COBRA Premiums and Self-Employment: Tax Deduction Rules

• Dan O'Donnell
• February 24, 2025
• 6 min read

COBRA can help you keep a former employer’s health coverage when you start working for yourself. Paying the full premium does not automatically make it eligible for the self-employed health insurance deduction. The way the insurance plan is established matters.

Is COBRA premium assistance still available?

The American Rescue Plan provided temporary federal COBRA premium assistance for eligible coverage from April 1 through September 30, 2021. That program has ended. It is not a federal subsidy for 2025 or 2026 premiums. Employer severance agreements and other assistance may have separate terms. Check what you actually paid after any reimbursement.

Can a self-employed person deduct COBRA premiums?

The self-employed health insurance deduction generally requires coverage established under the business. COBRA continued through a former employer is generally a former employer’s plan, rather than one established under your new business. Do not claim the deduction solely because you now earn self-employment income.

Ask your preparer to review the policyholder, plan sponsor, business structure, and any reimbursement arrangement. The IRS Form 7206 instructions explain the business-plan requirement and different rules for sole proprietors, partners, and shareholders who own more than 2% of an S corporation. Our self-employed health insurance deduction guide covers the broader eligibility tests.

Other ways COBRA premiums may receive tax treatment

Itemized medical expense deduction

Eligible COBRA premiums you pay with after-tax money may count toward Schedule A medical expenses. You must itemize, and only qualifying unreimbursed expenses above 7.5% of your adjusted gross income are deductible. See medical expense deduction rules for an example.

HSA distributions

Although health insurance premiums usually are not qualified HSA expenses, premiums for health care continuation coverage such as COBRA are an exception. An existing HSA may pay eligible COBRA premiums tax-free, subject to the usual distribution rules. You cannot also deduct those same premiums. Eligibility to spend an HSA balance is different from eligibility to make new contributions. Review HSA eligibility and tax benefits and IRS Publication 969.

Compare COBRA with Marketplace coverage carefully

Compare total premiums, deductibles, networks, and any available premium tax credit. Enrollment in COBRA generally prevents a Marketplace credit for those same months. An offer of COBRA that you do not enroll in is treated differently. Enrollment deadlines also matter: voluntarily ending COBRA early does not necessarily create a special enrollment period.

If Marketplace coverage qualifies, coordinate the premium tax credit with any self-employed deduction using IRS Publication 974. Do not deduct premiums paid by a credit or another tax-free benefit.

Records to keep before filing

• The COBRA election notice and coverage dates.
• Premium statements and proof of your payments.
• Employer reimbursements or assistance agreements.
• HSA distribution records and receipts.
• Marketplace forms for any months you changed coverage.

These records let you claim an eligible benefit once and support the correct treatment on your return.