How to use a Health reimbursement arrangement to cut business taxes in 2026

A Health reimbursement arrangement in 2026 lets businesses reimburse employees for medical expenses and individual health insurance premiums, tax-free. The employer gets a full business deduction. The employee receives the reimbursement without any income tax, payroll tax, or Social Security withholding. For S Corporations and C Corporations, this is one of the most efficient ways to provide health benefits without the administrative burden of a traditional group health plan.

This article covers how QSEHRA 2026 limits work, how the ICHRA business deduction compares, which medical expenses qualify, and how different business entities can use HRA self-employed tax savings to reduce their tax bills. IRS Publication 969 provides the official guidance on Health reimbursement arrangements.

How Health reimbursement arrangements work in 2026

A Health reimbursement arrangement is an employer-funded plan that reimburses employees for qualified medical expenses. Unlike a Health savings account or a Flexible Spending Account, the HRA is funded entirely by the employer; employees do not contribute. The employer sets the annual allowance, and employees submit claims for eligible expenses up to that amount.

There are two main types of HRAs available to small and mid-size businesses:

• QSEHRA (Qualified Small Employer Health Reimbursement Arrangement): Designed for businesses with fewer than 50 full-time equivalent employees that do not offer a group health plan
• ICHRA (Individual Coverage Health Reimbursement Arrangement): Open to businesses of any size, including those that already offer group coverage to some employee classes

Both types allow tax-free reimbursement. Both require the employee to have minimum essential coverage. The main differences are eligibility rules, contribution limits, and how they interact with other group health plans.

QSEHRA contribution limits for 2026

The QSEHRA is designed for small employers. For 2026, the maximum annual reimbursement amounts are:

• Self-only coverage: $6,350 per year ($529.17 per month)
• Family coverage: $12,800 per year ($1,066.67 per month)

These limits are set by the IRS and adjusted annually for inflation. The employer can set a lower limit, but cannot exceed these caps. The same allowance must be offered to all eligible employees, though the amount may vary by age and family size.

QSEHRA requirements include the following:

1. The employer must have fewer than 50 full-time equivalent employees
2. The employer cannot offer a group health insurance plan to any employees
3. The employer must provide written notice to eligible employees at least 90 days before the start of each plan year
4. Employees must have minimum essential coverage to receive tax-free reimbursements

If an employee does not have minimum essential coverage, the reimbursements are included in the employee's taxable income. The employer still gets the business deduction either way.

ICHRA rules and the business deduction

The ICHRA business deduction is available to employers of any size. Unlike the QSEHRA, the ICHRA has no annual dollar cap set by the IRS; the employer chooses the reimbursement amount. This flexibility makes it attractive for larger businesses and those that want to offer different benefit levels to different employee classes.

Employee classes that can receive different ICHRA allowances include:

• Full-time employees vs. part-time employees
• Salaried employees vs. hourly employees
• Employees in different geographic locations
• Seasonal workers vs. permanent employees
• Employees covered by a collective bargaining agreement vs. non-union employees

The employer can offer traditional group insurance to one class and the ICHRA to another. An employee cannot be offered both; they must fall into one category. Employees who receive the ICHRA must purchase individual health insurance coverage to receive tax-free reimbursements.

Businesses subject to high healthcare costs, including those in states like New York and California, often use ICHRAs so employees can select plans on the individual market that best fit their needs. At the same time, the employer controls costs with a fixed monthly allowance.

S Corporation owner rules for HRA participation

S Corporation shareholders who own more than 2% of the company are treated as self-employed for health insurance purposes under IRC Section 1372. This creates a wrinkle in HRA self-employed tax savings planning. A 2%-or-greater shareholder-employee can participate in the company's HRA, but the reimbursements are included in the shareholder's W-2 as income subject to income tax. The reimbursements are not subject to payroll tax.

The shareholder then claims the self-employed health insurance deduction on their personal return, which offsets the W-2 inclusion. The net result is tax neutral for the shareholder but still produces a business deduction for the S Corporation on the reimbursement payment.

For C Corporation shareholder-employees, the treatment is more favorable. C Corporation owners can receive HRA reimbursements completely tax-free, with no W-2 inclusion and no income tax, because C Corporation shareholders are treated as regular employees for fringe benefit purposes. This is one area where C Corporations have a structural advantage over S Corporations for health benefit planning.

Partnerships have their own rules. All partners, regardless of ownership percentage, are treated as self-employed for fringe benefit purposes and cannot receive tax-free HRA benefits. The reimbursement is treated as a guaranteed payment, which is includable in the partner's gross income and subject to self-employment tax.

Eligible medical expenses under an HRA

HRAs can reimburse any expense that qualifies as a medical expense under IRC Section 213(d). The employer defines which categories are covered in the plan document. Common eligible expenses include:

1. Health insurance premiums, including individual market, COBRA, and Medicare premiums
2. Doctor visits, specialist consultations, and hospital charges
3. Prescription medications and over-the-counter drugs (since the CARES Act took effect in 2020)
4. Dental and vision care, including exams, glasses, and contacts
5. Mental health services and counseling

The plan must be documented in writing, and the employer must verify that the submitted expenses qualify for reimbursement before reimbursing them. Employers can use third-party HRA administrators to handle claims processing, compliance, and record keeping.

Business owners in states without a state income tax, such as Texas and Florida, still benefit from the federal deduction and payroll tax savings on HRA reimbursements. Businesses in these states can review their filing obligations through Texas and Florida.

Turn your health costs into a business deduction

Instead's comprehensive tax platform helps businesses set up and manage Health reimbursement arrangements alongside other tax strategies. Instead's intelligent system calculates the optimal contribution level based on your employee count and entity type, tracks reimbursements against annual limits, and generates the documentation needed for compliance. Explore tax savings strategies for your business, run tax reporting to quantify the HRA's impact on your bottom line, and compare pricing plans to find the right fit.

Frequently asked questions

Q: Can a sole proprietor set up an HRA?

A: No. HRAs require an employer-employee relationship. Sole proprietors without W-2 employees cannot establish an HRA for themselves. They can instead use the self-employed health insurance deduction, which provides an above-the-line deduction for health insurance premiums.

Q: What is the difference between a QSEHRA and an ICHRA?

A: The QSEHRA is for employers with fewer than 50 employees who do not offer group health insurance. It has IRS-set annual contribution limits of $6,350 for self-only and $12,800 for family coverage in 2026. The ICHRA has no size restriction, no IRS contribution cap, and can be offered alongside group insurance to different employee classes.

Q: Are HRA reimbursements taxable for S Corporation shareholders?

A: For shareholders owning more than 2% of the S Corporation, HRA reimbursements are included in the shareholder's W-2 as income. The shareholder can then claim the self-employed health insurance deduction on their personal return to offset this income. Shareholders who own 2% or less receive tax-free reimbursements, like regular employees.

Q: Can an HRA cover dental and vision expenses?

A: Yes. HRAs can reimburse any expense that qualifies as a medical expense under IRC Section 213(d), which includes dental exams, fillings, orthodontics, eye exams, prescription glasses, and contact lenses.

Q: Does an employee need health insurance to use an HRA?

A: For QSEHRAs and ICHRAs, employees must have minimum essential coverage to receive tax-free reimbursements. Without coverage, the reimbursements are taxable income. Some integrated HRAs, when paired with group plans, have different rules.