What is a QSEHRA? The Qualified Small Employer HRA Explained

Have you ever heard of a QSEHRA? If not, you’re not alone. Since its launch, the qualified small employer health reimbursement arrangement has been a game-changer for small employers. However, this health benefit remains unfamiliar to many.

The QSEHRA is an alternative to traditional group health insurance for small organizations. It allows employers to provide a formal health benefit with a budget they define.

In this article, we’ll explain what a QSEHRA is and how it works. You’ll learn who’s eligible for this benefit, and other options available for employers.

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

• How small employers can use a QSEHRA in place of a traditional group health plan as a flexible health benefit
• How employers contribute to a QSEHRA
• What the QSEHRA eligibility requirements are for employees

What is a QSEHRA: A brief overview

A QSEHRA is a tax-free health benefit employers can use to reimburse employees for personal healthcare expenses. It lets small businesses help employees pay for individual health insurance premiums and other medical expenses.

Only organizations with fewer than 50 full-time equivalent employees (FTEs) can offer a QSEHRA. Contributions come only from the business, meaning there’s no cost-sharing with employees. Plus, these reimbursements are tax-free for eligible employees and tax-deductible for employers.

In short, QSEHRAs are a way for small businesses to say “goodbye” to budget-busting group plans and “hello” to a more affordable, flexible benefit.

How a QSEHRA works

If you have a small business with fewer than 50 FTEs and are new to health benefits, a QSEHRA may be the best option for you. With it, you can sidestep the hassle or cost of traditional group health plans. You’ll simply offer employees a monthly allowance to use on the premiums, products, and services that fit their needs.

Here’s how it works:

1. The company sets a monthly allowance. The allowance is the maximum amount of tax-free money a business will give its employees for healthcare for the month. You can offer as much as you want up to the allowance caps. In 2025, the IRS caps annual allowances at $6,350 for single employees and $12,800 for employees with spouses or families. This comes out to $529.16 and $1,066.66 per month, respectively.
2. Employees get qualifying coverage. Employees must have a health plan that meets minimum essential coverage (MEC) standards to participate in a QSEHRA. This could be an individual health insurance policy or existing coverage through a parent or spouse’s group plan. If the employee doesn’t have MEC before being offered a QSEHRA, they can enroll in qualifying coverage once offered the benefit. That’s because the offering of a QSEHRA creates a special enrollment period.
3. Employees make healthcare purchases. With their own money, employees buy the healthcare items and services they want. This could include individual health insurance, copays, deductibles, and prescription drugs. A QSEHRA can even reimburse employees for items like bandages, sunscreen, and contact lenses.
4. Employees submit proof of eligible expenses. After incurring an expense, employees submit proof of purchase to the company or HRA administration. Valid documentation includes receipts or an explanation of benefits from their insurance company.
5. The employer reviews and reimburses employee expenses. The organization or HRA administrator reviews employees’ documentation. A QSEHRA can only reimburse expenses listed in IRS Publication 502 and the CARES Act. If the expense is eligible for reimbursement, they approve it. Reimbursements are free of income and payroll taxes.

The best part? Employers don’t have to stress about minimum participation requirements. So, whether you have one employee or a growing team, QSEHRAs make offering health coverage easier and more affordable.

Formal QSEHRA plan documents govern the benefit. An HRA administrator can handle the process of generating legal documents and keeping them up-to-date.

Who can offer a QSEHRA?

By definition, a QSEHRA is a reimbursement benefit for qualified small employers. So, what two conditions must an employer meet to provide a QSEHRA?

To offer a QSEHRA, an organization must meet the following requirements:

• Have fewer than 50 full-time equivalent employees (FTEs)
• Not offer a group insurance benefit, including health, dental, or vision

The organization must also have at least one W-2 employee. Organizations that currently offer a group plan can cancel their plan and offer a QSEHRA.

Who can participate in a QSEHRA?

An organization must offer the QSEHRA to all full-time W-2 employees. Employers can choose to include part-time employees, too. If they do, they must offer the benefit on the same terms as full-time employees. Contractors (Form 1099 employees) aren’t eligible for the QEHRA.

If an employee is eligible for a QSEHRA, they may not be able to automatically participate in the benefit. There are a few boxes they have to check first.

To participate in a QSEHRA, employees must:

• Be a W-2 employee (their spouse and legal dependents can also participate)
• Have insurance coverage that meets MEC standards

Business owners can also participate in a QSEHRA as long as the IRS considers them a W-2 employee. Our infographic can help you learn more about business owner eligibility.

How does a QSEHRA work with premium tax credits?

The QSEHRA coordinates with premium tax credits. However, this depends on affordability. If an employee’s QSEHRA allowance is affordable, they can’t collect their premium tax credits. If their allowance is unaffordable, they can collect their tax credits. But, they must reduce the amount of their credit dollar-for-dollar by the amount of their monthly QSEHRA allowance.

Learn more with our guide to calculating your premium tax credit with a QSEHRA.

Are there other types of HRAs available?

A QSEHRA isn’t the only type of HRA available. PeopleKeep can help you offer two other types of HRAs:

• The individual coverage HRA (ICHRA): Like a QSEHRA, employers can use an ICHRA to reimburse employees for individual health insurance and out-of-pocket costs. However, this HRA is made for organizations of all sizes. It also has no maximum allowance caps and has more customization features. With it, you can customize benefit eligibility and allowances with employee classes, like salaried or hourly.
• The group coverage HRA (GCHRA): This type of HRA works alongside a group health insurance plan. It allows you to reimburse employees for out-of-pocket costs like deductibles and copays. Employees must be enrolled in your group plan to participate in a GCHRA and can’t use it to pay for their insurance premiums.

Where can I learn more about the QSEHRA?

If you’re interested in learning more about the QSEHRA, be sure to check out our in-depth resources:

• The guide to the QSEHRA: Get all the details you need in this complete guide.
• The QSEHRA: Pros and cons: Learn the advantages and disadvantages of offering a QSEHRA.

Conclusion

A QSEHRA is an ideal way for small businesses to offer quality health benefits to employees. Employers who want to offer a QSEHRA can use administration software like PeopleKeep to set up and launch their benefits in minutes.

When you work with PeopleKeep, we handle the hard work for you. You’ll get help reviewing employee expenses, generating legal plan documents, and much more.

Schedule a demo with an HRA specialist or learn more about how PeopleKeep can help you launch a QSEHRA.

This blog post was originally published on November 8, 2018. It was last updated on August 14, 2024.