2025 Year-End Medical Plan Strategies for Small Business Owners

If you run a small business with fewer than 50 employees, your 2025 year-end medical plan strategies can make a big difference in how much tax you pay and how well you take care of your team. The law doesn’t force you to offer a health plan if you have under 50 employees – but from a tax and retention standpoint, you almost always should.

The good news: when you stay under the 50-employee threshold, most of the medical plan rules are simpler and easier to work with. And if your spouse is your only employee in a sole proprietorship, you may even be able to use a powerful Section 105 health reimbursement arrangement (HRA) that is exempt from Affordable Care Act group plan rules.

Below are five year-end moves to review before December 31. Even implementing one or two of these 2025 medical plan strategies could free up real cash and protect more of your profits.

1. Reimburse Section 105 HRA Medical Expenses Before December 31

If you’re a sole owner-operator, don’t skip over the Section 105 medical reimbursement plan. In the right setup, it can turn large out-of-pocket medical costs into fully deductible business expenses.

In general, this strategy works best when:

• You file as a Schedule C sole proprietor and your only employee is your spouse; or
• You operate through a C corporation where you (or you and your spouse) are the only employees.

If you already have a Section 105 plan in place, make sure you actually reimburse the eligible 2025 medical expenses before midnight on December 31. The reimbursement is what creates the business deduction this year – not simply incurring the expense.

Going forward, consider putting yourself on a monthly reimbursement schedule for 2026 so you’re not scrambling at year-end.

2. Use Your 2025 QSEHRA Limits Before Year-End

If a spouse-employee Section 105 plan doesn’t fit your situation and you have fewer than 50 employees, a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) may be a better fit.

For 2025, the inflation-adjusted QSEHRA reimbursement limits are:

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

Those limits apply to the total annual reimbursements for individually purchased health insurance and eligible out-of-pocket medical expenses combined.

Key year-end actions:

• If you already have a QSEHRA in place for 2025, make sure all reimbursements you want to deduct for this year are processed by December 31.
• If you want a QSEHRA starting January 1, the law generally expects you to furnish written notice to eligible employees at least 90 days before the start of the QSEHRA plan year. There is a $50-per-employee penalty (capped annually) if you fail to provide the required notice – but many small employers decide the benefit is still worth it and rely on reasonable, good-faith compliance.

Done correctly, a QSEHRA is a strong fringe-benefit strategy because:

• Your business gets a tax deduction for the reimbursements, with no payroll tax on those amounts; and
• Employees generally receive the reimbursements free of income and payroll tax, as long as they maintain minimum essential coverage.

3. Reimburse Individual Coverage HRA (ICHRA) Expenses Before December 31

Starting in 2020, employers of any size gained another option: the Individual Coverage Health Reimbursement Arrangement (ICHRA). An ICHRA lets you reimburse employees for individually purchased health insurance premiums and certain other medical expenses when they are covered under individual health insurance (for example, through the Marketplace or a private exchange) instead of a traditional group plan.

If you already sponsor an ICHRA, treat year-end just like any other reimbursing arrangement:

• Confirm that employees have submitted eligible 2025 medical expenses and premiums; and
• Process reimbursements you want deducted in 2025 by December 31.

If you’re comparing a QSEHRA and an ICHRA for 2026, keep this in mind: QSEHRA is only for employers with fewer than 50 employees and has annual dollar caps, while ICHRA is available to employers of all sizes and does not have a statutory maximum reimbursement limit, but comes with more design rules and coordination requirements.

4. Fix Your S Corporation Health Insurance Deduction Before Year-End

If you own an S corporation and want to deduct your health insurance premiums above the line on your Form 1040, you must run those premiums through the S corporation correctly. Two requirements need to be satisfied before December 31:

• The S corporation must either pay the premiums directly or reimburse you for the cost of your health insurance; and
• The S corporation must include the cost of that health insurance in your Form W-2 as taxable wages (typically in Box 1, but not subject to Social Security and Medicare tax when handled properly).

If you skip these steps and simply pay the premiums personally, you likely lose the above-the-line self-employed health insurance deduction and are stuck with an itemized deduction subject to the 7.5% of adjusted gross income floor – which often means a much smaller or even zero deduction.

There’s still time to fix this before year-end in many cases, but you need to coordinate with your payroll and bookkeeping now so the reimbursement hits the 2025 books and your W-2 is prepared correctly.

5. Claim the Small Business Health Insurance Tax Credit

If you provide group health insurance to your employees and qualify as a small employer under the Affordable Care Act rules, you may be eligible for a valuable small business health care tax credit.

In broad terms, to qualify you generally must:

• Have a small number of full-time equivalent employees (FTEs);
• Pay average annual wages below an inflation-adjusted threshold; and
• Pay at least 50% of the cost of employee-only coverage for your workers.

When you qualify, the credit can be worth up to 50% of the employer-paid premiums for eligible small businesses (with a lower percentage for certain tax-exempt employers) and is generally available for only two consecutive tax years. That means you want to be intentional about when you start using it.

Some planning opportunities to consider:

• If you offered qualifying coverage in prior years but never claimed the credit, you may still be able to amend returns and claim it retroactively.
• If you are just now adding group coverage, you may want to structure the start date and employer contribution so you can maximize the credit for a full two-year window.
• Keep in mind that group health insurance is a long-term cost; the tax credit is generous but temporary, so you want to be sure the benefit remains affordable after the credit period ends.

For official eligibility rules, phaseout thresholds, and calculation details, see the IRS guidance on the Small Business Health Care Tax Credit.

Year-End Takeaways for 2025

Here are the key action steps to review with your advisor before the year closes:

• If you already have a Section 105 HRA in place and haven’t been reimbursing expenses regularly, issue a reimbursement now for eligible 2025 expenses and set up a consistent reimbursement process for 2026.
• If you’re considering a QSEHRA for 2026, start the implementation and notice process now so you avoid penalties and give employees time to choose coverage.
• Compare QSEHRA and ICHRA if you want more flexibility for employees or expect to grow beyond 50 employees.
• If you operate as an S corporation, make sure your 2025 health insurance premiums are properly reimbursed by the S corporation and reflected on your W-2 so you don’t lose the above-the-line deduction.
• If you currently provide group health insurance, check whether you qualify for the small business health care tax credit and whether prior-year returns should be amended to claim it.

Need help choosing and implementing the right 2025 medical plan strategy? A coordinated health benefits and tax plan can create big savings and better coverage for you and your team.

Ready to design a tax-efficient health benefits plan for 2025? Schedule a Free Tax Strategy Session to review your options before year-end.

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