Which premiums can a QSEHRA reimburse?

As healthcare costs continue to rise, more employers are seeking cost-effective ways to maintain competitive health benefits. Traditional group health policies are becoming increasingly unaffordable, especially for small businesses. In fact, small employers anticipate a 9% increase in health benefit costs going into 2025¹.

Thankfully, there’s an alternative: the qualified small employer health reimbursement arrangement (QSEHRA). With a QSEHRA, employees can buy their own individual health insurance policies and get tax-free reimbursements for their premiums and other medical costs.

According to our 2024 QSHERA Report, 42% of all QSEHRA reimbursements were for premiums. While the QSEHRA is designed to replace employer-sponsored group premiums, not all individual insurance premiums are eligible for reimbursement. It’s important to know which premiums qualify to help you choose the right plans and maximize your QSEHRA benefit.

In this blog post, you’ll learn:

• How a QSEHRA can provide tax-free reimbursements for medical expenses and offer financial flexibility for employers and employees.
• Which insurance premiums are eligible for reimbursement under a QSEHRA.
• The types of premiums that are ineligible for QSEHRA reimbursement.

How does a QSEHRA work?

The QSEHRA is for employers with fewer than 50 full-time equivalent employees (FTEs) who don't offer a group health or ancillary plan. With this type of HRA, employers set a monthly allowance. Their employees buy individual health insurance and other qualified medical expenses. Once employees make an approved purchase, their employers reimburse them tax-free up to their allowance amount.

Here are some highlights of the QSEHRA:

• The QSEHRA has no minimum contribution requirements. But, the IRS sets annual maximum contribution limits.
• QSEHRAs are customizable. Employers can design their benefit to reimburse employees for insurance premiums only or their premiums plus out-of-pocket expenses. They can also vary allowances by family size, age, and family status.
  • If you’re administering your QSEHRA with PeopleKeep, only varying allowances by family size and status are available.
• Business owners must offer the QSEHRA on equal terms to all W-2 full-time employees. Part-time employees can also join the benefit if they receive the same allowance as full-time workers.
• Employees can choose their own health plan, and the offer of a QSEHRA creates a special enrollment period for them to enroll. To participate, their plan must meet minimum essential coverage (MEC) requirements.
• All QSEHRA reimbursements are free of payroll taxes for employers and employees. Reimbursements are also free of income tax for employees.

The QSEHRA's flexibility makes it an excellent solution for small businesses looking for a quality, budget-friendly health benefit. It also gives employees more control over their finances and medical care.

What types of premiums can a QSEHRA reimburse?

As mentioned above, employees can participate in the QSEHRA as long as they have a health plan with MEC. But just because an employee has MEC doesn’t mean that every premium they pay for is reimbursable.

For example, some insurance plans meet MEC and are eligible for reimbursement. Other plans don’t provide MEC but are still reimbursable expenses. Lastly, some policies don’t offer MEC and are ineligible for payment under a QSEHRA.

To simplify, let’s review the different categories of eligible insurance premiums below.

Individual health insurance

Individual health insurance is a policy that consumers buy on their own, which isn’t dependent on employment. Individual plans include single policies and family coverage. Policyholders are responsible for paying their entire monthly premiums themselves to maintain coverage.

All individual major medical plans on public exchanges meet MEC. They’re eligible for tax-free QSEHRA reimbursements. Some government health plans are also acceptable.

Most individual plans on private exchanges also meet MEC standards. You can determine if a plan meets MEC by reading the summary of benefits and coverage (SBC).

Below are the types of individual health plan premiums that are eligible for reimbursement:

• Individual health insurance coverage on a public exchange. This includes the federal Health Insurance Marketplace or a state-based exchange
• Individual health plans on a private exchange. This includes policies purchased directly from an insurance carrier or a broker
• Medicare
• Medicaid
• CHIP
• Student health insurance plans
• TRICARE
• VA health insurance

If you offer your employees a QSEHRA through PeopleKeep and your staff uses our integrated shopping experience to find individual health coverage, their policy will meet MEC and be eligible for reimbursement.

Group health insurance

Traditional group health insurance is a type of policy employers choose, buy, and offer eligible employees and their dependents for a reduced price. Unlike individual coverage, employers and employees split the premium costs. Enrolled employees must pay their monthly premiums to maintain active coverage. They generally do this on a pre-tax basis withheld from their paycheck.

Employees can still use a QSEHRA if they have a traditional group health plan. While an employer can’t offer a group plan and a QSEHRA, employees may still have group coverage through a spouse, parent, or second job. In general, an employer can’t reimburse employees for group plan premiums. But depending on how the QSEHRA is set up, a few may qualify for reimbursement.

Below are the types of group plan premiums that are eligible for reimbursement:

• A spouse’s group health insurance policy, if the employer allows it
  • The QSEHRA can reimburse eligible employees for premiums paid toward a spouse’s employer-sponsored health coverage.
  • Unlike other eligible expenses, these reimbursements will likely be taxable income. This is because the spouse is likely paying their group plan premiums on a pre-tax basis through payroll deductions.
• COBRA insurance
  • COBRA is a continuation of group health insurance coverage. The IRS considers COBRA premiums eligible if the employer designs their QSEHRA benefit to allow them.

Supplemental health coverage

Supplemental benefits help employees pay for specific medical services that their major medical plan may not fully cover. This can include emergency services, hospital stays, and more. Employers can offer these plans as part of their employee benefits package. But, employees can also buy them on their own from a broker or insurance company.

Unlike major health plans, most supplemental plans don’t provide MEC. But, they do provide medical benefits and require regular premium payments. Employees can’t only have a supplemental policy and participate in a QSEHRA. But, they can receive reimbursements for some of these premiums as long as they have MEC from another plan.

Below are the types of supplemental premiums that are eligible for reimbursement:

• Short-term insurance
• Multiplan insurance
• Prescription drug insurance

Ancillary insurance premiums

A QSEHRA also allows employers to reimburse their employees for some types of ancillary insurance premiums. Like supplemental plans, ancillary insurance doesn’t provide MEC.

Here are the types of ancillary premiums an employer can reimburse employees for:

• Dental coverage
• Vision coverage
• Long-term care policies

What types of premiums are ineligible for QSEHRA reimbursement?

Many premiums are eligible for reimbursement under a QSEHRA. However, a few are ineligible, even if an employee has another healthcare plan with MEC.

The following aren’t eligible premiums for reimbursement²:

• Fixed lump sum policies
  • This includes accident insurance coverage, critical illness insurance, and hospital indemnity insurance.
  • These plans pay out a set dollar amount per day or medical service, regardless of the actual expenses incurred. Because there’s no way to ensure the policyholder uses the paid-out funds for medical costs, they’re ineligible for reimbursement.
• Healthcare sharing ministries
  • Healthcare sharing ministries aren’t ACA-compliant, and the IRS doesn’t consider them insurance policies. Instead, they consider membership fees toward these plans to be charitable donations. So, they aren't eligible for reimbursement.
• A parent’s health insurance policy
  • These health policies count as MEC under the QSEHRA. But they’re ineligible for reimbursement because the IRS doesn't consider the dependent responsible for any part of the premiums. This is the case even if the dependent pays some or all of the premium.
• Cash benefit plans
  • These plans don’t provide a medical benefit, only a cash benefit. So, they’re ineligible for reimbursement.
• Native American health plans
• Direct care membership plans
• Life insurance
• Policies providing payment for loss of earnings
• Plan for loss of life, limb, sight, etc.
• Auto and home insurance

Conclusion

Health insurance offers financial protection if you need medical care—but it comes at a cost. Thankfully, a QSEHRA can help employees better afford their health plan premiums. Only employees with MEC can use the benefit and receive tax-free reimbursements. But once they secure coverage, they can start saving money on various insurance premiums.

If you’re an employer ready to offer a personalized QSEHRA to your employees, PeopleKeep is here to help! Have a chat with an HRA specialist today to learn how a QSEHRA can cover your employees’ medical expenses.

1. Mercer - Health Benefit Cost Growth in 2025

2. IRS Publication 502