2026 Section 105 HRA / QSEHRA Health Reimbursement Deduction Limits: Complete Guide

2026 Section 105 HRA / QSEHRA Health Reimbursement Deduction Limits: Complete Guide

Understanding the section 105 HRA / QSEHRA health reimbursement deduction limit is essential for every business owner and self-employed professional seeking to reduce their 2026 tax bill through smarter health benefits. For 2026, the QSEHRA allows small employers to reimburse employees up to $5,850 (self-only) or $13,050 (family coverage) tax-free, per IRS Revenue Procedure 2025-32. Meanwhile, Section 105 HRAs carry no fixed statutory dollar cap — making them a powerful but often misunderstood tool for eligible businesses.

This information is current as of 6/11/2026. Tax laws change frequently. Verify updates with the IRS if reading this later.

Table of Contents

• Key Takeaways
• What Is a Section 105 HRA?
• What Is a QSEHRA and Who Qualifies?
• What Are the 2026 QSEHRA Deduction Limits?
• How Do Section 105 HRA Deductions Work for the Self-Employed?
• How Does the Section 105 HRA Work for S-Corp Owners?
• How Do Section 105 HRA and QSEHRA Compare to Other Health Options?
• How Do You Set Up a Section 105 HRA or QSEHRA in 2026?
• Uncle Kam in Action: Real-World HRA Tax Savings
• Next Steps
• Related Resources
• Frequently Asked Questions

Key Takeaways

• For 2026, the QSEHRA self-only limit is $5,850 and the family limit is $13,050 per IRS Rev Proc 2025-32.
• Section 105 HRAs have no fixed statutory dollar cap — they are limited by plan design and nondiscrimination rules, not annual IRS limits.
• The QSEHRA is available only to employers with fewer than 50 full-time employees who do not offer a group health plan.
• Self-employed sole proprietors cannot directly use a Section 105 HRA for themselves — but they may use the spouse-as-employee strategy or S-corp structure.
• QSEHRA reimbursements are tax-free to employees and fully deductible as a business expense for the employer.

What Is a Section 105 HRA?

A Health Reimbursement Arrangement, or HRA, is one of the most powerful and flexible tools in a business owner’s tax strategy toolkit. Under IRS Internal Revenue Code Section 105, employers can establish a formal plan to reimburse employees for out-of-pocket medical expenses and health insurance premiums. These reimbursements are completely tax-free to the employee and fully deductible as a business expense for the employer.

This arrangement is called a Section 105 HRA because it derives its authority from IRC § 105, which governs amounts received under employer accident and health plans. When properly structured, every dollar reimbursed under a Section 105 HRA converts a personal, after-tax medical expense into a pre-tax business deduction — a powerful tax arbitrage that benefits both employer and employee.

The Key Features of a Section 105 HRA

Section 105 HRAs share several defining characteristics. Understanding these features helps business owners determine whether this strategy applies to their situation. Here are the core characteristics:

• Employer-funded only: Employees cannot contribute to an HRA. The employer sets and funds the benefit.
• No statutory dollar cap: Unlike FSAs or QSEHRAs, IRC § 105 itself places no annual maximum on reimbursements.
• Tax-free reimbursements: Amounts paid to employees are excluded from gross income under IRC § 105(b).
• Nondiscrimination rules apply: The plan must not discriminate in favor of highly compensated employees under IRC § 105(h).
• Qualified medical expenses only: Reimbursements must cover expenses listed in IRS Publication 502, such as premiums, deductibles, and copays.
• Written plan document required: A formal plan document must be adopted before claims are made.

Why Section 105 HRAs Are Especially Valuable for Business Owners

For small business owners and entrepreneurs, the Section 105 HRA allows total flexibility. The employer decides how much to reimburse, which employees are eligible, and which medical expenses qualify. Furthermore, because there is no annual IRS-set limit, a well-structured Section 105 HRA can reimburse tens of thousands of dollars annually for the right business entity — far exceeding the QSEHRA caps discussed below.

However, there is an important limitation. The ACA market reform rules effectively prohibited standalone HRAs for most employers unless they were integrated with a group health plan — or fell under one of the specific carve-out categories like the QSEHRA or ICHRA. Consequently, traditional Section 105 HRAs are most commonly used in combination with a group health plan, or through specific eligible structures like C-corporations, or via the spouse-as-employee strategy for sole proprietors. Moreover, strategic tax planning helps owners select the right structure for maximum deductions.

What Is a QSEHRA and Who Qualifies?

The QSEHRA was established by the 21st Century Cures Act in 2016 to give small employers an affordable way to help employees pay for health insurance without sponsoring a traditional group plan. The IRS issued comprehensive guidance in IRS Notice 2017-67, which remains the foundational regulatory authority for QSEHRA administration alongside the annual limits set each year by IRS revenue procedures.

For 2026, the QSEHRA remains one of the most accessible and compliant health benefit options for small business owners who want to offer a meaningful benefit without the complexity or cost of group insurance. Working with a tax strategist who understands HRA structures is critical to setting this up correctly.

QSEHRA Eligibility Requirements for 2026

To offer a QSEHRA in 2026, an employer must meet all of the following criteria. Missing even one requirement disqualifies the arrangement:

• Fewer than 50 full-time employees: The employer must not be an Applicable Large Employer (ALE) under the ACA.
• No group health plan offered: The employer cannot simultaneously offer a traditional group health plan to any employees.
• All eligible employees must be covered: The QSEHRA must be offered to all eligible full-time employees on the same terms (except for variations based on age and family size).
• Written notice required: Employees must receive written notice at least 90 days before the plan year begins, or upon hire if sooner.
• Employees must have MEC: Reimbursements are only tax-free when the employee has minimum essential coverage (MEC) — i.e., individual health insurance.

Who Is an Eligible Employee Under the QSEHRA?

Generally, all common-law employees qualify. However, employers may exclude certain categories: employees under age 25, employees with fewer than 90 days of service, part-time or seasonal employees, and employees covered by a collective bargaining agreement. Additionally, the QSEHRA rules state that it cannot discriminate in favor of highly compensated employees — benefits must be offered on equal terms based only on age and family status.

What Are the 2026 QSEHRA Deduction Limits?

Every year, the IRS adjusts the QSEHRA limits for inflation. The 2026 limits were established by IRS Revenue Procedure 2025-32, released in October 2025. These limits represent the maximum amount a qualifying small employer can reimburse each eligible employee on a tax-free basis under a QSEHRA during the 2026 plan year.

Furthermore, the limit is prorated on a monthly basis. If an employee is enrolled in the QSEHRA for only part of the year — for example, six months — the maximum tax-free reimbursement is one-half of the annual limit. This prorated rule applies based on the number of months the employee is enrolled, not the calendar year as a whole.

2026 QSEHRA Annual Limits Table

Tax Year	Self-Only Maximum	Family Maximum	IRS Authority
2026 (current)	$5,850	$13,050	Rev Proc 2025-32
2025 (prior year)	$6,150	$12,450	Rev Proc 2024-40
2024	$6,150	$12,450	Rev Proc 2023-34
2023	$5,850	$11,800	Rev Proc 2022-38
2022	$5,450	$11,050	Rev Proc 2021-45

Note: Always verify the current year limits directly with IRS Publication 15-B or the applicable IRS Revenue Procedure, as limits are subject to annual inflation adjustments.

What Happens When Reimbursements Exceed the 2026 Limits?

Excess QSEHRA reimbursements — amounts above the 2026 annual limits — are treated as taxable wages to the employee. They must be reported on Form W-2, Box 1, and are subject to income tax withholding and FICA taxes. Consequently, an employer who inadvertently reimburses more than the cap faces payroll tax liability and potential penalties. Therefore, precise recordkeeping and plan monitoring are essential throughout the year.

Prorating the 2026 QSEHRA Limit: A Practical Example

Suppose you hire a new employee on July 1, 2026. That employee is eligible for the QSEHRA for six months (July through December). The prorated self-only limit for this employee equals $5,850 ÷ 12 × 6 = $2,925. Therefore, your maximum tax-free reimbursement for this employee in 2026 is $2,925. Accordingly, plan contributions should be set up to reflect this proration from the start.

How Do Section 105 HRA Deductions Work for the Self-Employed?

This is one of the most frequently misunderstood areas in small business tax planning. A sole proprietor, single-member LLC owner, or general partner is not considered a common-law employee of their own business. As a result, they cannot receive tax-free HRA reimbursements for their own medical expenses from their own business entity — at least not directly. However, several legitimate strategies allow self-employed individuals to access comparable or even superior tax benefits.

Strategy 1: The Spouse-as-Employee Approach

The most widely used Section 105 HRA strategy for sole proprietors involves legitimately employing a spouse as a bona fide W-2 employee of the business. Here is how it works:

• The spouse performs real, documented work for the business and receives reasonable W-2 compensation.
• The business establishes a Section 105 HRA plan that covers the employee-spouse and their family (which includes the business owner).
• The HRA reimburses the family’s medical expenses, including premiums and out-of-pocket costs.
• These reimbursements are deductible as a business expense on Schedule C (not subject to the 7.5% AGI floor for itemized medical deductions).

This strategy can generate substantial tax savings. For example, if a self-employed business owner in the 22% federal bracket uses a Section 105 HRA to reimburse $12,000 in family medical expenses, the federal income tax savings amount to approximately $2,640 — plus additional state income tax savings and, importantly, self-employment tax savings, since the business deduction reduces net self-employment income.

Use our Self-Employment Tax Calculator to estimate how much your self-employment tax burden decreases when you add a Section 105 HRA deduction.

Strategy 2: Operating as a C-Corporation

C-corporation owners who receive W-2 wages from their own company are treated as common-law employees. Therefore, a C-corp can provide a Section 105 HRA to the owner-employee and deduct 100% of reimbursements as a business expense. Critically, because the Section 105 HRA has no annual statutory cap, a C-corp owner can potentially reimburse substantial medical costs without any IRS-imposed limit — subject only to the plan’s terms and nondiscrimination rules.

What About the Self-Employed Health Insurance Deduction?

Sole proprietors and single-member LLC owners still have access to the self-employed health insurance deduction under IRC § 162(l), which allows deduction of health, dental, and long-term care premiums for the owner and family above the line on their Form 1040. However, this deduction has limitations — it cannot exceed net self-employment income, and it does not reduce self-employment tax. In contrast, a properly structured Section 105 HRA deducted as a Schedule C business expense can reduce both income tax and the self-employment tax base, making it potentially more valuable.

How Does the Section 105 HRA Work for S-Corp Owners?

S-corporation owners face a unique — and sometimes frustrating — set of rules when it comes to health benefits. Under the tax code, a greater-than-2% S-corp shareholder is treated as a partner for benefit purposes. This means the S-corp cannot provide a traditional Section 105 HRA to the owner-shareholder in the same way a C-corp can. Instead, the IRS requires a specific workaround.

The S-Corp Health Insurance Workaround in 2026

Here is the compliant process for S-corp owners as of 2026:

• The S-corp pays the health insurance premium (or reimbursements) directly on behalf of the shareholder-employee.
• The premium amount is added to Box 1 of the shareholder’s W-2 as additional wages (but not to boxes 3 or 5 — not subject to FICA).
• The shareholder then claims the self-employed health insurance deduction on Form 1040 under IRC § 162(l), deducting premiums above the line.
• The deduction reduces AGI but does not reduce self-employment tax.

Can S-Corp Owners Use a QSEHRA?

Yes, S-corp owners can offer a QSEHRA to their non-shareholder W-2 employees. However, the greater-than-2% shareholder-employee themselves cannot receive tax-free QSEHRA reimbursements, per IRS Notice 2017-67 guidance. The QSEHRA is an excellent tool for S-corp owners who want to provide health benefits to their non-owner employees without sponsoring a full group health plan. For a business with five employees and no group plan, the 2026 QSEHRA limits allow the company to reimburse up to $5,850 per employee (self-only) or $13,050 (family) in premium assistance — entirely deductible by the corporation.

Working with experienced tax strategists ensures your S-corp health benefit structure is both compliant and optimized for maximum tax efficiency in 2026.

How Do Section 105 HRA and QSEHRA Compare to Other Health Options?

Small business owners frequently ask: which health reimbursement strategy is right for my situation? The answer depends on your entity type, number of employees, existing group health plans, and total benefit budget. Therefore, understanding the comparison is essential before implementing any plan.

Comparison Table: Section 105 HRA vs. QSEHRA vs. ICHRA

Feature	Section 105 HRA	QSEHRA (2026)	ICHRA
Annual Dollar Cap	None (plan-set)	$5,850 / $13,050	None (employer-set)
Employer Size	Any size	Under 50 FTEs only	Any size
Group Plan Required?	Often integrated with one	No group plan allowed	No group plan needed
Owner/Sole Prop	Via spouse or C-corp	Employees only (not owner)	Employees only (not owner)
Deductible to Employer	Yes, 100%	Yes, 100%	Yes, 100%
Tax-Free to Employee	Yes	Yes (within limits)	Yes
ACA Premium Tax Credit	Limits eligibility	Reduces credit dollar-for-dollar	May limit eligibility

QSEHRA and the ACA Premium Tax Credit Interaction

This interaction is critical to understand. When an employee receives QSEHRA reimbursements, those amounts reduce the employee’s ACA Premium Tax Credit on a dollar-for-dollar basis. Therefore, an employee with lower income who would otherwise qualify for a large Marketplace premium subsidy will see that credit reduced by any QSEHRA benefit they receive. Employers must notify employees of the QSEHRA amount in advance so employees can make informed decisions about their Marketplace enrollment.

How Do You Set Up a Section 105 HRA or QSEHRA in 2026?

Many business owners delay implementing HRA strategies because they assume the setup is complicated. In reality, the steps are straightforward — but the documentation requirements are strict. The IRS requires written plan documents and notice requirements to be met before any reimbursements are processed. Our tax advisory team can walk you through each step.

Step-by-Step: Setting Up a QSEHRA in 2026

• Step 1 — Confirm eligibility: Verify you have fewer than 50 full-time equivalent employees and do not offer a group health plan.
• Step 2 — Set your benefit amount: Decide on a dollar amount up to the 2026 limits ($5,850 self-only / $13,050 family).
• Step 3 — Draft a written plan document: The plan must be formally adopted before claims can be submitted.
• Step 4 — Send required employee notices: Notify all eligible employees at least 90 days before the plan year begins (or upon hire). The notice must include the maximum benefit amount.
• Step 5 — Verify employee insurance: Collect proof of minimum essential coverage from each employee before processing reimbursements.
• Step 6 — Process reimbursement claims: Establish a claims procedure that requires employees to submit receipts or explanation-of-benefits documents.
• Step 7 — Report on W-2: Report the QSEHRA benefit amount in Box 12 of each employee’s W-2 using Code FF, regardless of whether it was taxable or not.

Step-by-Step: Setting Up a Section 105 HRA (Spouse-Employee Strategy)

• Step 1 — Establish genuine employment: The spouse must perform real services and receive reasonable market-rate compensation on a W-2.
• Step 2 — Draft a written HRA plan document: The plan must define the benefit, eligible expenses, and terms before implementation.
• Step 3 — Ensure nondiscrimination compliance: If you have other employees, the HRA must not discriminate in favor of highly compensated employees under IRC § 105(h).
• Step 4 — Reimburse qualified medical expenses: The spouse-employee submits medical receipts; the business reimburses from its bank account.
• Step 5 — Deduct on Schedule C: The total reimbursements are deducted as a business expense — not as a medical deduction — on Schedule C, reducing both income tax and self-employment tax.

Qualified Medical Expenses Eligible for Reimbursement

Both Section 105 HRAs and QSEHRAs can reimburse the wide range of expenses defined as “medical expenses” under IRS Publication 502. These include:

• Health, dental, and vision insurance premiums
• Prescription medications
• Doctor, hospital, and specialist visits
• Deductibles, copays, and coinsurance
• Mental health and therapy services
• Chiropractic and acupuncture (when medically necessary)
• Long-term care insurance premiums (within IRS age-based limits)
• COBRA and Medicare premiums (if retired or separated from employment)

 

 

Uncle Kam in Action: Real-World HRA Tax Savings

Client Snapshot: Marcus is a 38-year-old freelance software developer who operates as a sole proprietorship under a single-member LLC. He files as a self-employed individual and has significant medical expenses each year.

Financial Profile: Marcus earns approximately $145,000 annually from consulting contracts. His family — himself, his spouse Sarah, and two children — incurs about $14,000 per year in medical expenses, including $7,200 in health insurance premiums and $6,800 in deductibles, copays, and prescriptions.

The Challenge

Before working with Uncle Kam, Marcus was deducting his health insurance premiums using the self-employed health insurance deduction under IRC § 162(l). However, this deduction did not reduce his self-employment tax base. Moreover, the remaining $6,800 in out-of-pocket medical costs exceeded the 7.5% AGI threshold for itemized deductions only barely, providing minimal benefit on Schedule A. In short, Marcus was leaving significant money on the table each year.

The Uncle Kam Solution

Uncle Kam recommended the spouse-as-employee Section 105 HRA strategy. Sarah was already helping Marcus with administrative tasks — scheduling, invoicing, and client communication. Uncle Kam formalized this arrangement by:

• Establishing Sarah as a legitimate W-2 employee with documented job duties and a reasonable $28,000 salary.
• Drafting a formal Section 105 HRA plan document covering the family’s medical expenses.
• Processing $14,000 in family medical expense reimbursements through the HRA during the 2026 tax year.
• Deducting the $14,000 as a business expense on Schedule C — reducing both taxable income and self-employment income.

The Results

The Section 105 HRA strategy generated remarkable, measurable results for Marcus’s 2026 tax year:

• Federal Income Tax Savings: $14,000 deduction × 22% bracket = $3,080
• Self-Employment Tax Savings: $14,000 × 14.13% (net SE rate) = $1,978
• Total Tax Savings: Approximately $5,058 in combined federal tax savings.
• Uncle Kam Fee: $1,800 for full implementation and planning.
• First-Year ROI: $5,058 savings ÷ $1,800 investment = 181% return in year one alone.

Marcus now saves over $5,000 annually by using expenses he was already paying — simply restructured through the right tax vehicle. Read more success stories like Marcus’s in our client results archive.

Next Steps

Understanding the section 105 HRA / QSEHRA health reimbursement deduction limit for 2026 is a powerful first step — but implementation is where the real tax savings happen. Take action now with these concrete next steps. Whether you are a sole proprietor, S-corp owner, or small business employer, our tax preparation and filing team is ready to guide you.

• Step 1: Determine your entity type and which HRA structure fits your situation (sole prop, S-corp, C-corp).
• Step 2: Calculate your annual medical expenses to determine the potential deduction value and tax savings.
• Step 3: Review the 2026 QSEHRA limits — $5,850 self-only and $13,050 family — to determine if a QSEHRA fits your employee benefit needs.
• Step 4: Consult a qualified tax professional to draft your written HRA or QSEHRA plan document before making any reimbursements.
• Step 5: Schedule a strategy session with Uncle Kam’s tax strategy team to model your specific tax savings scenario for 2026.

Related Resources

• Uncle Kam Tax Strategy Services — Maximize Your Deductions
• Self-Employed Tax Guide — 1099 Contractor Strategies for 2026
• Entity Structuring — Find the Right Business Structure
• Uncle Kam Tax Guides — Comprehensive 2026 Resources
• Frequently Asked Tax Questions — Uncle Kam FAQ Hub

Frequently Asked Questions

What is the difference between a Section 105 HRA and a QSEHRA in 2026?

A Section 105 HRA is a broad employer-funded medical reimbursement plan under Internal Revenue Code Section 105. It has no statutory dollar cap — the employer sets the benefit amount. A QSEHRA is a specific type of HRA created by Congress for small employers with fewer than 50 employees. For 2026, the QSEHRA has IRS-set annual limits of $5,850 (self-only) and $13,050 (family). Both allow tax-free reimbursements to employees and are 100% deductible by the employer. However, the QSEHRA requires no group health plan, while many Section 105 HRAs are integrated with group coverage.

Can a self-employed person use a Section 105 HRA for their own medical expenses?

Not directly. A sole proprietor or single-member LLC owner is not a common-law employee of their own business. Therefore, they cannot receive tax-free HRA reimbursements for themselves. However, they can use a Section 105 HRA through a legitimate spouse-as-employee arrangement or by operating as a C-corporation. In those structures, the owner’s family medical expenses become fully deductible business expenses — reducing both income tax and self-employment tax. S-corp owners follow a separate premium reporting process under IRC § 162(l).

What are the exact 2026 QSEHRA contribution limits?

Per IRS Revenue Procedure 2025-32, the 2026 QSEHRA annual limits are $5,850 for self-only coverage and $13,050 for family coverage. These limits are prorated monthly for employees enrolled for only part of the year. Reimbursements above these caps are treated as taxable wages and must be reported on Form W-2. The IRS adjusts these limits annually for inflation, so always confirm current figures with IRS Publication 15-B or the current Revenue Procedure.

Does the QSEHRA affect an employee’s ACA Premium Tax Credit?

Yes. When an employee receives QSEHRA reimbursements, the amount reduces their ACA Premium Tax Credit on a dollar-for-dollar basis. For example, if an employee is eligible for a $300 monthly Marketplace credit but receives $250 per month from the QSEHRA, only $50 of the credit remains. Employers must include the QSEHRA amount in the employee notice so employees can properly account for this offset when enrolling in Marketplace coverage. For higher-income employees who do not qualify for the Premium Tax Credit, this interaction is irrelevant.

How do I report QSEHRA reimbursements on employee W-2 forms?

Employers must report the total QSEHRA benefit provided during the year in Box 12 of each employee’s W-2 using Code FF. This reporting is required regardless of whether the reimbursements were within the annual limit (tax-free) or exceeded it (taxable). For reimbursements that exceeded the annual 2026 cap, the excess must also appear in Box 1 as taxable wages. Employers should keep detailed reimbursement records throughout the year to ensure accurate W-2 reporting at year-end.

What happens if a small employer offers a QSEHRA and also provides a group health plan?

An employer cannot offer both a QSEHRA and a group health plan simultaneously. Offering a group health plan disqualifies the employer from maintaining a QSEHRA. If an employer crosses the 50-employee threshold and becomes an Applicable Large Employer, they also lose QSEHRA eligibility going forward. In that case, the employer may wish to transition to an ICHRA (Individual Coverage HRA), which has no employer-size restriction and no annual dollar cap set by the IRS.

Can S-corp owner-employees receive QSEHRA benefits?

Greater-than-2% S-corp shareholders cannot receive tax-free QSEHRA reimbursements for themselves, per IRS Notice 2017-67. They are treated as partners for fringe benefit purposes. However, the S-corp can absolutely offer a QSEHRA to non-shareholder W-2 employees. The shareholder-employee instead uses the separate S-corp health insurance reporting mechanism: premiums are reported as W-2 income and then deducted by the shareholder under IRC § 162(l) on their personal Form 1040.

Does the One Big Beautiful Bill Act (OBBBA) affect Section 105 HRA or QSEHRA rules in 2026?

The One Big Beautiful Bill Act, signed into law July 4, 2025, primarily introduced the Working Families Tax Cuts — including new deductions for tips, overtime pay, and car loan interest. As of June 2026, no provisions of the OBBBA directly modified Section 105 HRA rules or QSEHRA contribution limits. The 2026 QSEHRA limits remain governed by IRS Revenue Procedure 2025-32. However, since new legislation can affect various tax areas throughout the year, always confirm current rules with the IRS official announcements page or a qualified tax professional.

What records must I keep for a Section 105 HRA or QSEHRA?

Thorough recordkeeping protects the deduction in the event of an IRS audit. At a minimum, retain: the written HRA plan document; signed employee enrollment forms; all reimbursement requests with original receipts or Explanation of Benefits (EOB) statements; proof of minimum essential coverage for each employee; written notices provided to employees; and annual W-2 Code FF reporting records. Keep all documentation for at least seven years. Robust records demonstrate the arrangement is a legitimate employer health benefit — not a disguised personal expense.

Last updated: June, 2026