Is the QSEHRA a good fit for nonprofits?

With rising health insurance costs, nonprofit organizations often struggle to offer competitive health benefits while staying within tight budgets. Increasing health insurance premiums make traditional group healthcare coverage difficult to afford, especially for small nonprofits.

A qualified small employer health reimbursement arrangement (QSEHRA) offers an alternative. Instead of sponsoring a group health plan, nonprofits can reimburse employees for individual health insurance and qualified medical expenses.

In this article, we'll explain the key benefits of offering a QSEHRA in place of a group health insurance plan.

In this blog post, you'll learn:

• What a QSEHRA is and how it works.
• How to decide if a QSEHRA is the right fit for your organization.
• How the QSEHRA compares to another type of HRA.

What is the QSEHRA?

The QSEHRA is an employer-funded health benefit available to small businesses and nonprofits with fewer than 50 full-time equivalent employees (FTEs). With a QSEHRA, employers can reimburse employees for their individual health insurance premiums and other eligible medical expenses outlined in IRS Publication 502¹ and the CARES Act².

Eligible medical expenses include:

• Preventive care
• Doctor's visits
• Dental and vision care
• Prescription drugs
• Over-the-counter medication
• Mental health counseling

What are the benefits of the QSEHRA?

For nonprofit organizations, the QSEHRA is an attractive option for several reasons. Let's review five of them in more detail below.

1. It's affordable

According to KFF³, annual premiums for employer-sponsored health insurance in 2025 were $9,325 for single coverage and $26,993 for family coverage. This represents a 5% increase in average single premiums and a 6% hike in average family premiums compared to the previous year. However, premium rate hikes are significantly higher for groups with high claims volume or chronic conditions, often falling in the 20-30% range.

With the QSEHRA, you can avoid annual rate hikes. Using the QSEHRA instead of a traditional group health plan gives you control over your budget. With a QSEHRA, employers set a monthly allowance and reimburse employees up to that amount. Additionally, with PeopleKeep, any unused amounts at the end of the plan year stay with the employer.

2. It offers tax advantages

The QSEHRA offers tax-free reimbursements to employees. Reimbursements are exempt from payroll taxes for both the nonprofit and its employees. Additionally, these reimbursements aren’t subject to income tax for employees. To participate in the benefit, employees must maintain minimum essential coverage (MEC). If you mistakenly reimburse⁴ an employee who doesn’t have MEC, you must count that amount as taxable income.

3. It's customizable

Nonprofits can set their own contribution amounts, allowing them to tailor the benefit to fit their budget. This is especially important for nonprofits since they need to make every dollar count.

While the QSEHRA has no minimum contribution requirement, the IRS sets annual limits on maximum contributions. This means you'll never pay more than the annual limits per employee, helping improve cost control.

4. It empowers employees

Instead of getting stuck with a one-size-fits-all group health plan, an employee can choose their own individual health insurance policy through a private exchange or the Health Insurance Marketplace. This gives them more choice over health coverage, network, and premiums, which can improve employee satisfaction with your health benefit.

5. It can help attract and retain top talent

Furthermore, the QSEHRA can help nonprofits attract and retain talented employees. PeopleKeep by Remodel Health's 2024 Employee Benefits Survey found that 92% of employees consider health benefits important.

When a nonprofit offers a health benefit, it shows that the organization cares about the well-being of its staff. It can also help differentiate the nonprofit in a competitive labor market. A 2024 nonprofit benefits survey⁵ found that 93% of nonprofit organizations offer health insurance to employees.

Is the QSEHRA a good fit for your nonprofit?

Before deciding if the QSEHRA is right for your nonprofit, it's important to consider your organization's specific needs, budget, and employee demographics.

Here are three questions all nonprofits should ask when evaluating this health benefit.

1. Would your nonprofit benefit from the QSEHRA?

For organizations with many employees, traditional group health insurance plans may offer more comprehensive coverage and cost savings. Working Americans have long considered group health coverage the premier employer-sponsored benefit, and choosing a QSEHRA would require the nonprofit to educate employees about a new and unfamiliar health benefit.

If the nonprofit can't afford group health insurance, or if some other circumstance, like minimum participation requirements, makes group health insurance a poor fit, the QSEHRA is a great option.

However, a QSEHRA isn’t the right fit for every organization. If you’re unsure if a QSEHRA is right for you, PeopleKeep’s HRA specialists are here to help answer your questions and evaluate any cost savings.

2. Do your employees qualify for premium tax credits?

Many of the nation's nonprofit employees qualify for government premium subsidies. Nonprofits should know that IRS Code Section 36B⁶requires employees to coordinate their premium tax credit with any QSEHRA allowances.

If your employee's QSEHRA allowance is unaffordable based on their income, they can continue to collect any premium tax credits they're eligible for. But if their QSEHRA allowance is affordable, they must waive their credits. If an employee is eligible for a premium tax credit and their allowance is unaffordable, they must reduce the amount of their credit dollar-for-dollar by the amount of the monthly HRA allowance.

For example:

• An employee with a $500 premium tax credit and a $200 QSEHRA allowance would have a premium tax credit of $300 after adjustment.

Because of these requirements, employees may have some or all of their premium tax credits reduced by the QSEHRA. This doesn't diminish the QSEHRA's value, but nonprofits should consider the implications before launching this health benefit. Learn how to calculate affordability and your premium tax credit with a QSEHRA.

3. Can your nonprofit offer a meaningful monthly allowance for out-of-pocket medical costs?

While the QSEHRA doesn’t have minimum contribution requirements, the nonprofit needs to choose an allowance that's both affordable for the organization and beneficial to its employees.

According to PeopleKeep by Remodel Health's 2025 QSEHRA Report, small businesses offered an average monthly allowance of $442. Small employers offered different amounts depending on their employee count. Based on the data collected, smaller organizations led the way in QSEHRA allowances.

Is there another HRA available for nonprofits?

If the QSEHRA doesn't feel like the right healthcare option for your nonprofit, you can offer an individual coverage HRA (ICHRA) instead.

An ICHRA functions similarly to a QSEHRA, but with added flexibility:

• No size restrictions. Whether you have 5 employees or 500, your nonprofit can offer an ICHRA. This makes it an ideal option for organizations that are growing or already exceed the QSEHRA size limit.
• Greater customization. With an ICHRA, you can vary allowances by 11 employee classes, such as full-time and part-time employees. This level of flexibility allows nonprofits to design a benefit that aligns closely with their workforce and budget. Like the QSEHRA, you can also vary allowances by employee age and family size.
• No annual contribution caps. Unlike the QSEHRA, there are no annual limits on employer contributions with ICHRA. This gives nonprofits more control over how generous they want their benefit to be.
• Works alongside premium tax credits. Employees offered an ICHRA must choose between the ICHRA and premium tax credits through the individual marketplace. If the ICHRA is affordable, employees won’t be eligible for subsidies. If it’s unaffordable, they can opt out and still claim tax credits.

Conclusion

Group health insurance isn't the only option when it comes to employee benefits. With a qualified small employer HRA (QSEHRA), small businesses and nonprofits can offer a personalized health benefit at an affordable price while empowering their employees to take control of their healthcare. It offers customization and flexibility while helping nonprofits attract and retain top talent.

Interested in learning more about the QSERHA or ICHRA? Schedule a call with an HRA specialist today!

References

This blog article was originally published on June 27, 2018. It was last updated on April 29, 2026.

1. IRS Publication 502
2. IRS outlines changes to health care spending available under CARES Act
3. KFF 2025 Employer Health Benefits Survey
4. IRS Notice 2017-67
5. Nonprofit Benefits Survey Reveals Trends in Employee Compensation
6. 26 U.S. Code § 36B - Refundable credit for coverage under a qualified health plan