As a small business owner, you may be looking for ways to offer your employees health care. Maybe you’re not sure if a small group health plan is the right fit, or you’re worried about what your business can afford.
The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is an option worth exploring. It provides small businesses the ability to help their employees who have qualifying health coverage access health care through tax-free reimbursements.
In this article, we’ll cover what QSEHRA (short for qualified small employer HRA) is, which businesses are eligible, and how you can get started.
What is a QSEHRA?
QSEHRA is a type of Health Reimbursement Arrangement (HRA) that allows you to reimburse your employees for eligible individual health insurance premiums and/or qualified medical expenses (like copays and prescriptions).
In order to participate in a QSEHRA, employees must have health insurance plans that meet Minimum Essential Coverage (MEC) as defined by the Affordable Care Act (ACA). They must also submit claims to their employer for reimbursements. QSEHRA reimbursements are funded entirely by the employer, and they’re tax-free for the employer and employee as long as the employee has MEC for that month.
Is my business eligible to offer employees QSEHRA?
In general, setting up and managing a QSEHRA is pretty simple, but there are some exceptions. It’s important to ask yourself these questions before you move ahead.
Do you have fewer than 50 full-time equivalent employees?
If you have part time employees, you must take into account the number of hours they work in order to calculate whether you qualify for QSEHRA. Your status is based on your average number of full-time equivalent (FTE) employees in the prior calendar year. Use these step-by-step instructions to determine your FTE number.
Do you currently offer a group health plan?
If you want to offer a QSEHRA instead of a group health plan you must wait for your current group health plan to run out, or cancel it. You also cannot provide vision, dental, other HRAs, or health Flexible Spending Accounts (FSAs) in tandem with a QSEHRA. (However, QSEHRA requirements don’t treat former employees the same as current employees, so if you provide a group plan to, say, retirees, you may continue to do so.)
Are your employees covered by a qualifying health insurance plan?
As mentioned above, in order to be eligible for QSEHRA an employee must be covered by a health insurance plan that meets MEC requirements. This includes individual coverage bought on or off the state or federal health insurance marketplace.
Employees without coverage can enroll during the annual open enrollment period or, if they qualify, a special enrollment period. (Note that if an employee has coverage through a parent or spouse, reimbursements work a bit differently.)
Is your business part of a group of employers?
You may not be eligible for QSEHRA if you participate in a group—even if your specific business employs less than 50 full-time equivalent (FTE) workers. An example of this would be if you’re part of a controlled group, which is two or more companies with the same owner.
The IRS treats all companies in a controlled group as a single employer. If any company within the group of employers offers a group health plan to its employees, your company does not qualify for QSEHRA. The Q&A portion of this bulletin from the IRS includes details on what qualifies as a group of employers according to QSEHRA requirements. You can find detailed definitions here. Be sure to consult your tax advisor for more information.
Is your business an Applicable Large Employer (ALE)?
An ALE is a business with 50 or more FTE workers, so it may seem obvious that an ALE can’t qualify for QSEHRA, but there is some nuance here you should understand: there is an exception for seasonal employees. If your workforce exceeds 50 FTE employees for 120 days or fewer in a calendar year, and the employees who put you over 50 are seasonal workers (perhaps hired for retail work during the holidays), you aren’t considered an ALE.
Remember that companies that share an owner may be defined as an ALE, even if those companies are small as individual businesses. For example, Company A employs 24 FTE workers and Company B employs 27 FTE workers; if these companies share an owner, they are an ALE and therefore not eligible for QSEHRA because their combined workforce is 51. You can read more about the definition of an ALE here.
Another thing to note: if you are a small business at the start of the year, but throughout the year you acquire enough employees to become an ALE (based on your average FTE count for that year), you will no longer be eligible to offer QSEHRA starting on January 1 of the following year. If you outgrow QSEHRA, an individual coverage HRA (ICHRA) may be a good alternative.
What to do next
Eligible and ready to get started? Check out this post on creating a QSEHRA budget and this post on how to set up a QSEHRA. Before your plan year starts, you’ll also need to send eligible employees a written notice about their benefit.
FAQs
Can I exclude certain employees from a QSEHRA?
Yes. You can exclude employees under age 25, employees with fewer than 90 days of service, part-time or seasonal employees, non-resident aliens with no U.S. earned income, and employees covered by a collective bargaining agreement that includes health benefits. Excluded employees can’t receive QSEHRA reimbursements.
How much can employers reimburse with a QSEHRA?
The IRS sets an annual QSEHRA reimbursement limit and adjusts it each year. The limit is higher for family coverage than for self-only coverage. For 2026, it’s $6,450 for self-only coverage and $13,100 for family coverage. You can vary the amount based on an employee’s age and the number of family members covered, but otherwise you must offer the same terms to all eligible employees. The IRS typically announces the next year’s limits in the fall.
How does an employee get reimbursed under a QSEHRA?
Employees generally pay their premiums or medical expenses first, then submit proof to you, such as a premium statement, receipt, or explanation of benefits, along with proof that they had minimum essential coverage (MEC) for that month. You review the claim and reimburse the eligible amount, up to the limit you set. Reimbursements for months without MEC are taxable income to the employee, so tracking coverage month by month matters.
How does a QSEHRA affect the premium tax credit?
Employees who apply for the premium tax credit through the health insurance marketplace must report their QSEHRA amount. If the QSEHRA is considered affordable, the employee isn’t eligible for the premium tax credit. If it isn’t affordable, the premium tax credit is reduced by the monthly QSEHRA amount.
What’s the difference between a QSEHRA and an ICHRA?
An individual coverage HRA (ICHRA) also reimburses employees for individual health insurance, but it has no employer size limit and no federal cap on reimbursements, and you can offer different amounts to different classes of employees. A QSEHRA is limited to employers with fewer than 50 FTEs and has an annual reimbursement limit. If your business is an Applicable Large Employer (ALE), an ICHRA may be the better fit.
