedule C taxpayer with no employees other than his or her spouse and
The C corporation where the taxpayer is the only employee.

If you have a Section 105 medical reimbursement plan, ensure reimbursements are made before midnight on December 31 to qualify as business deductions this year.

2. Reimburse QSEHRAs before December 31

As a subscriber, you know that if the Section 105 plan described above does not work for you and you have fewer than 50 employees, the QSEHRA is a good option.

The 2025 inflation-adjusted QSEHRA limits on reimbursements for individually purchased health insurance and out-of-pocket medical expenses are $6,350 for self-only coverage and $12,800 for family coverage.

If you don’t have a 2025 plan in place and you have a January 1 start date, the IRS can assess a penalty of $50 per employee for your failure to give written notice to employees at least 90 days prior to the start of the QSEHRA.

The QSEHRA is a winning fringe-benefit compensation strategy for the small business owner:

You deduct the medical reimbursements to the employees as a business expense and don’t owe payroll taxes on the reimbursements.
Your employees pay neither income nor payroll taxes on the reimbursements.

3. Reimburse ICHRAs before December 31

As you may remember, a presidential executive order created a new health plan, effective for 2020 and later, available to employers of all sizes: the ICHRA.

An ICHRA allows you to reimburse employees for both individually purchased health insurance premiums and other medical expenses, and it requires employees to be covered by individual health plans rather than through group coverage.

4. Comply with S Corporation Rules for Health Insurance Deductions

If you are the owner of an S Corporation, make sure you comply with these two requirements before December 31.

The S Corporation has either paid for your health insurance or reimbursed you for the cost of the insurance.
The S Corporation includes the cost of your health insurance on your W2.

You still have time to get your S Corporation health insurance on both the corporate books and your W-2, but don’t put this off; time is running out.

If you, the owner-employee of your S corporation, don’t run your health insurance premiums through your S Corporation, you get no above-the-line deduction on your Form 1040. Instead, you deduct the insurance as an itemized deduction subject to the 7.5-per-cent-of-adjusted-gross-income floor, which can mean either a limited or no deduction for your health insurance.

5. Claim the health insurance tax credit

If you are an Affordable Care Act-defined small employer and you are about to cover your employees with group health insurance, you can claim a tax credit of 50 percent in tax year 2025 and 2026.

To qualify for the credit with your group health insurance plan, you must cover at least 50 percent of the cost of single health care coverage for each of your employees.

You earn full credit when you have 10 or fewer full-time equivalent employees and those employees have average annual full-time-equivalent wages of less than $25,000. If you have more employees and/or the earnings are higher, then the tax law phases out part or all of the credit.

You may not claim the credit on health coverage you give to yourself, your spouse, or other specified relatives.

This is only the big picture, of course, but here are some planning thoughts:

If you earned the credit in 2022, 2023, or 2024 but failed to claim it, file an amended return now.
If you plan on providing health insurance for your employees and you have not yet done so, you need to hurry so you can earn that 50 percent credit this year. On the other hand, you might want to start in 2026, so you have a full year of payments eligible for the credit.
The 50 percent tax credit is huge-that’s a great incentive. But group health insurance is expensive, and you only get the subsidies for 2 years. After that, you’re on your own, and your cost of group health insurance likely will continue to increase.

FAQs

What is a Section 105 HRA?
A Section 105 HRA is an employer-funded plan that reimburses employees for qualified medical expenses, including health insurance premiums, on a tax-free basis. It is not health insurance but a reimbursement benefit.
What is a QSEHRA?
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is an IRS-approved employer-funded plan for small businesses (under 50 full-time employees) to reimburse employees tax-free for individual health insurance premiums and other qualified medical expenses up to set limits [$6,350 individual / $12,800 family for 2025].
Are reimbursements taxable?
Reimbursements under an ICHRA are tax-free to employees and are deductible business expenses for employers, as long as regulations and documentation requirements are met.

BergerCPAFirst, with over 30+ years of experience, offers comprehensive tax preparation services for individuals and businesses nationwide. Our commitment is to provide personalized attention while ensuring compliance and maximizing tax benefits. If you have any questions or would like to schedule a consultation, please call (201) 587-9200 or send us an inquiry.