How Do I Set Up a QSEHRA (Small Business HRA)? A 10-Step Guide

Key Takeaways

If you’ve been searching for health benefit options to offer your employees, you’ve likely come across a qualified small employer health reimbursement arrangement (QSEHRA). A type of small business health reimbursement arrangement (HRA), a QSEHRA allows small employers to contribute tax-free to their employees’ qualified medical expenses without offering group health insurance. 

If you’re not sure whether a qualified small employer HRA or providing small group health insurance coverage is better for your business, read this comparison to make an informed decision. You can also compare a QSEHRA to an individual coverage HRA (ICHRA) to evaluate the difference between them, too.

But, if you are ready to offer a QSEHRA as part of your employee benefits, we’ve broken down the 10 key steps to setting up a QSEHRA to help you get the ball rolling.

Step 1: Make sure you’re an eligible employer

You can only offer a QSEHRA if you:

• Have fewer than 50 full-time equivalent employees in the previous calendar year, and

• Do not offer any group health plans to your employees:
  

  • That includes other Health Reimbursement Arrangements (HRAs), vision and dental plans, and Flexible Spending Arrangements (FSAs), also known as Flexible Spending Accounts for paying for out-of-pocket medical expenses with pre-tax dollars. Plus, an employee can’t have access to FSA carryover (i.e., health FSA money that would’ve rolled over). 

  • Employers can offer a Health Savings Account (HSA) with a QSEHRA. However, this is only possible under specific conditions:
    

    • Employees who participate in both must be enrolled in a High Deductible Health Plan (HDHP), which is already an HSA requirement. 

    • Only health insurance premiums and not medical expenses can be reimbursed through the QSEHRA.

• Provide a QSEHRA for all employees. They all must participate. It’s an important distinction that employers must provide and not only offer a QSEHRA to all eligible employees (i.e., not including the few groups who can be excluded).

Note: Offering group coverage to former employees, such as retirees, does not impact an employer’s ability to provide a QSEHRA to current employees. However, former employees can’t participate in a QSEHRA.

This QSEHRA eligibility guide gives you all the details.

Step 2: Decide how you want to administer your QSEHRA

QSEHRAs can be administered by a third party, or you can choose to self-administer your QSEHRA.

Keep in mind: 

• Different third-party administrators will offer different configuration options for your QSEHRA; these variations may include limiting who is eligible and what types of reimbursements are eligible. Make sure you understand all of the requirements and limitations of your third-party QSEHRA plan before moving forward.

• Whether you self-administer QSEHRA or choose to administer through a third party, you, as the business owner, are responsible for QSEHRA reimbursements. QSEHRA is entirely funded by the employer.

Step 3: Decide who is eligible for a QSEHRA

If you choose to provide a QSEHRA, you must technically offer it to all “eligible employees.”

In practice, this means you generally have to make the QSEHRA available to all your full-time employees but can exclude certain other employees, such as:

• Employees under age 25 at the beginning of the plan year

• Those who have worked for you for less than 90 days  

• Part-time or seasonal employees

• Union employees (if health benefits were the subject of good faith bargaining)

• Nonresident aliens who don’t receive income from U.S. sources

Of course, you can offer the QSEHRA to the excludable classes of employees—as long as you’re consistent about whom you offer it to. That means if you provide the QSEHRA to Joe the Part-Time Employee, you must also offer it to all part-time employees on the same terms.

One more important thing to know: All employees and family members (if they can receive permitted benefits) must have their own health insurance plans that meet minimum essential coverage (MEC) requirements, as defined by the Affordable Care Act (ACA), in order to participate in the QSEHRA you offer. Most plans purchased through the individual insurance Marketplace or obtained through an employee’s spouse’s employer meet MEC requirements, but employees should check with their carriers to confirm.

How to evaluate affordability:This HealthCare.gov worksheet provides a 5-step approach to determining if an employer is providing an “affordable” QSEHRA offer. Employees can use it to determine if they should use the employer-provided QSEHRA or receive the premium tax credit (PTC). It can also be useful to employers, who can use it as a tool to help determine what their QSEHRA offer should be. 

Step 4: Determine how much each employee can be reimbursed

With QSEHRAs, there are no minimum employer contribution or participation requirements, so you have control over your costs. However, the IRS does set maximum reimbursement limits; these change every year, so be sure to check. (For 2025, the QSEHRA contribution limits are $6,350 for individual coverage and $12,800 for family coverage.)

For instance, you could choose to reimburse each eligible employee $200 per month. The amount is up to you as long as the annual total is within IRS-set maximums. 

Here are examples illustrating how those maximums would be applied:

Scenario #1

If a company’s maximum reimbursement is $5,000 for individuals and $10,000 for families, then an employee with self-only coverage who submits reimbursement for a total of $4,500 for the year will have that amount entirely repaid.

Scenario #2

If an employee with family coverage submits reimbursement for a total of $9,000 during the year, he or she will have that full amount repaid. 

Scenario #3

If an employee with self-only or family coverage seeks reimbursement for $11,000 during the year, that employee will be reimbursed the difference between the maximum benefit limit for employee contribution and the total amount of expenses. In this case, if the employee has self-only coverage, the reimbursement will be $5,000; if the employee has family coverage, the reimbursement will be $10,000.

Guidelines to follow for setting reimbursement amounts:

• You want to create a consistent reimbursement policy that applies equally to all eligible employees. 

• You can reimburse all employees the same amount or the maximum amount allowed by the IRS. However, you may vary the reimbursement amount by family size or by employee age⁠ (again, as long as it’s within the IRS limits). There are different ways to vary reimbursement amounts, including:
  

  • Pick a baseline policy that has MEC and use the premium amounts to set your maximums. For example, if a silver-tier Kaiser plan in your area is $400 for self-only coverage and $800 for family coverage, you could set your plan limits to $400 and $800, respectively.

  • Provide a percentage of the IRS limits. For example, you could set the maximum for employees with individual coverage to 50% of the IRS individual limit and the maximum for employees with family coverage to 50% of the IRS family limit.

  • Distinguish contributions between ages, based on a 1:3 ratio. You may set a reimbursement rate for employees at age 26 at $50 a month and employees at age 64 for $150. An employee between those ages would get the amount that is between age 26 and 64. 

• You’ll have to offer QSEHRA benefits to all eligible new hires as well. So make sure to pencil in those costs when planning your QSEHRA budget. (This free QSEHRA budget calculator will show you how to break down the numbers.)

• If an employer chooses for its QSEHRA to allow for an unused reimbursement amount to roll over from a prior plan year (aka a carryover), the total reimbursement for the employee can’t exceed the maximum limits set by the IRS for the new plan year.

Since QSEHRA benefits are generally pre-tax, there are tax savings and additional filings related to offering one. Make sure to talk with your tax accountant about the implications for you and your employees.

Step 5: Determine which expenses you want to reimburse

You can choose what employee health care expenses you’ll reimburse as long as they’re within legal limits.

What you can provide: A QSEHRA can be used to reimburse medical premiums or IRS-permitted medical expenses, such as copays.

The impact: Employers can’t give employees a choice between these two options, and must make the reimbursement for premiums or medical expenses available to all eligible employees to satisfy the QSEHRA’s same terms requirement.

What you can provide: Reimbursing only medical premiums can give you more predictability in costs, as your employees’ premiums will likely be the same each month (unless they change plans mid-year). 

The impact: With this choice, you can offer a QSEHRA with an HSA for employees with HDHPs, but medical expenses can’t be reimbursed through the QSEHRA.

What you can provide:

Choosing to reimburse medical expenses means your costs would depend on how much medical care your employees and their families receive, capped at the maximum allowable amount you set in Step 4. 

The impact: With this choice, employers can’t also offer an HSA.

Step 6: Pick a start date

If you’re not currently offering any group health plans to your employees, you can start your QSEHRA as soon as you want. 

While you can choose any start date, starting your benefit plan year on the first of a month can make your monthly allowances easier to calculate. (Even though you set an annual contribution limit, QSEHRA funds are available to employees monthly.) If you offer a QSEHRA for less than 12 months, the QSEHRA contribution limit will have to be prorated to the amount of time the QSEHRA is available.

If you cancel a group health insurance plan you’re currently offering to set up a QSEHRA, you can either align the start of the QSEHRA with the start of the new year, so your employees can participate in open enrollment for individual health insurance. Or, if you cancel the QSEHRA at another point of the year, that action will trigger a special enrollment period for your employees to enroll in an individual plan through the Health Insurance Marketplace. 

Step 7: Create your legal documents

Once you’ve decided on all of the above, you’ll need to document everything.

A QSEHRA requires a written notice to your employees that includes:

• Information about permitted benefit amounts;

• A statement that employees who are buying health insurance in the individual marketplace and are applying for advance PTC payment should let their health insurance exchange know about their QSEHRA benefit amount; and

• A note that reimbursements may be taxable if employees do not maintain their MEC health insurance.

It also requires a plan document, which includes how the QSEHRA is funded and operated, how reimbursements are paid, and other details.

A third-party administrator can help you draft these legal documents.  

Step 8: Set up a process to run your QSEHRA

Quick reminder: your employee’s health insurance plan must meet MEC requirements for them to be eligible to participate in the QSEHRA.

You’ll need to verify that your employee has MEC for the plan year before making any QSEHRA reimbursements. See Appendix B for a model verification form you can use.

Then you’ll need to set up a method to process and distribute reimbursements (say, through your payroll provider).

Whatever your reimbursement process is like, your employees will need to include documentation verifying that their expenses are eligible for reimbursement. Sound tedious? A third-party administrator can help you review and approve expenses.

One more thing: QSEHRA benefits are generally pre-tax. That is, unless your employee’s MEC coverage is on a pre-tax basis (like if they’re on their spouse’s employer-sponsored plan). In that case, their QSEHRA benefits will be taxable, and you’ll need to withhold payroll taxes from their QSEHRA reimbursements.

Step 9: Let your employees know about their new benefit

Once you’re ready to roll, let your team know about their new QSEHRA benefit.

Those legal documents that you prepared in Step 7? You’ll need to get that written notice to your employees at least 90 days before the start of the QSEHRA plan year. For employees that become eligible after the plan year starts, you’ll need to provide them with the written notice on the day they become eligible.

If an employer fails to provide the written notice, the fine is $50 per employee, up to a $2,500 maximum for the calendar year.

Step 10: Provide information so your employees can obtain health coverage

Remember that employees can only take advantage of QSEHRA benefits if they already have health insurance that meets minimum essential coverage requirements.

While you’re not allowed to endorse particular plans for your employees to obtain for QSEHRA reimbursement, you can provide information and tools to help them make their own informed decisions. Your state’s individual marketplace is a great place to start.

Setting up a QSEHRA can be a lot less daunting when you break it down step by step, and working with a third-party administrator can make it even easier.

QSEHRA FAQ

How much does it cost to set up and manage an HRA for a small business?

Setting up an HRA at your business can cost anywhere from a couple hundred dollars to over $1,000, depending on whether you set it up yourself or hire a third-party administrator. If you use a third-party administrator, maintaining the HRA tends to be a fixed cost per employee per month, usually between $5-20. However, you might also have to pay a monthly plan fee or annual fee, too. If you self-administer your HRA, your costs will be pretty low—just what you contribute to your employees’ accounts. 

Can small businesses offer an HRA instead of traditional health insurance?

Yes, small business owners can offer HRAs instead of traditional health insurance—as long as they follow the rules. To offer a QSEHRA, your business has to have between one and 49 full-time employees. You can’t offer QSEHRAs in conjunction with any other traditional group health plan, and you have to make the QSEHRA available to all employees. 

What types of HRAs can small businesses use (e.g., QSEHRA, ICHRA)?

Small businesses can offer two types of HRAs: QSEHRAs and ICHRAs. A qualified small employer health reimbursement arrangement (QSEHRA) gives employers with fewer than 50 full-time employees the opportunity to contribute to their employees’ qualified medical expenses via tax-free reimbursements. There’s no minimum contribution, but there are maximums set by the IRS. An individual coverage health reimbursement arrangement (ICHRA) gives employers the same opportunity to reimburse employees for medical expenses, but the rules are less strict. You just need to have at least one employee to offer an ICHRA, and there are no maximum contribution limits. However, the employee does need to have individual health insurance coverage.

Am I eligible to offer a small business HRA (requirements)?

If you want to offer a QSEHRA to your employees, you need to have had at least one full-time employee—but no more than 49—in the last calendar year. You also can’t offer any group health plans. If you want to offer an ICHRA to your employees, you just need to have at least one employee (who isn’t a spouse or owner).  

What expenses are eligible under a small business HRA?

It depends on the HRA and which expenses you decide to reimburse. For a QSEHRA, eligible expenses include all qualifying health expenses—including medical premiums and co-pays—are eligible for reimbursement as long as the employee has qualifying health coverage. As the employer, though, you can choose whether to reimburse medical premiums and co-pays, or just one or the other.