Offering health coverage as a small employer can be difficult, especially if traditional group insurance isn’t the right choice for your budget or workforce. The qualified small employer health reimbursement arrangement (QSEHRA) gives small businesses a flexible, tax-advantaged way to offer a comprehensive health benefit without the inflated cost or hassle. But if you’re new to the QSEHRA, you probably have questions.
This article explains how a QSEHRA works and answers common FAQs so you can determine whether it’s the right health benefit solution for your organization.
In this blog post, you’ll learn:
- How a QSEHRA works and which employers are eligible to offer one.
- What expenses a QSEHRA can reimburse, the annual contribution limits for 2026, and how the benefit affects premium tax credits.
- How working with an HRA administration can help small employers set up and administer their QSEHRA benefit compliantly.
A QSEHRA is a health benefit specifically for small businesses with fewer than 50 full-time equivalent employees (FTEs) that don’t offer a group health insurance plan or ancillary coverage.
The QSEHRA is a defined contribution health plan, meaning you choose a set monthly allowance to offer each of your employees. After employees incur an eligible expense and submit proper documentation, you reimburse them tax-free up to their available allowance. With a QSEHRA, employees can request reimbursement for individual health insurance premiums and other qualified out-of-pocket medical expenses.
Now that you know a little more about the QSEHRA in general, below are answers to some of the most common questions employers ask about the employee benefit.
Any organization with at least one W-2 employee and fewer than 50 FTEs can establish a QSEHRA, provided it doesn’t offer a group health plan. This includes for-profit companies, nonprofits, religious institutions, and government groups.
Unlike traditional group insurance, there’s no minimum participation requirement. You don’t need a specific number of employees to enroll in the QSEHRA to offer the benefit.
A QSEHRA is automatically available to all full-time W-2 employees and their eligible dependents at organizations that offer it. Employers may include part-time workers, but they must offer the same allowance amounts to both part-time and full-time employees. Certain business owners qualify if the IRS considers them common law employees. For example, C corporation owners can participate, while S corporation owners can’t.
Employees are eligible as long as they have qualifying coverage. They may have an individual health plan, group coverage through a spouse’s employer, or coverage through a parent’s group plan. To receive tax-free reimbursements, employees (and any covered dependents) must have a health plan that provides minimum essential coverage (MEC). Employers must verify MEC eligibility before issuing the first tax-free reimbursement.
If an employee doesn’t have MEC and you mistakenly reimburse them, you must report any QSEHRA reimbursements as taxable income on their IRS Form W-2.
No. An employer can’t offer a group health plan and a QSEHRA simultaneously. If you currently have group coverage at your company and want to switch to a QSEHRA, you must first cancel your group policy.
No. An employer can’t offer both a group dental or group vision plan and a QSEHRA. Under the 21st Century Cures Act, the federal government still considers group ancillary benefits as group medical plans. However, employees can enroll in individual dental and vision plans and request reimbursement for those items through the QSEHRA. If you want to offer a group ancillary plan, consider offering an ICHRA instead.
To participate in the QSEHRA and receive tax-free reimbursements, employees must enroll in a health plan that meets MEC requirements.
The following are examples of plans that provide MEC:
Plans that only provide “limited” benefits, such as standalone dental or vision coverage, don’t meet MEC requirements. Healthcare sharing ministries also don’t count as MEC.
No, the QSEHRA is a tax-advantaged benefit. QSEHRA reimbursements are tax-deductible and free from payroll taxes for employers. They’re also income tax-free for employees as long as they have MEC. If you mistakenly reimburse an employee who doesn’t have MEC, you must report any reimbursements as taxable income.
There are many ways employees can purchase a health plan that meets MEC requirements. They can enroll through the federal Health Insurance Marketplace or a state-based exchange. Or they can work with a health insurance agent or broker to find an eligible plan. In terms of timing, they can enroll in coverage during the annual Open Enrollment Period or if they qualify for a special enrollment period due to a qualifying life event. If you offer the QSEHRA to an employee for the first time, this creates a 60-day SEP.
If you administer your QSEHRA through PeopleKeep by Remodel Health, your employees can shop for and enroll in health plans directly from their dashboards.
Yes. Employers can launch a QSEHRA at any point during the year. When employees become newly eligible for the benefit, either due to a mid-year plan start or because they’re a new hire, they’ll qualify for a special enrollment period and have 60 days to enroll in individual coverage.
If your QSEHRA operates on a non-calendar plan year, the HRA allowance resets at the start of your chosen plan year. However, employees’ annual plan deductibles will still reset according to the calendar year, as determined by their insurance policy.
A QSEHRA can reimburse any healthcare expenses outlined in IRS Publication 5021 and expanded items under the CARES Act2. Employees, their spouses, and qualified dependents can make eligible purchases and submit them for tax-free reimbursement, provided they have qualifying health coverage.
A few eligible out-of-pocket expenses for reimbursement are:
Employers can limit which expenses are eligible for reimbursement. For example, you may choose only to reimburse insurance premiums to keep your benefits budget in check. However, you must clearly define eligible expenses in your plan documents.
PeopleKeep makes it easy to choose which type of QSEHRA you want to offer. During plan setup, you can choose to establish a premium-only QSEHRA or a premium-plus QSEHRA.
There’s no minimum contribution requirement for a QSEHRA, but the IRS sets annual maximum contribution limits.
For plan years beginning in 2026, the maximum contribution amounts are:
You don’t need to pre-fund your QSEHRA. You only pay out reimbursements after employees submit eligible medical expenses, and you approve the cost. QSEHRA funds can rollover month-to-month and year-to-year, provided funds don’t exceed the annual limit. However, unused QSEHRA funds with PeopleKeep remain with you at the end of the plan year. Employers keep any unused allowances if an employee leaves your company.
Not exactly. While you must generally offer a QSEHRA on the same terms to eligible employees, you can vary allowance amounts based on age and family size.
For instance, you may provide an allowance that is up to three times higher than the one you give your youngest employees. You can also offer larger allowances to employees with families compared to those with self-only coverage.
A QSEHRA can affect an employee’s eligibility for premium tax credits if they purchase health coverage on a public exchange.
Employees can only receive premium tax credits if their QSEHRA allowance is unaffordable. For 2026, a QSEHRA is affordable if an employee’s share of the premium for the second-lowest-cost silver plan exceeds 9.96% of their household income after accounting for the QSEHRA allowance.
Here’s how it works:
Both the QSEHRA and the individual coverage HRA (ICHRA) reimburse employees for individual health insurance and medical expenses. However, they serve different types of employers and have different rules.
The chart below outlines the differences between these two health benefits.
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QSEHRA |
ICHRA |
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Employer eligibility requirements |
The QSEHRA is for small businesses with fewer than 50 FTEs that don’t offer a traditional group health plan or ancillary coverage. There is no minimum participation rate. |
The ICHRA is available to employers of any size, whether or not they also offer group coverage. However, employers can’t give employees in the same class both options or the option to choose between a group plan and an ICHRA. There is no minimum participation rate. |
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ACA employer mandate |
The QSEHRA isn’t available to employers with 50 or more FTEs. Only applicable large employers (ALEs) are subject to the employer mandate, and they are ineligible to offer the QSEHRA. |
ALEs can use an ICHRA to meet the employer mandate, provided the benefit is affordable, and the employer offers it to at least 95% of their full-time employees. |
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Employee eligibility |
All full-time W-2 employees are automatically eligible for the benefit. Employers may include part-time workers if they receive the same allowance as full-time employees. All employees must have a health plan with MEC to receive tax-free reimbursements. |
Employees must enroll in a qualifying individual health insurance to participate. Employers can define eligibility using 11 employee classes, such as full-time, part-time, and seasonal workers. |
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Annual allowance caps |
The QSEHRA has no minimum contribution limits. However, the IRS sets annual maximum limits. For 2026, the limits are:
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The ICHRA has no minimum or maximum contribution limits. |
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Rollover guidelines |
Unused funds may roll over month to month. Some HRA administrators allow annual rollovers, but the total amount can’t exceed the annual limit. PeopleKeep doesn’t support annual rollovers. |
Unused funds can carry over from month to month. Some HRA administrators allow annual rollovers. PeopleKeep doesn’t support annual rollovers. |
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Budgetary guidelines |
Employers may only vary allowance amounts based on age and family size. |
Employers may vary allowances by employee class, age, and family size. |
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Premium tax credit guidelines |
Employees with a QSEHRA can collect their premium tax credits if their allowance is unaffordable. However, the amount of their QSEHRA allowance will reduce their premium tax credit. |
Employees must choose between the ICHRA and their tax credits based on affordability. They can’t receive both. Employees should waive their tax credits and opt into the ICHRA if their benefit is affordable. They can opt out of the benefit and collect their credits if it's not affordable. |
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This type of HRA is best suited for |
Organizations that:
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Organizations that:
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To remain compliant, small businesses must create and maintain formal plan documents for their QSEHRA. These documents must meet requirements under the Affordable Care Act (ACA) and the Employee Retirement Income Security Act (ERISA)3, specifically Section 4014.
In general, your plan documents should explain how the benefit works, which expenses are eligible, and how you or your HRA administrator will handle the reimbursement process. It must also instruct employees to notify any Marketplace to which they apply for premium tax credits about their QSEHRA allowance.
A compliant QSEHRA plan typically includes:
While there’s no automatic penalty for failing to draft a plan document, employers can face fines if they don’t provide it upon request.
Although employers can administer a QSEHRA on their own, doing so requires careful compliance with several federal requirements. You must draft legal plan documents, verify proof of MEC, review and store reimbursement documentation, and stay current with changing regulations. Errors can result in costly penalties.
Many employers choose to use HRA administration software, such as PeopleKeep by Remodel Health, to design and manage their QSEHRA. Partnering with an HRA administrator allows you to manage allowances, review and approve reimbursements, maintain proper documentation, and generate required notices in one place.
With PeopleKeep, we can help you reduce your compliance risk and save time while ensuring your QSEHRA remains aligned with evolving federal regulations.
A QSEHRA offers small businesses a predictable, customizable alternative to traditional group health insurance. Thanks to its contribution limits, tax advantages, and the ability to support employees with different types of health coverage, it can be an excellent way to provide a comprehensive health benefit without blowing your budget.
Whether you’re switching from a group plan or you just want to ensure your QSEHRA remains compliant, PeopleKeep by Remodel Health is here to help! Book a call with us to learn more about how we can help you administer your benefit.