Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

Navigating health benefits as a small business owner can feel like walking through a maze. You want to provide meaningful coverage for your team but don’t want the headache (or cost) of a traditional group health plan. That’s where the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) comes into play. It's a flexible, tax-advantaged way for small businesses to help employees pay for their healthcare expenses without the complexity of managing a group plan.

But what exactly is a QSEHRA? How does it work? And is it the right fit for your small business? Let's dive into the details.

What is a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)?

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a type of Health Reimbursement Arrangement (HRA) specifically designed for small businesses with fewer than 50 full-time employees. Established under the 21st Century Cures Act of 2016, QSEHRAs allow employers to reimburse employees for qualified medical expenses, including individual health insurance premiums, on a tax-free basis.

Key Features of QSEHRA:

• For Small Employers Only: Only businesses with fewer than 50 full-time employees are eligible.
• Tax-Free Reimbursements: Employers can reimburse employees for health insurance premiums and other qualifying medical expenses tax-free.
• No Group Health Plan Required: Employers don’t need to offer a group health plan; employees can purchase individual plans that suit their needs.
• Annual Contribution Limits: The IRS sets annual contribution limits. For 2025, the maximum is $6,950 for individual coverage and $14,100 for family coverage.

How Does QSEHRA Work?

With a QSEHRA, small businesses set aside a fixed amount of money each month that employees can use for qualifying healthcare expenses. Here’s how it typically works:

1. Employer Sets a Budget: The employer decides the maximum annual reimbursement amount per employee, up to the IRS limit.
2. Employees Purchase Their Own Insurance: Employees buy their own health insurance policies that meet their needs.
3. Submit and Get Reimbursed: Employees submit proof of qualified expenses, such as premium payments or out-of-pocket medical costs, and are reimbursed tax-free up to their allowed limit.
4. Tax Benefits for Employers: Employers get a tax deduction on the reimbursements, making it a cost-effective way to provide health benefits.

Who is Eligible for QSEHRA?

Eligible Employers:

• Small businesses with fewer than 50 full-time employees.
• Must not offer a group health plan to any employees.
• Can be structured as an LLC, S-corp, C-corp, or sole proprietorship.

Eligible Employees:

• All full-time employees must be offered the QSEHRA.
• Employers can choose to include or exclude:
  • Part-time and seasonal employees
  • Employees under 25 years of age
  • Employees with less than 90 days of service
  • Union employees (if health benefits were negotiated in a collective bargaining agreement)
  • Non-resident aliens with no US income

What Expenses Can Be Reimbursed Under QSEHRA?

QSEHRA can reimburse a variety of qualified medical expenses, including:

• Health Insurance Premiums: Individual health plans, dental, and vision insurance.
• Out-of-Pocket Medical Costs: Deductibles, copays, and prescription medications.
• Other Qualified Medical Expenses: As defined under IRS Publication 502, including dental and vision care expenses.

What Are the QSEHRA Contribution Limits?

The IRS sets annual contribution limits for QSEHRAs, which are adjusted for inflation each year. For 2025, the maximum reimbursement limits are:

• $6,950 for individual coverage
• $14,100 for family coverage

Important Notes:

• Employers can set lower reimbursement limits but cannot exceed the IRS maximums.
• Unused funds do not roll over to the next year.

QSEHRA vs. ICHRA: What's the Difference?

You might be wondering how QSEHRA compares to the Individual Coverage HRA (ICHRA). Here are some key differences:

1. Employer Size:
   • QSEHRA: Only available for businesses with fewer than 50 full-time employees.
   • ICHRA: No size limit; available to businesses of any size.
2. Contribution Limits:
   • QSEHRA: Subject to annual IRS contribution limits ($6,950 for individuals and $14,100 for families in 2025).
   • ICHRA: No cap on employer contributions, offering more flexibility for higher reimbursement amounts.
3. Employee Classes:
   • QSEHRA: Must be offered to all full-time employees on the same terms, with limited ability to differentiate.
   • ICHRA: Allows employers to offer different reimbursement amounts to specific classes of employees (e.g., full-time vs. part-time, salaried vs. hourly).
4. Group Plan Requirement:
   • QSEHRA: Employers cannot offer a traditional group health plan alongside the QSEHRA.
   • ICHRA: Can be offered alongside a group health plan, allowing more flexibility for mixed benefits strategies.
5. ACA Compliance:
   • QSEHRA: Automatically satisfies the Affordable Care Act (ACA) employer mandate for businesses under 50 employees, but does not apply to large employers.
   • ICHRA: Satisfies the ACA employer mandate for applicable large employers (50+ employees) if the ICHRA is considered affordable under ACA guidelines.

By understanding these differences, small businesses can choose the right HRA option that aligns with their goals, whether they need the simplicity of QSEHRA or the advanced flexibility of ICHRA.

Pros and Cons of QSEHRA

Pros:

• Cost Control: Employers set a fixed budget with no surprise premium increases.
• Tax Advantages: Reimbursements are tax-free for both employers and employees.
• Flexibility for Employees: Employees can choose the health plan that fits their needs.
• Simple Administration: No group health plan to manage, reducing administrative burden.

Cons:

• Contribution Limits: IRS caps may limit higher reimbursements.
• Complexity in Coordination: Employees with Premium Tax Credits may see reduced subsidies.
• Uniform Benefit Requirement: Must be offered to all full-time employees on the same terms.

Is QSEHRA the Right Choice for Your Small Business?

QSEHRA is a great option if:

• You have fewer than 50 employees and don’t want to manage a group health plan.
• You want to provide a tax-free health benefit without the cost volatility of group premiums.
• You want to offer your employees the freedom to choose their own health insurance.

However, if you want more flexibility in employee classes or larger contribution limits, you might want to explore an ICHRA instead.

How to Set Up a QSEHRA for Your Small Business

Setting up a QSEHRA is simpler than you might think, especially with the right tools. Here’s how to get started:

1. Determine Your Budget: Decide how much you want to reimburse employees each year.
2. Create Legal Plan Documents: Ensure your plan complies with IRS requirements, including eligibility rules and reimbursement limits.
3. Communicate the Benefit: Notify employees at least 90 days before the start of the plan year.
4. Administer the Plan: Collect receipts, approve expenses, and process reimbursements.
5. Stay Compliant: Ensure ongoing compliance with IRS and ACA regulations.

Why SimplyHRA is the Best Choice for Small Business Health Benefits

Navigating the world of health benefits doesn’t have to be complicated. At SimplyHRA, we specialize in making QSEHRA and ICHRA solutions simple, affordable, and compliant for small businesses. Our platform lets you set up a plan in minutes, gives employees the freedom to choose their own health coverage, and keeps you compliant without the hassle of managing a group health plan.

Ready to get started? Sign up for an employer account or Schedule a demo today!

Frequently Asked Questions (FAQs) about Qualified Small Employer Health Reimbursement Arrangement (QSEHRA):

Q: Can employees use QSEHRA funds to pay for dental and vision insurance premiums?

A: Yes, QSEHRA funds can be used to pay for dental and vision insurance premiums as well as other qualified medical expenses outlined in IRS Publication 502. This flexibility allows employees to tailor their health coverage to their specific needs.

Q: Can a small business owner participate in their own QSEHRA?

A: It depends on the business structure. C-corp owners can participate in QSEHRA as employees. However, S-corp owners, sole proprietors, and partners generally cannot participate due to IRS rules on self-employment income.

Q: How does QSEHRA affect employees who receive Premium Tax Credits on the Health Insurance Marketplace?

A: Employees eligible for Premium Tax Credits must report their QSEHRA allowance to the marketplace. The allowance may reduce the amount of their tax credit, depending on whether the QSEHRA makes their health insurance “affordable” according to ACA guidelines.

Q: Can employers offer different QSEHRA allowance amounts to different employees?

A: Employers can vary QSEHRA allowances based on age and family size, but not on other criteria like job role or seniority. All full-time employees must receive the benefit on the same terms to comply with nondiscrimination rules.

Q: What happens if an employee doesn’t use all of their QSEHRA funds by the end of the year?

A: Unused QSEHRA funds do not roll over to the next year. The allowance resets annually, allowing employers to adjust contribution amounts each year within IRS limits.

Q: Can employees participate in a QSEHRA if they are covered under a spouse's health insurance plan?

A: Yes, employees can use QSEHRA funds to reimburse eligible out-of-pocket medical expenses, even if they are covered under a spouse's group health plan. However, they cannot use QSEHRA funds to pay for the spouse's premium.

Q: Is it mandatory to offer QSEHRA to all full-time employees?

A: Yes, QSEHRA must be offered on the same terms to all full-time employees. Employers can choose to exclude certain categories, such as part-time or seasonal employees, but they must apply these exclusions uniformly.

Q: How are QSEHRA reimbursements reported for tax purposes?

A: Employers report QSEHRA reimbursements on employees' W-2 forms in Box 12 using code FF. The reimbursements are not included in gross income, as they are tax-free for employees.

Q: Can an employer switch from QSEHRA to ICHRA or another health benefit in the future?

A: Yes, employers can switch from QSEHRA to ICHRA or another health benefit option, but they must provide proper notice to employees and comply with plan year requirements. It’s recommended to make changes at the start of a new plan year to minimize administrative complications.

Q: Do employees need to have minimum essential coverage (MEC) to receive QSEHRA reimbursements?

A: Yes, employees must have minimum essential coverage (MEC) to receive QSEHRA reimbursements tax-free. If an employee does not have MEC, any reimbursements they receive will be considered taxable income.

Q: How does QSEHRA impact businesses in states with their own health insurance mandates?

A: In states with individual health insurance mandates, such as California and Massachusetts, employees must ensure they have qualifying health coverage to avoid state penalties. QSEHRA can help employees afford compliant health insurance but does not automatically satisfy state requirements.