HRA reimbursement limits continue annual increases

Enhanced reimbursement limits transform employee healthcare benefits

The One Big Beautiful Bill Act delivers substantial improvements to Health reimbursement arrangement programs, creating unprecedented opportunities for businesses to provide tax-advantaged healthcare benefits while generating significant deductions. For 2026, the annual inflation adjustments to QSEHRA contribution limits continue their upward trajectory, while ICHRA programs maintain their unlimited flexibility for employers seeking maximum contribution potential.

These enhanced limits represent a strategic opportunity for businesses of all sizes to invest in employee healthcare while simultaneously reducing their tax liability. The combination of increased reimbursement caps, expanded rollover provisions, and new coordination rules between Health reimbursement arrangement programs and other tax-advantaged accounts creates a robust framework for comprehensive healthcare cost management.

Understanding how these expanded limits work within the broader context of the One Big Beautiful Bill Act becomes essential for businesses planning their 2026 employee benefits strategies. With proper implementation and strategic coordination, eligible employers can maximize their business deductions while providing meaningful healthcare support to their workforce.

Understanding the 2026 QSEHRA contribution limits

The QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) remains a valuable option for businesses with fewer than 50 full-time equivalent employees that do not offer group health insurance. The annual inflation adjustments ensure that these contribution limits keep pace with rising healthcare costs.

Key 2026 QSEHRA contribution limits include:

• Individual coverage maximum increases to approximately $6,550 annually
• Family coverage maximum rises to roughly $13,200 annually
• Inflation indexing based on the Consumer Price Index for medical care
• Annual announcements are released by the IRS each fall for the following year

These limits apply to the total amount employers can contribute toward employee medical expenses and health insurance premiums throughout the plan year. The structured increases provide predictable planning parameters while ensuring the benefit maintains its purchasing power.

For small businesses evaluating their options, QSEHRA offers administrative simplicity and meaningful tax benefits. The employer receives a full business deduction for all qualifying reimbursements, while employees receive tax-free benefits for maintaining minimum essential coverage.

ICHRA unlimited contribution flexibility expands opportunities

Unlike QSEHRA, which has statutory caps, ICHRA (Individual Coverage Health Reimbursement Arrangements) allow employers to contribute unlimited amounts. This flexibility makes ICHRA particularly attractive for businesses seeking to provide generous healthcare benefits without arbitrary contribution ceilings.

The ICHRA advantage includes the following benefits:

1. No federal contribution limits on employer reimbursements
2. Ability to vary contributions by employee classification
3. Scalability from small businesses to large enterprises
4. Integration options with marketplace individual health plans
5. Geographic rate variation for multi-location employers

Employers can establish different contribution amounts for distinct employee classes based on legitimate business criteria. Common classification factors include full-time versus part-time status, geographic location, job function, and length-of-service requirements.

This classification flexibility allows businesses to tailor their healthcare investment to workforce demographics and competitive labor market conditions while maintaining compliance with nondiscrimination requirements.

One Big Beautiful Bill Act provisions affecting HRA programs

The One Big Beautiful Bill Act includes several provisions that directly affect how Health reimbursement arrangement programs interact with other tax-advantaged healthcare accounts. These changes create new planning opportunities while streamlining previously complex coordination rules.

FSA and HRA to HSA rollover provisions

Section 110210 of the One Big Beautiful Bill Act establishes new rollover pathways for employees transitioning to High Deductible Health Plans. Employees switching to an HDHP after four or more years without such coverage can now roll funds from their Flexible Spending Account or Health reimbursement arrangement into a Health savings account.

Rollover contribution limits under the new provision include:

• Single coverage rollover maximum of $3,200
• Family coverage rollover maximum of $6,400
• One-time rollover opportunity per qualifying transition
• Coordination with annual HSA contribution limits

This provision addresses a longstanding barrier that prevented employees with existing HRA balances from maximizing their Health savings account contributions when transitioning to high-deductible coverage.

HSA compatibility with spousal FSA coverage

Section 110212 clarifies that individuals can contribute to Health savings accounts even when their spouse maintains a Health Flexible Spending Account, provided the FSA does not reimburse expenses for the HSA owner. This restriction ensures the spouse's FSA covers only the spouse's expenses, not the HSA-eligible individual's.

The practical impact allows married couples to optimize their healthcare account strategies without forfeiting either spouse's preferred arrangement. Strategic coordination between spousal accounts can maximize total family tax advantages while maintaining full compliance.

Calculating your business deduction potential

The tax benefits from Health reimbursement arrangement programs flow directly to your business as ordinary deductions, reducing taxable income dollar-for-dollar. Understanding how to calculate your potential savings helps justify the administrative investment required to establish and maintain an HRA program.

Example calculation for QSEHRA implementation:

1. Number of eligible employees with family coverage: 8
2. Annual QSEHRA contribution per employee: $13,200
3. Total annual HRA contributions: $105,600
4. Business tax rate: 32%
5. Annual tax savings: $105,600 × 32% = $33,792

Example calculation for ICHRA implementation:

• Number of eligible employees: 15
• Average annual ICHRA contribution: $8,000 per employee
• Total annual HRA contributions: $120,000
• Business tax rate: 24%
• Annual tax savings: $120,000 × 24% = $28,800

These calculations demonstrate the substantial deduction potential available through properly structured HRA programs. The actual savings depend on your specific employee count, contribution levels, and applicable tax rates.

Eligible medical expenses and qualifying reimbursements

Health reimbursement arrangement programs can reimburse employees for a comprehensive range of qualifying medical expenses as defined under IRC Section 213. Understanding which expenses qualify helps ensure proper plan administration and optimal benefit utilization.

Qualifying expenses under HRA programs include:

1. Individual health insurance premiums and marketplace plan costs
2. Medicare Part B, Part C, and Part D premiums
3. Prescription medications and medical supplies
4. Dental examinations, cleanings, and treatment procedures
5. Vision care, including examinations, glasses, and contact lenses
6. Mental health services and counseling
7. Preventive care and wellness screenings

The One Big Beautiful Bill Act expands qualifying expense categories to include Direct Primary Care arrangement fees, with monthly limits of $150 for individuals and $300 for families. These DPC fees now qualify as medical expenses eligible for HRA reimbursement, creating additional flexibility for employees seeking alternative healthcare delivery models.

Employers retain discretion over which qualifying expenses their HRA program covers, enabling customization based on workforce needs and budget constraints.

Strategic coordination with retirement planning

Health reimbursement arrangement programs complement retirement planning strategies to create comprehensive employee benefit packages. The tax advantages compound when businesses coordinate HRA programs with Traditional 401k plans and other qualified retirement accounts.

Coordination strategies for maximum benefit include:

• Establishing HRA contributions alongside employer 401k matching
• Timing benefit increases to align with annual enrollment periods
• Communicating total compensation value, including healthcare benefits
• Integrating HRA administration with existing payroll systems
• Training HR staff on coordinated benefit explanations

For businesses also offering Roth 401k options, the combination of tax-deductible HRA contributions and after-tax Roth contributions provides employees with diversified tax treatment across their total benefits package.

Entity structure considerations for HRA implementation

Different business entity structures face varying rules and optimization opportunities when implementing Health reimbursement arrangement programs. Understanding these distinctions ensures proper compliance while maximizing available tax benefits.

C Corporation HRA advantages

C Corporations enjoy the most straightforward HRA implementation, with all reimbursements fully deductible as business expenses. Owner-employees can participate in HRA programs on the same basis as other employees, receiving tax-free reimbursements without additional complications.

S Corporation owner considerations

S Corporations face additional complexity for shareholders owning more than 2% of the company. While the business can deduct HRA contributions for these owner-employees, reimbursements must be reported as wages on Form W-2. However, these amounts remain exempt from FICA taxes, preserving significant payroll tax savings.

Partnership and sole proprietorship rules

Partnership structures allow HRA implementation for legitimate employees, though partners themselves cannot receive HRA benefits. However, spouses of bona fide employees may qualify for HRA participation, providing indirect benefits to family-owned businesses.

Documentation and compliance requirements

Maintaining proper documentation forms the foundation of defensible HRA programs. The IRS requires specific records to substantiate the business deduction and verify the tax-free treatment of employee reimbursements.

Essential documentation components include:

1. Written plan document specifying terms, eligibility, and covered expenses
2. Employee enrollment records and signed acknowledgments
3. Reimbursement request forms with supporting receipts
4. Payment records showing amounts and dates of disbursements
5. Annual nondiscrimination testing documentation

The plan document must clearly outline eligible participants, maximum annual benefit amounts, covered expense categories, and claims submission procedures. This documentation serves as the legal framework for program operations and must be established before any reimbursements are provided.

Employers should retain HRA records for at least six years following the plan year to support potential IRS examination of claimed deductions.

Avoiding common HRA implementation mistakes

Several common errors can jeopardize HRA tax benefits or create compliance issues that require correction. Understanding these pitfalls helps ensure successful program implementation and ongoing operation.

Common mistakes to avoid include:

• Failing to establish written plan documents before reimbursements begin
• Discriminating in favor of highly compensated employees
• Reimbursing expenses without adequate substantiation
• Missing required employee notices and disclosures
• Exceeding QSEHRA contribution limits for applicable programs

Discrimination violations are among the most serious compliance risks. HRA programs must provide benefits nondiscriminatorily, ensuring that similarly situated employees receive equal treatment. While different employee classes can receive different benefit levels, all employees within each class must be treated identically.

Inadequate substantiation creates both compliance and audit risks. Every reimbursement should be supported by documentation showing the nature of the expense, the amount paid, the date of service, and the provider of care.

Multi-year planning and budget considerations

Strategic multi-year planning enhances the value of HRA programs by creating predictable benefit trajectories and allowing for gradual contribution increases. This approach supports both employee retention and business budget management.

Planning considerations include:

1. Projecting annual contribution increases based on inflation expectations
2. Establishing reserve funds for potential claim fluctuations
3. Communicating multi-year benefit enhancement plans to employees
4. Coordinating HRA increases with other compensation adjustments
5. Reviewing plan design annually for optimization opportunities

For 2026 and beyond, businesses should anticipate continued increases in QSEHRA limits driven by medical care inflation. Building these projections into long-term benefits planning ensures sustainable program operation while maintaining competitive employee offerings.

Technology solutions for HRA administration

Modern technology platforms can significantly simplify HRA administration while ensuring compliance with complex regulations. These solutions streamline claims processing, maintain required documentation, and provide real-time benefit tracking for both employers and employees.

Technology benefits for HRA management include:

• Automated eligibility tracking and enrollment processing
• Digital claims submission with receipt capture
• Real-time reimbursement status and balance tracking
• Compliance monitoring and required notice generation
• Integration with payroll and accounting systems

Instead's comprehensive platform provides the tools businesses need to implement and manage Health reimbursement arrangement programs effectively. The AI-powered system guides employers through plan design, calculates optimal contribution levels, and generates compliant documentation for all program components.

Coordinate your 2026 healthcare strategy with Instead

Don't miss out on the expanded HRA opportunities available under the One Big Beautiful Bill Act. Starting with plan years beginning after December 31, 2025, eligible businesses can leverage enhanced contribution limits, new rollover provisions, and improved coordination rules to create powerful healthcare benefit programs.

Instead's comprehensive tax platform makes it simple to design, implement, and administer Health reimbursement arrangement programs that maximize your business deductions while providing meaningful benefits to your workforce. Our intelligent system ensures full compliance with IRS requirements while identifying optimization opportunities specific to your business structure.

Explore Instead's pricing plans today to discover how our platform can transform your approach to employee healthcare benefits and tax planning for 2026 and beyond.

Frequently asked questions

Q: How do 2026 QSEHRA limits compare to 2025 contribution caps?

A: The 2026 QSEHRA limits continue the annual inflation adjustment pattern, with individual coverage maximums increasing from $6,350 in 2025 to approximately $6,550 in 2026, and family coverage rising from $12,800 to roughly $13,200. These increases reflect medical care inflation indexing as required by statute.

Q: Can businesses switch from QSEHRA to ICHRA to eliminate contribution limits?

A: Yes, businesses can transition from QSEHRA to ICHRA to access unlimited contribution flexibility. However, this transition requires careful planning to ensure proper plan termination and the establishment of a new plan. ICHRA also introduces additional administrative requirements, including monthly attestation verification and coordination of premium tax credits.

Q: What happens to unused HRA funds at year-end under the new rules?

A: The treatment of unused HRA funds depends on plan design. Employers can structure HRAs to allow rollover of unused amounts to subsequent years, forfeit unused balances, or provide limited grace periods for claims incurred in the previous year. The One Big Beautiful Bill Act does not change these employer discretion provisions.

Q: Can employees use HRA funds for family members not covered by their insurance?

A: Yes, HRA reimbursements can cover qualifying medical expenses for spouses and tax dependents regardless of whether they are enrolled in the employee's health insurance. This flexibility allows HRA benefits to support entire families while maintaining the tax-free treatment of reimbursements.

Q: How do the new FSA/HRA to HSA rollover rules affect existing HRA balances?

A: Employees switching to High Deductible Health Plans after four or more years without HDHP coverage can execute a one-time rollover of HRA funds into their Health savings account. The rollover is limited to $3,200 for single coverage or $6,400 for family coverage, and it counts toward the annual HSA contribution limit.