Does QSEHRA disqualify employees from individual premium tax credits?

The qualified small employer health reimbursement arrangement (QSEHRA) revolutionizes the way small businesses approach employee health benefits. It empowers them to better manage costs while ensuring their employees receive health coverage.

However, you may wonder if the QSEHRA disqualifies your employees from receiving any premium tax credits they were using prior to being offered this health benefit. The answer depends on the benefit's affordability and their allowance amounts.

In this article, we'll explain how the QSEHRA affects premium tax credits.

In this blog post, you'll learn the following:

• How employer-sponsored coverage is more affordable with the QSEHRA.
• How premiums tax credits offer financial assistance to your employees and make it easier for them to afford their individual health insurance coverage.
• How the QSEHRA impacts your employees who receive premium tax credits.

What is the QSEHRA?

The QSEHRA is a tax-free, employer-funded health benefit. It's designed for small businesses with fewer than 50 full-time equivalent employees (FTEs).

With the QSEHRA, employers can reimburse employees for more than 200 types of out-of-pocket medical expenses, including monthly premiums for health insurance coverage. This way, employers can forgo a costly traditional group health plan. Employees can then pick out the health insurance plans that work best for them.

Here's how the QSEHRA works:

• You set a monthly allowance for your employees to use on their medical expenses and other healthcare needs.
• Your employees make healthcare purchases using their own money.
• They submit proof of their eligible expenses to you or your HRA administrator for reimbursement.
• You approve the eligible healthcare expense and reimburse your employees up to their allowance amounts.

To participate in the QSEHRA, employees need qualified health plans that provide minimum essential coverage (MEC). A qualified health plan can be an individual health insurance policy or existing coverage through a parent’s or spouse’s group plan.

Employers can also vary allowances according to family status. So you can offer more to employees who need to purchase family coverage as opposed to those who only need self-only coverage. However, your employer contributions can't exceed the annual limit set by the IRS.

What are premium tax credits?

The Affordable Care Act (ACA) introduced premium tax credits, also known as health insurance subsidies, in 2014. They help lower-income individuals and families afford health insurance coverage. These credits are only available for marketplace coverage through the federal Health Insurance Marketplace or state exchanges. Plans from private exchanges are ineligible for tax credits.

According to KFF¹, more than 19.3 million Marketplace enrollees received premium tax credits in 2024. The financial assistance these tax credits provide eases the burden of buying health insurance. Individuals can apply them to their monthly health insurance premiums in advance or choose to receive them as an income tax refund, reducing their overall costs. If you get a tax credit each month rather than waiting until tax filing season, these are referred to as advance premium tax credits (APTC).

Thanks to the Inflation Reduction Act of 2022², individuals buying health insurance on a public exchange won't have to pay more than 8.5% of their actual household income for a benchmark silver plan through the end of 2025. If Congress doesn’t renew this extension, eligibility will revert to only those with household incomes between 100% and 400% of the federal poverty level in 2026.

Here’s how premiums tax credits work:

• Individuals applying for health insurance coverage provide a quick estimate of their yearly income amount.
• Those who qualify for premium tax credits can use any portion of the tax credit to lower their monthly health insurance premiums. They can even pay APTCs directly to their health insurance provider.

How does the QSEHRA affect premium tax credits?

Your employees who receive premium tax credits may be able to coordinate them with their monthly QSEHRA allowances. However, they can only do so if the QSEHRA you offer them is unaffordable.

In 2025, the QSEHRA is affordable if your employee pays 9.02% or less of their actual income for the second-lowest-cost silver plan premium on the Health Insurance Marketplace after factoring in their QSEHRA allowance. The second-lowest-cost silver plan is known as the benchmark plan.

If the QSEHRA allowance is affordable, your employee can't receive any tax credits. If the allowance isn't affordable, your employees must reduce their premium tax credit subsidy dollar-for-dollar by their monthly QSEHRA allowance amount.

For example, suppose an employee qualifies for a $500 premium tax credit but receives $200 in monthly contributions from their employer. Let’s assume their allowance is unaffordable. In that case, they’ll only be able to claim a $300 premium tax credit. The federal government requires this to prevent "double-dipping" on tax benefits. Otherwise, your employees could face heavy penalties.

It's important to note that your employees can’t opt out of the QSEHRA to collect their full premium tax credit. This differs from an individual coverage HRA (ICHRA), where employees can opt out of the benefit if their allowance is unaffordable.

Is a health stipend more beneficial for employees with premium tax credits?

If you have several employees who receive premium tax credits, you may prefer to offer them a taxable health stipend. While the QSEHRA is a tax-free health benefit, there are no tax advantages to using a health stipend. This means your employees can still receive their premium tax credits as long as the stipend doesn’t push their annual income past the eligibility limit.

A health stipend is additional money you add to your employees' paychecks for their healthcare needs. Since the IRS considers health stipends taxable income, you need to include stipend amounts as income on your employees’ W-2s.

Here are some examples of out-of-pocket expenses your employees can use their health stipend on:

• Monthly premium payments for individual health, vision, or dental plans
• Physician services
• Emergency care
• Over-the-counter mediation
• Prescription drugs

The catch here is that you can't force your employees to spend their stipend on these services. You're also not allowed to ask for proof of coverage or proof of purchase for a health insurance policy. This means your employees can use their health stipends on whatever they want, whether that's medical care or car payments.

Conclusion

The QSEHRA is a fantastic option for employers and employees alike. Employers help employees afford the cost of health insurance without having to offer an expensive group plan. However, the QSEHRA will impact your employees who receive premium tax credits to prevent double-dipping with the federal government.

If you want to offer hassle-free health benefits to your team, PeopleKeep can help! Our health stipend and QSEHRA administration platforms allow you to provide health benefits to your employees in just minutes each month. Contact us today to learn whether a stipend or HRA is right for your organization!

PeopleKeep doesn’t provide legal or tax advice. This article is for informational purposes only. To ensure compliance, you should seek guidance from a legal or tax professional.

This blog article was originally published in May 2013. It was last updated on December 26, 2024.

1. KFF Estimated Total Premium Tax Credits Received by Marketplace Enrollees
2. KFF Five Things to Know about the Renewal of Extra Affordable Care Act Subsidies in the Inflation Reduction Act