If you own a business and your family has real medical expenses (the kind that don’t come close to itemized deduction thresholds), you may be leaving deductions on the table. A Health Reimbursement Arrangement lets the business pay for the family’s medical costs and deduct them. The employee (you, or a family member you employ) gets the reimbursement tax-free.
Section 105 plan: the sole prop / single-member LLC version
This is the original. The business owner (typically a sole prop or single-member LLC) employs their spouse, the spouse picks family health insurance, the business reimburses the spouse for the family’s medical expenses through a written § 105 plan. The business deducts the reimbursements. The spouse-employee gets tax-free benefit. The business owner’s entire family is covered as the spouse’s dependents.
This does not work directly for an S-corp owner. Because the S-corp owner is treated as a more-than-2% shareholder, reimbursements to them or their spouse-employee are wages. There are workarounds (employ a non-shareholder spouse via the operating business, or use a different structure), but it’s more complex.
QSEHRA: the small employer version
For businesses with fewer than 50 full-time employees that do NOT offer a group health plan. The business sets a monthly allowance (max around $6,350 for self-only, $12,800 for family in 2025), and reimburses employees for premiums and qualified medical expenses up to that cap. The reimbursement is tax-free if the employee has minimum essential coverage.
S-corp owners with more than 2% ownership are excluded from the QSEHRA tax benefits (their reimbursements would be wages). For non-owner employees and for the owner’s family if covered under a non-owner spouse’s plan, it works.
ICHRA: the newest, most flexible version
Introduced in 2020 for any size employer. The business sets an allowance, the employees go buy individual health insurance on the marketplace or off, and the business reimburses for premiums and (optionally) medical expenses. ICHRAs can be designed by class (full-time, part-time, geographic, seasonal, salaried vs hourly).
An ICHRA replaces the group plan for the chosen classes. It does not work alongside a traditional group plan for the same class. For S-corp owners, the >2% shareholder rule still limits the tax benefit for the owner, but it’s a strong tool for the company’s W-2 employees and for spousal coverage structures.
What expenses qualify
Anything that would be a § 213 medical expense: premiums, doctor visits, prescriptions, dental, vision, chiropractic, mental health, eligible OTC items, transportation to medical care, even some long-term care. The full list is broader than people expect.
What to watch
- Written plan document. Required for all three. Without one, the reimbursements are wages.
- Nondiscrimination. § 105 plans and ICHRAs have rules about treating employees comparably. Excluding only the owner’s family creates issues.
- >2% S-corp shareholder limit. The owner can’t get tax-free benefit through the S corp directly. Plan around it.
- Coordination with marketplace subsidies. If an ICHRA is offered, the employee may lose marketplace subsidies they were getting.