Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
Summary Definition: A tax-free benefit that allows small businesses to reimburse employees for individual health insurance premiums and medical expenses.
What is a QSEHRA?
A qualified small employer health reimbursement arrangement (QSEHRA) is a tax-advantaged benefit designed for small businesses with fewer than 50 full-time equivalent (FTE) employees that do not offer a group health plan.
QSEHRAs allow employers to reimburse employees tax-free for qualified health insurance premiums and eligible out-of-pocket medical expenses. However, unlike a standard health reimbursement arrangement (HRA), which typically supplements a group health plan, a qualified small employer HRA is intended specifically for employers who do not offer group coverage, making it a standalone, budget-friendly alternative.
Key Takeaways
- QSEHRAs are a benefits plan that offer small employers a tax-free, ACA-compliant way to reimburse employees for individual health insurance and medical expenses without administering a group health plan.
- To maintain compliance, employers must follow strict QSEHRA rules, including annual reimbursement limits, notice requirements, and uniform eligibility standards.
- While flexible and cost-effective, a QSEHRA plan may impact an employee’s premium tax credit (PTC) eligibility and require employers to maintain minimum essential coverage (MEC) for the QSEHRA reimbursement to remain tax-free.
Other Small Employer Health Reimbursement Arrangement Types
Small employers have multiple HRA options beyond the QSEHRA, each designed to serve distinct organizational structures and coverage goals. The most common alternatives (i.e., Individual Coverage HRA, Group Coverage HRA, and Excepted Benefit HRA) differ in eligibility rules, flexibility, and integration with group health plans.
Therefore, when deciding between plan options (e.g., QSEHRA vs. ICHRA), employers should carefully weigh these differences to determine which plan type best fits their organization.
| HRA Type | Employer Eligibility | Employee Eligibility | Reimbursable Expenses |
| QSEHRA |
|
Enrolled in an individual plan with minimum essential coverage (MEC) |
|
| ICHRA |
|
Enrolled in an individual plan |
|
| GCHRA |
|
Enrolled in a group plan |
|
| EBHRA |
|
Group plan available (enrollment optional) |
|
How a Qualified Small Employer HRA Works
Unlike traditional group health plans, qualified small employer health reimbursement plans don’t involve direct insurance coverage. Instead, employers allocate a monthly allowance from which employees can request reimbursements after submitting proof of QSEHRA-eligible expenses.
QSEHRA Limits 2025
Per the IRS, QSEHRA 2025 limits are $6,350 for self-only coverage and $12,800 for family coverage. These caps represent the maximum amounts employers can annually reimburse each employee and are adjusted annually for inflation.
Employers can, however, choose to offer smaller amounts but must consistently apply the same reimbursement terms to eligible employees.
Who Qualifies for a QSEHRA?
To ensure employers administer QSEHRA benefits fairly and consistently, the IRS outlines various requirements and eligibility criteria for employers and their employees.
For example, one of the QSEHRA employer requirements is that they offer the plan on equal terms to all eligible full-time employees, although reimbursement amounts may vary based on age or family size.
Conversely, one of the QSEHRA employee requirements is that individuals be enrolled in individual health insurance meeting minimum essential coverage (MEC) standards, such as a plan obtained through the health insurance marketplace.
Other QSEHRA Administration Requirements
In addition to eligibility and reimbursement requirements, QSEHRA providers must also provide written notice about the plan to all eligible employees at least 90 days before the start of the plan year or on the employee’s start date, whichever comes later.
This notice must outline the employee’s annual reimbursement limit, explain the need to maintain MEC, and clarify how QSEHRA participation may impact PTC eligibility.
Specifically, enrolled employees are no longer PTC eligible if the QSEHRA is considered “affordable” under Affordable Care Act (ACA) guidelines. If, however, it's deemed unaffordable, the employee may still qualify for a PTC, but the amount of the QSEHRA reimbursement must reduce the credit.
QSEHRA Benefits and Drawbacks
Allowing small businesses to offer tax-free health benefits without adopting a group health plan helps control costs and gives employees freedom to choose their coverage.
However, IRS annual reimbursement caps may not fully cover an employee’s healthcare costs. Furthermore, as a health reimbursement arrangement, QSEHRAs require employees first to incur and pay health expenses themselves instead of relying on a pre-funded account (e.g., health savings account), which can complicate personal budgeting and finances.
Related Glossary Terms
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