QSEHRA: The Complete Guide for Small Business Owners
What is a QSEHRA? Eligibility, contribution limits, eligible expenses, QSEHRA vs ICHRA, notice requirements, and setup steps for small business.
QSEHRA
The complete guide for small business owners
When my company hit 8 employees, the question I heard most often was not about salary or PTO. It was about health insurance. "Do you offer benefits?" Every candidate asked. Every employee mentioned it. And every time, the honest answer was the same: "We are too small to offer group health insurance at a reasonable cost."
Group health insurance for a company with 8 employees is expensive, complicated, and often requires minimum participation rates that are hard to meet when half your team is under 30 and does not see the value. The quotes I received ranged from $400 to $800 per employee per month for plans that required 70% participation. The administrative burden of managing enrollment, compliance, and renewals was a full-time job I did not have anyone to assign to.
Then I discovered the QSEHRA. A Qualified Small Employer Health Reimbursement Arrangement lets small businesses with fewer than 50 employees reimburse employees for individual health insurance premiums and medical expenses, tax-free for the employee and tax-deductible for the employer. No group plan to manage. No minimum participation. No insurance company to negotiate with. I set a monthly allowance, employees bought their own insurance, and I reimbursed them up to the limit.
This guide covers everything a small business owner needs to know about QSEHRAs: what they are, how they work, who qualifies, the 2025 and 2026 contribution limits, what expenses are eligible, how QSEHRA compares to ICHRA and group insurance, the notice requirements you must follow, how to set one up step by step, and how to integrate QSEHRA into your employee onboarding process. At FirstHR, we handle the documentation side of benefits: delivering the required QSEHRA notice during onboarding, collecting e-signed acknowledgments, storing plan documents, and tracking employee eligibility through the HRIS.
What Is a QSEHRA?
A QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) is a formal, IRS-approved benefit that allows small employers to reimburse employees for individual health insurance premiums and qualifying medical expenses. Created by the 21st Century Cures Act (signed December 13, 2016, effective January 1, 2017), the QSEHRA was designed specifically for small businesses that cannot afford or do not want to offer traditional group health insurance.
The key distinction: a QSEHRA is not health insurance. It is a reimbursement arrangement. The employer does not buy a health plan, negotiate with an insurance carrier, or manage enrollment. The employer sets a budget, employees buy their own coverage, and the employer reimburses them. This structure gives small businesses the ability to offer a health benefit without the complexity, cost, and minimum participation requirements of group insurance.
How a QSEHRA Works: Step by Step
The QSEHRA process follows six steps, from plan setup through reimbursement and reporting. The employer controls the budget and the plan design. The employee controls which insurance they buy and which expenses they submit.
The entire process repeats annually. Each year, the employer reviews their reimbursement amounts (adjusting for IRS limit increases), delivers updated notices to employees, and the cycle continues. For new hires joining mid-year, the allowance is prorated based on their start date and the remaining months in the plan year.
| Role | What They Do | What They Do NOT Do |
|---|---|---|
| Employer | Sets allowance amounts, creates plan document, delivers notices, funds reimbursements, reports on W-2 | Does NOT buy insurance, does NOT choose employee plans, does NOT manage enrollment |
| Employee | Purchases their own health insurance, submits eligible expenses for reimbursement, provides proof of MEC | Does NOT contribute to the QSEHRA (employer-funded only), does NOT choose the allowance amount |
| HRA Administrator (if used) | Verifies expense eligibility, processes reimbursements, maintains HIPAA-compliant records, provides compliance support | Does NOT sell insurance, does NOT provide medical advice |
Employer Eligibility: Who Can Offer a QSEHRA
Two conditions must be met simultaneously. There are no exceptions or workarounds.
The 50-FTE Threshold
The employer must have fewer than 50 full-time equivalent employees. Full-time means 30+ hours per week or 130+ hours per month (using the ACA definition). Part-time employees count proportionally: two half-time employees (15 hours/week each) equal one FTE. The count includes all common-law employees but excludes sole proprietors, partners in a partnership, and 2%+ shareholders in an S-corporation. The employee vs contractor guide covers the classification rules that determine who counts.
The No Group Health Plan Requirement
The employer must not offer a group health insurance plan to ANY employee. This is absolute. If you offer group coverage to even one class of employees (full-time, executives, any subset), you cannot offer a QSEHRA to anyone. This is the most common disqualifying factor and the primary reason some employers choose an ICHRA instead (which allows offering group coverage to some employee classes and an HRA to others).
The Uniformity Requirement
The QSEHRA must be provided on the same terms to all eligible employees. The employer cannot offer different amounts based on job title, department, or compensation level. However, the IRS allows variation by two factors: coverage type (self-only vs family) and age (using age-based variation tied to the ACA age curve). Most small employers keep it simple: one amount for employees with self-only coverage, one amount for employees with family coverage.
Employee Eligibility
Not every employee must be included in a QSEHRA. The employer can exclude specific categories, but the exclusions must be based on objective criteria, not individual selection.
| Category | Can Be Excluded? | Notes |
|---|---|---|
| Employees who have not completed 90 days of service | Yes | Standard waiting period, consistent with ACA rules |
| Part-time employees (under 30 hours/week) | Yes | Must apply uniformly to all part-time employees |
| Seasonal employees | Yes | Must apply uniformly |
| Employees under age 25 | Yes | Allowed under IRC Section 9831(d)(2)(B) |
| Employees covered by a spouse's or parent's group plan | No | They are eligible for QSEHRA even if they have other coverage |
| Specific individuals by name | No | Eligibility must be based on class, not individual selection |
The most important employee-side requirement: to receive tax-free reimbursements, the employee must have minimum essential coverage (MEC). This includes marketplace plans (Bronze, Silver, Gold, Platinum), most employer-sponsored plans (from a spouse or parent), Medicare, Medicaid, CHIP, and TRICARE. Short-term health insurance plans and health care sharing ministry memberships generally do not qualify as MEC.
QSEHRA Contribution Limits
The IRS sets maximum annual reimbursement amounts for QSEHRAs, adjusted each year for inflation. The employer can set their allowance at any amount up to these maximums. These are annual limits that prorate for employees who join mid-year.
| Year | Self-Only Maximum | Family Maximum | Source |
|---|---|---|---|
| 2017 (first year) | $4,950 | $10,050 | 21st Century Cures Act |
| 2018 | $5,050 | $10,250 | Rev. Proc. 2017-37 |
| 2019 | $5,150 | $10,450 | Rev. Proc. 2018-27 |
| 2020 | $5,250 | $10,600 | Rev. Proc. 2019-29 |
| 2021 | $5,300 | $10,700 | Rev. Proc. 2020-32 |
| 2022 | $5,450 | $11,050 | Rev. Proc. 2021-25 |
| 2023 | $5,850 | $11,800 | Rev. Proc. 2022-24 |
| 2024 | $6,150 | $12,450 | Rev. Proc. 2023-34 |
| 2025 | $6,350 | $12,800 | Rev. Proc. 2024-25 |
| 2026 | $6,350 | $12,800 | Rev. Proc. 2025-19 (verify when published) |
How Proration Works
For employees who join the QSEHRA mid-year, the annual limit is prorated by the number of months of coverage. An employee who starts on July 1 with a self-only plan receives up to 6/12 of the annual maximum for that year. The prorated amount must be calculated and included in their written notice. The onboarding plan guide covers how to integrate benefits paperwork into the new hire process.
QSEHRA Eligible Expenses
A QSEHRA can reimburse any expense that qualifies as a medical expense under IRC Section 213(d). This is the same definition the IRS uses for itemized medical expense deductions, detailed in IRS Publication 502. The employer can choose to reimburse all Section 213(d) expenses or limit reimbursement to health insurance premiums only.
| Category | Eligible Expenses | Not Eligible |
|---|---|---|
| Health insurance premiums | Individual health insurance, marketplace plans, dental insurance, vision insurance, Medicare Part B and D premiums | Group health insurance premiums (employer cannot offer group), short-term health insurance in some states |
| Doctor and hospital | Office visits, specialist visits, hospital stays, surgery, urgent care, emergency room | Cosmetic surgery (unless medically necessary), gym memberships, general health programs |
| Prescription and pharmacy | Prescription medications, insulin, prescribed medical devices | Over-the-counter medications (unless prescribed), vitamins and supplements (unless prescribed) |
| Mental health | Therapy, counseling, psychiatric care, substance abuse treatment | Marriage counseling (unless treating a diagnosed condition) |
| Dental and vision | Cleanings, fillings, crowns, braces, eye exams, prescription glasses, contact lenses | Teeth whitening, non-prescription sunglasses |
| Preventive care | Annual physicals, vaccinations, screenings, well-child visits | General fitness expenses |
| Other medical | Lab work, X-rays, physical therapy, chiropractic care, hearing aids, medical equipment | Health club dues, personal hygiene items, toiletries |
The employer must specify in the plan document which expenses are eligible. The two most common approaches: (1) reimburse all Section 213(d) expenses (broadest coverage, most appreciated by employees, harder to administer), or (2) reimburse only health insurance premiums (simplest to administer, easiest to verify). Many small employers start with premiums-only and expand to all Section 213(d) expenses after they have the administration in place.
Tax Benefits of a QSEHRA
| Tax Aspect | For the Employer | For the Employee (with MEC) | For the Employee (without MEC) |
|---|---|---|---|
| Income tax | Reimbursements are a tax-deductible business expense | Reimbursements are excluded from taxable income | Reimbursements ARE included in taxable income |
| FICA (Social Security/Medicare) | No employer FICA on reimbursements | No employee FICA on reimbursements | No FICA (still exempt regardless of MEC status) |
| FUTA (Federal Unemployment) | No FUTA on reimbursements | N/A | N/A |
| State income tax | Deductible in most states (verify your state) | Excluded in most states (verify your state) | Included in most states |
| W-2 reporting | Must report total permitted benefit in Box 12, Code FF | N/A (employer responsibility) | N/A |
The tax advantage is significant. For an employer in the 25% marginal tax bracket who reimburses $5,000 per employee per year, the tax deduction saves approximately $1,250 per employee. For the employee in the 22% bracket with MEC, the tax-free reimbursement saves approximately $1,100 compared to paying premiums with after-tax dollars. Combined, the QSEHRA creates roughly $2,350 in tax savings per employee per year compared to simply paying a higher salary. The HR functions guide covers how benefits administration fits within the broader set of HR responsibilities.
QSEHRA vs ICHRA: Which HRA Is Right for Your Business?
The ICHRA (Individual Coverage Health Reimbursement Arrangement) was introduced in 2020 as a more flexible alternative to the QSEHRA. Both allow employers to reimburse employees for individual health insurance, but they differ in significant ways.
| Feature | QSEHRA | ICHRA |
|---|---|---|
| Employer size limit | Fewer than 50 FTEs only | No size limit (any employer) |
| Can offer alongside group health insurance? | No (must not offer any group plan) | Yes (can offer group to some classes, ICHRA to others) |
| Annual contribution limits | Yes ($6,350 self / $12,800 family for 2025) | No limits (employer sets any amount) |
| Must offer same terms to all employees? | Yes (same amount for same coverage type) | No (can vary by 11 employee classes: full-time, part-time, salaried, hourly, by location, etc.) |
| Employee classes | Not applicable (one class) | Up to 11 classes defined by IRS regulations |
| Employees must have MEC for tax-free benefit? | Yes | Yes (employees must enroll in individual coverage) |
| Marketplace premium tax credit interaction | May reduce PTC | Employee must choose: ICHRA or PTC (cannot use both) |
| Complexity | Lower (simpler rules, fewer options) | Higher (class definitions, affordability testing, opt-out rules) |
| Best for | Small businesses (<50) wanting a simple, uniform benefit | Any-size employers wanting flexibility by employee class |
When to Choose QSEHRA
Choose a QSEHRA if you have fewer than 50 FTEs, you do not offer group health insurance, and you want to offer the same benefit to all eligible employees with minimal administrative complexity. The QSEHRA is simpler to set up, simpler to administer, and has clear IRS-set limits that make budgeting predictable.
When to Choose ICHRA
Choose an ICHRA if you have 50+ employees, if you want to offer group insurance to some employees and an HRA to others, if you want to offer different amounts to different employee classes (full-time vs part-time, by location, by job category), or if you want to reimburse more than the QSEHRA annual limits. The ICHRA is more flexible but requires more complex administration, including affordability determinations for each employee class.
For most small businesses with 5 to 50 employees that do not currently offer group insurance, the QSEHRA is the better starting point. It is simpler, cheaper to administer, and covers the primary use case: helping employees afford individual health insurance. The HR technology guide covers how to choose tools that support benefits documentation alongside other HR functions.
QSEHRA vs Group Health Insurance
| Factor | QSEHRA | Group Health Insurance |
|---|---|---|
| Employer buys insurance? | No. Employees buy their own. | Yes. Employer selects and purchases a group plan. |
| Employer cost control | Total control: set any allowance up to IRS limits | Limited: insurer sets premiums, which increase annually |
| Employee choice | Complete: employees choose any individual plan that fits their needs | Limited: employees choose from the plans the employer selected |
| Minimum participation | None | Most insurers require 70-75% of eligible employees to enroll |
| Administrative complexity | Low (set allowance, reimburse, report on W-2) | High (enrollment, renewals, COBRA, compliance, carrier management) |
| Employer cost (25 employees, moderate benefit) | $2,500-$6,000/month total | $10,000-$20,000/month total (employer portion of premiums) |
| Recruiting advantage | Moderate (employees appreciate the benefit but manage their own insurance) | Strong (group coverage is a standard expectation at mid-market+) |
| Scalability | Simple at any size under 50 | Complexity increases with size but infrastructure supports it |
The practical question for most small business owners: is the recruiting advantage of group insurance worth 3 to 5 times the cost? For companies competing for talent against mid-market employers who offer full group coverage, the answer may be yes. For companies where the labor market is less competitive or where employees value flexibility (remote workers who live in different states, younger employees who want specific plan types), the QSEHRA provides a meaningful benefit at a manageable cost.
Research from the Work Institute shows that 20% of turnover happens within the first 45 days. While benefits are not the primary driver of early turnover (onboarding quality and manager relationships are), the absence of any health benefit can disqualify a small business from a candidate's consideration entirely. A QSEHRA changes "we do not offer benefits" to "we offer tax-free health insurance reimbursement," which is a materially different conversation in an interview. The employer branding guide covers how benefits positioning affects hiring.
QSEHRA Notice Requirements
The QSEHRA notice is a legal requirement under IRC Section 9831(d)(4). Failing to provide the notice subjects the employer to a $50 per employee penalty for each day the notice is late, up to $2,500 per employee per year. This is one of the most commonly violated QSEHRA rules because small business owners often do not know the requirement exists.
| Requirement | Detail | Deadline |
|---|---|---|
| Initial notice (existing employees) | Written notice to all eligible employees before the first plan year | At least 90 days before the plan year starts |
| Annual notice (continuing employees) | Updated notice before each subsequent plan year | At least 90 days before the new plan year starts |
| New hire notice | Written notice to employees hired after the plan year begins | On the employee's start date (or the date they become eligible) |
| Content: permitted benefit amount | The dollar amount of the employee's QSEHRA benefit for the plan year | Must be specific to the employee (prorated if joining mid-year) |
| Content: MEC statement | Statement that employee must provide proof of MEC to receive tax-free reimbursement | Required language per IRS Notice 2017-67 |
| Content: marketplace PTC statement | Statement that QSEHRA may reduce marketplace premium tax credit | Required language per IRS Notice 2017-67 |
The notice can be delivered electronically if the employer meets the DOL electronic disclosure requirements (the employee must have regular access to email as part of their job, must consent to electronic delivery, and must be able to request a paper copy). For most small businesses, email delivery with a read-receipt or e-signature acknowledgment satisfies this requirement.
The document management guide covers how to store and track QSEHRA notices alongside other employee documents. The onboarding checklist covers where the QSEHRA notice fits in the overall new hire process.
How to Set Up a QSEHRA: Step by Step
The total setup time for a small business with 10 employees: approximately 4 to 8 hours if using a third-party administrator (they provide the plan document and notices), or 8 to 16 hours if self-administering (you need to source templates, understand compliance requirements, and set up your own tracking). The HR processes guide covers how QSEHRA administration fits within the broader set of HR processes.
Administration Options
| Option | Cost | Best For | What It Handles |
|---|---|---|---|
| Self-administration | $0 (your time only) | 1-5 employees, premiums-only reimbursement | You verify expenses, process reimbursements, maintain records, and handle W-2 reporting yourself |
| HRA software platform | $5-$20/employee/month | 5-20 employees, want compliance support without full TPA cost | Employee portal for claims submission, automatic eligibility verification, balance tracking, W-2 reporting |
| Third-party administrator (TPA) | $15-$40/employee/month | 5-50 employees, want hands-off compliance | Everything: plan document, notices, claims verification, HIPAA-compliant record-keeping, W-2 reporting, employee support |
The administration choice depends on your risk tolerance and time. Self-administration saves money but requires you to understand IRC Section 213(d) eligibility rules, maintain HIPAA-compliant records (because you are handling medical expense information), and ensure accurate W-2 reporting. A TPA costs $15 to $40 per employee per month but handles all compliance, reducing your liability if something is done incorrectly.
W-2 Reporting and Compliance
Employers must report the QSEHRA benefit on each employee's W-2 form. This is a compliance requirement with specific rules that differ from how other benefits are reported.
| Reporting Element | Requirement | Common Mistake |
|---|---|---|
| What to report | The total PERMITTED BENEFIT for the year (the maximum the employee could have received) | Reporting the amount actually reimbursed instead of the permitted amount |
| Where to report | W-2 Box 12, Code FF | Reporting in the wrong box or with the wrong code |
| When to report | On the W-2 for the year the benefit was available | Forgetting to report for employees who did not submit any claims (the permitted benefit must still be reported) |
| Prorated amounts | Report the prorated amount for employees who were eligible for less than the full year | Reporting the full annual amount for mid-year hires |
| Terminated employees | Report the permitted benefit through their last day of eligibility | Excluding terminated employees from QSEHRA W-2 reporting |
The most common W-2 reporting mistake: reporting the amount actually reimbursed instead of the permitted benefit. If an employee's annual QSEHRA allowance is $5,000 but they only submitted $3,000 in claims, Box 12 Code FF should show $5,000 (the permitted benefit), not $3,000 (the actual reimbursement). This distinction matters because the permitted benefit amount is what the IRS uses to determine the employee's marketplace premium tax credit eligibility. The HR report guide covers the broader reporting practices that QSEHRA fits into.
QSEHRA and Employee Onboarding
The QSEHRA notice is a Day 1 onboarding task for every new hire who joins after the plan year has started. Missing the notice delivery on the hire date triggers the $50/day penalty. This makes QSEHRA notice delivery one of the most time-sensitive compliance items in the onboarding process, alongside the I-9 (due by the end of the third business day).
| Onboarding Step | QSEHRA Action | Deadline |
|---|---|---|
| Pre-boarding (before Day 1) | Prepare the employee-specific QSEHRA notice with prorated amounts | Before the start date |
| Day 1 | Deliver the written QSEHRA notice to the new hire | On the start date |
| Day 1 | Collect signed acknowledgment of QSEHRA notice receipt | On the start date |
| Week 1 | Collect proof of minimum essential coverage (MEC) | As soon as possible (required for tax-free reimbursement) |
| Week 1 | Explain how to submit reimbursement claims | During benefits orientation |
| First pay period | Set up QSEHRA reimbursement in payroll system | Before first reimbursement |
| Year-end | Include QSEHRA permitted benefit on W-2, Box 12, Code FF | W-2 filing deadline |
Organizations with strong onboarding see 82% better retention (Gallup). Including the QSEHRA benefit in onboarding serves two purposes: compliance (the notice must be delivered on Day 1) and engagement (explaining the benefit helps new hires appreciate the value of working at your company). A new hire who understands that their employer provides tax-free health insurance reimbursement feels better about joining than one who receives a form they do not understand. The 30-60-90 day plan guide covers the milestone framework that includes benefits orientation in the first week. The employee self-service guide covers how to make QSEHRA information accessible to employees after onboarding.
Common QSEHRA Mistakes
| Mistake | Why It Happens | Consequence | The Fix |
|---|---|---|---|
| Offering QSEHRA while also offering group health insurance | Employer does not understand the exclusivity rule | QSEHRA is disqualified; all reimbursements become taxable | Verify: you cannot offer ANY group plan and a QSEHRA simultaneously |
| Missing the 90-day notice deadline | Employer sets up QSEHRA but does not know about the notice requirement | $50/day/employee penalty, up to $2,500/employee/year | Calendar the notice deadline 90 days before plan year; automate for new hires |
| Not delivering notice to new hires on Day 1 | Notice delivery is not in the onboarding checklist | $50/day/employee penalty | Add QSEHRA notice to your onboarding workflow as a Day 1 required task |
| Reporting actual reimbursement on W-2 instead of permitted benefit | Misunderstanding of what Box 12 Code FF requires | Incorrect W-2, potential IRS inquiry, employee PTC miscalculation | Report the PERMITTED BENEFIT (maximum available), not the amount actually used |
| Offering different amounts based on job title or salary | Trying to give executives a better benefit | Violates uniformity requirement; QSEHRA may be disqualified | Same amounts for all employees in the same coverage category (self-only or family) |
| Not collecting proof of MEC | Employer reimburses without verifying coverage | Employee reimbursements that should be taxable are treated as tax-free | Require proof of MEC before processing the first reimbursement |
| Self-administering without HIPAA compliance | Employer reviews medical expense details without proper safeguards | HIPAA violation risk if medical information is not stored securely | Use a TPA, or designate one person with restricted access to handle claims |
| Forgetting to prorate for mid-year hires | Employer gives new hire the full annual allowance instead of prorating | Over-reimbursement; potential plan disqualification | Calculate prorated amount based on months remaining in the plan year |
The most consequential mistake is the first one: offering a QSEHRA while also offering group health insurance. This disqualifies the entire QSEHRA, meaning all reimbursements made during the year become taxable income for employees and the employer loses the FICA exemption. If you are considering adding group insurance while running a QSEHRA, you must terminate the QSEHRA before the group plan takes effect. SHRM recommends consulting with a benefits attorney before making changes to any health benefit arrangement. The small business HR guide covers the broader benefits decision framework. The compliance hub covers state-specific health benefit requirements that may apply alongside your QSEHRA.
Frequently Asked Questions
What is a QSEHRA?
A QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) is a tax-advantaged benefit that allows small employers with fewer than 50 full-time equivalent employees to reimburse employees for individual health insurance premiums and qualifying medical expenses. The employer sets a monthly or annual allowance up to IRS limits. Employees purchase their own health insurance and submit expenses for reimbursement. Reimbursements are tax-free for employees who have minimum essential coverage (MEC) and tax-deductible for the employer.
Who is eligible to offer a QSEHRA?
To offer a QSEHRA, an employer must have fewer than 50 full-time equivalent employees AND must not offer a group health insurance plan to any employee. Both conditions must be met. The employer must fund the QSEHRA entirely (no employee salary reductions or contributions). The benefit must be offered on the same terms to all eligible employees, though reimbursement amounts can vary by age and family size (self-only versus family coverage).
What are the QSEHRA contribution limits for 2026?
For 2026, the QSEHRA maximum annual reimbursement is $6,350 for self-only coverage and $12,800 for family coverage. These limits are set by the IRS and adjusted annually for inflation. The employer can set their allowance at any amount up to these maximums. These are the maximum amounts the employer can reimburse, not the amount the employer must reimburse. Many employers set allowances below the maximum.
What expenses does a QSEHRA cover?
A QSEHRA can reimburse any expense that qualifies as a medical expense under IRC Section 213(d), which is the same definition used for itemized medical deductions. This includes individual health insurance premiums, dental and vision insurance premiums, doctor visits and specialist copays, prescription medications, lab work and diagnostic tests, mental health services, physical therapy, medical devices, and most out-of-pocket medical costs. The employer can choose to reimburse all Section 213(d) expenses or limit reimbursement to insurance premiums only.
What is the difference between a QSEHRA and an ICHRA?
The main differences: QSEHRA is limited to employers with fewer than 50 FTEs who do not offer group health insurance. ICHRA has no employer size limit and can be offered alongside group coverage to different employee classes. QSEHRA has annual contribution caps set by the IRS. ICHRA has no contribution limits. QSEHRA must offer the same terms to all eligible employees. ICHRA allows different amounts for different employee classes (full-time, part-time, seasonal, by location). QSEHRA is simpler to administer. ICHRA is more flexible but more complex.
Is a QSEHRA tax-free?
Yes, with conditions. Reimbursements under a QSEHRA are tax-free for employees who have minimum essential coverage (MEC), which includes most individual health insurance plans, marketplace plans, Medicare, and Medicaid. For employees without MEC, QSEHRA reimbursements are included in taxable income. For the employer, QSEHRA reimbursements are always a tax-deductible business expense, and no payroll taxes (FICA/FUTA) apply to the reimbursements regardless of the employee's MEC status.
What is the QSEHRA notice requirement?
Employers must provide a written notice to each eligible employee at least 90 days before the beginning of each plan year. For new hires, the notice must be provided on their start date (or as soon as they become eligible). The notice must include: the amount of the employee's permitted benefit, a statement that the employee must provide proof of MEC to receive tax-free reimbursement, and a statement that if the employee receives a marketplace premium tax credit, the QSEHRA benefit may reduce the credit amount. This requirement comes from IRC Section 9831(d)(4).
Can I offer a QSEHRA and group health insurance at the same time?
No. A QSEHRA is exclusively for employers who do not offer group health insurance to any employee. If you offer a group plan to even one class of employees, you cannot offer a QSEHRA. This is the fundamental eligibility requirement. If you want to offer an HRA alongside group coverage, you need an ICHRA, which allows different benefits for different employee classes, or a group coverage HRA, which supplements an existing group plan.
How do I set up a QSEHRA?
Setting up a QSEHRA involves six steps: determine your eligibility (fewer than 50 FTEs, no group health plan), set your reimbursement amounts (up to IRS limits), create a written plan document (required before the plan year starts), deliver written notices to all eligible employees (90 days before plan year or on hire date), choose an administration method (self-administered, third-party administrator, or HRA software), and set up a reimbursement process (how employees submit claims, how you verify and reimburse). Most employers use a third-party HRA administrator for compliance and ease.
Does a QSEHRA affect marketplace premium tax credits?
Yes. If an employee receives premium tax credits (PTC) through the Health Insurance Marketplace, their QSEHRA benefit may reduce the amount of their PTC. Specifically, the employee's QSEHRA permitted benefit reduces their expected contribution toward premiums when calculating affordability for PTC purposes. However, if the QSEHRA benefit is considered affordable (the employee's required premium contribution after the QSEHRA benefit is less than 9.02% of household income for 2026), the employee is not eligible for PTC. This interaction is one of the most complex aspects of QSEHRA and should be explained clearly in the employee notice.
What happens to unused QSEHRA funds at the end of the year?
It depends on the plan design. The employer can choose whether unused amounts roll over to the next plan year or are forfeited. If rollover is allowed, the rolled-over amount plus the new year's allowance cannot exceed the IRS maximum for that year. Many employers design plans without rollover (use-it-or-lose-it) for simplicity and cost predictability. The rollover policy must be specified in the plan document.
Do I need a third-party administrator for a QSEHRA?
Legally, no. An employer can self-administer a QSEHRA. Practically, most employers with more than 5-10 employees use a third-party HRA administrator because self-administration requires verifying that each expense qualifies under IRC Section 213(d), maintaining HIPAA-compliant records of medical expenses, tracking individual allowance balances, processing reimbursements, and ensuring W-2 reporting is correct. Third-party administrators typically charge $15-$40 per employee per month and handle all compliance. For businesses with 2-5 employees, self-administration is feasible with a good plan document.
What is minimum essential coverage (MEC) and why does it matter for QSEHRA?
Minimum essential coverage (MEC) is health coverage that satisfies the individual mandate requirements under the ACA. It includes marketplace plans, most employer-sponsored plans, Medicare, Medicaid, CHIP, TRICARE, and other government programs. Short-term health insurance and health sharing ministry plans generally do not qualify as MEC. MEC matters for QSEHRA because reimbursements are only tax-free for employees who maintain MEC. Employees without MEC still receive the reimbursement, but it is included in their taxable income.