The QSEHRA: Pros and cons

A robust benefits package that includes medical coverage is an important recruiting tool for every employer. However, soaring medical costs and group premiums can make offering health benefits challenging for small business owners with limited budgets. Luckily, health reimbursement arrangements (HRAs), such as the qualified small employer HRA (QSEHRA), can help small employers overcome this challenge.

The QSEHRA is a budget-friendly alternative to traditional group coverage for small businesses that can support a wide range of employees. Because of their flexibility, the QSEHRA has become increasingly popular.

However, before determining if a QSEHRA is right for you and your employees, you must consider the benefit’s pros and cons.

Takeaways from this blog post:

• The QSEHRA is a tax-advantaged benefit option for small employers, providing flexibility and control over budget and benefit design.
• With a QSEHRA, employers avoid minimum participation requirements. Employees can also choose their preferred health insurance plan.
• QSEHRAs have many advantages but may only be suitable for some organizations due to maximum contribution limits, employee challenges with premium tax credit coordination, and business owner eligibility requirements.

How does a QSEHRA work for small employers?

The QSEHRA is for employers with fewer than 50 full-time equivalent employees (FTEs). You can’t offer a QSEHRA alongside a traditional group health insurance or ancillary plan. Unlike a group plan, which employers select for their employees, the QSEHRA allows employees to choose their preferred health coverage on the individual market. Then, the employer reimburses employees tax-free for their individual health plan premiums and other qualified out-of-pocket medical costs.

Here are the basics of how a QSEHRA works:

1. The employer sets a defined monthly contribution amount, called an allowance, for each employee based on their budget and goals.
1. HRAs are employer-owned, so only you can fund them. However, you can’t offer more allowance than the annual maximum contribution limits set by the IRS.
2. You must offer all employees the same allowance amount. However, you can vary allowances by employee age and family size. PeopleKeep doesn’t support age-based allowances with QSEHRA. Instead, you can consider an individual coverage HRA (ICHRA).
2. Next, employees buy their preferred health insurance plan on a private or public exchange. To participate in the QSEHRA, employees must have a health plan that meets minimum essential coverage (MEC).
3. Once an employee enrolls in eligible health coverage, they pay their monthly premiums and other qualified medical expenses out-of-pocket, such as copayments, prescription drugs, and preventive care.
4. After they pay for an eligible item or service, employees submit proper documentation for review. Once the employer or HRA administrator approves the claim, employers reimburse the employee tax-free up to their set allowance limit, which they can’t exceed.

What are the pros of a QSEHRA?

A QSEHRA is an excellent option for small employers for many reasons. Below are a few of its key advantages.

1. It has tax advantages

The QSEHRA is a pre-tax benefit, offering many tax advantages for employers and employees. QSEHRA reimbursements are tax-deductible and exempt from FUTA, FICA, and payroll taxes for employers. Reimbursements are also free of income tax for the employee.

If an employee is accidentally reimbursed for eligible medical expenses for a month that they didn’t maintain a health insurance policy that provides MEC, the amount must be reported as taxable income on their W-2.

2. It gives small business owners more control over their budgets

Because QSEHRAs are a flexible, defined contribution benefit, you have more control over your budget and how you can design the benefit. There’s no minimum contribution limit, no annual rate hikes, and you only pay out reimbursements when your employees submit proof of a qualified purchase.

Any unused funds stay with you if an employee leaves your company, unlike a health savings account (HSA). With PeopleKeep, any unused funds also stay with you at the end of the plan year.

Our 2025 QSEHRA Report found that employees used 51% of their allowances on average. That leaves 49% with employers on average.

3. It doesn’t have minimum participation requirements

If you have at least one W-2 employee, you can offer a QSEHRA. Additionally, all full-time W-2 employees with MEC are automatically eligible to participate. You can also add your part-time workers to the benefit, as long as you give them the same allowance as your full-time employees.

4. They’re flexible

One of the best perks of the QSEHRA is its flexibility. For example, you can choose whether you want to allow reimbursements for insurance premiums only or premiums plus other out-of-pocket medical expenses. You can also vary allowance amounts by age or family size.

Our 2025 QSEHRA Report found that employers with premium-plus benefits offered an average monthly allowance of $443, while those with premium-only plans provided $438 per month.

You can also use a QSEHRA to reimburse employees for a spouse’s portion of their employer-sponsored group health insurance premiums. This is an optional feature of the QSEHRA, and reimbursement of group premiums is generally taxable. Our 2025 Report found that 43% of PeopleKeep customers enabled employer-sponsored premium reimbursement.

5. You can manage your QSEHRA with an HRA administrator

Managing a QSEHRA doesn’t require you to work with an insurance company. However, you must follow QSEHRA compliance requirements, such as creating legal plan documents, reviewing employee documentation for reimbursements, and notifying your staff of benefit changes. But you don’t have to do it alone. Using HRA administration software, like PeopleKeep by Remodel Health, allows you to manage the most time-consuming tasks quickly and easily while still staying compliant.

6. Remote employees can participate regardless of location

Remote employees and multi-state workers can participate in the QSEHRA without any administrative or compliance roadblocks. No matter their location, your employees can still choose individual health coverage from a public marketplace, local insurer, or broker and receive reimbursements when they incur an eligible expense. This allows all your staff to take advantage of the benefit equally, improving employee satisfaction and morale.

However, you can’t differ allowances by location. This could result in some employees receiving a generous allowance, while others are left with significant out-of-pocket expenses. If you have employees in multiple states, an ICHRA may be a better fit.

7. They help you attract and retain employees

Offering quality health benefits remains a top consideration for most employees. Our 2024 Employee Benefits Survey found that 92% of employees value having health benefits. With a QSEHRA, employees can choose the coverage and medical care they want instead of being bound to a traditional group health plan. You can highlight this advantage in your job listings, improving your recruiting efforts and the chance they’ll remain at your company long-term.

What are the cons of a QSEHRA?

While the QSEHRA has several advantages, it’s important to consider its potential cons so you can determine if this health benefit is truly the best choice for you and your employees. Below are some possible downsides to offering a QSEHRA.

1. There are maximum contribution caps

In 2026, employers can offer a maximum annual allowance of $6,450 for single employees and $13,100 for employees with a family. If you want to provide your staff with more money than these amounts, you can offer an individual coverage HRA (ICHRA), which works similarly to a QSEHRA but has greater flexibility and no contribution limits.

2. There are limited employee class customization options

Some types of HRAs allow business owners to offer different employee allowance amounts based on job-specific criteria, like full-time or part-time status. However, QSEHRAs only enable small employers to vary allowances based on family status, such as single employees, single with dependents, married, and married with dependents. You can also vary allowances by age if you use the IRS-required 1:3 ratio between your youngest and oldest workers.

Keep in mind that if you offer a QSEHRA through PeopleKeep, we don’t allow age-based allowances. However, our ICHRA benefit can support age variations as well as other employee class customization options.

3. Coordinating with premium tax credits can be challenging

Employees receiving premium tax credits can participate in a QSEHRA. However, they must coordinate their credits with the HRA based on affordability, which can be confusing at first.

If an employee’s QSEHRA meets affordability thresholds, they can’t collect their tax credits for that month. They can collect their premium tax credits if they’re eligible and their HRA isn’t affordable for one or more months. But, they must reduce their credit by their QSEHRA allowance amount.

4. Employees without MEC can’t participate

Small employers are only eligible for a QSEHRA if they don’t offer any other type of group health coverage at their organization, including group ancillary plans. Also, only employees with medical coverage that meets MEC can participate in the benefit. Those with an alternative policy — such as a healthcare sharing ministry or short-term policy — are ineligible as they don’t provide MEC. However, offering a QSEHRA opens a 60-day special enrollment period where your newly eligible employees can buy a qualifying plan with MEC so they can use the benefit.

5. Not all business owners are eligible

QSEHRA eligibility for business owners depends on how they file taxes. C corporation owners can participate in a QSEHRA, but sole proprietors, S corporation owners, and partners are ineligible. However, if a sole proprietor or partner’s spouse is a W-2 employee of their company, they can use their spouse’s HRA allowance as an eligible dependent and receive reimbursements.

6. Self-administration can lead to pitfalls

Self-administering a QSEHRA is possible. However, it can be complex, time-consuming, and result in compliance errors, which can expose you to costly IRS penalties. The idea of self-administration may discourage some employers from choosing a QSEHRA. However, HRA administration software can lessen the burden and make the process more manageable.

7. Employers can’t extend QSEHRA benefits to retirees

If an employer wants to offer a QSEHRA to retired employees, they can’t do so. IRS Notice 2017-67 specifically addresses this, clarifying that you may only provide a QSEHRA to employees¹. Instead, employers can offer a retiree-HRA or use an ICHRA (though with ICHRA, former employees belong to the class they were in while an active employee). PeopleKeep only supports W-2 employees.

How PeopleKeep by Remodel Health can help small businesses offer and administer a QSEHRA

A QSEHRA gives small businesses a flexible, affordable way to offer personalized health benefits. But like any employer-sponsored benefit, it comes with administrative responsibilities and compliance requirements that can be tricky without the right tools.

PeopleKeep makes it easy to offer and manage a QSEHRA from start to finish. Our HRA administration software streamlines the entire process by automating key administrative tasks — such as creating plan documents, verifying claim documentation, and processing reimbursements — so you stay compliant and reduce the time your team spends managing benefits.

With PeopleKeep, you can:

• Customize a QSEHRA that aligns with your company's budget and benefits strategy.
• Give employees the ability to choose the individual health insurance plan, doctors, and healthcare services that best meet their needs.
• Employees can browse, compare, and enroll in qualifying individual healthcare coverage directly through their PeopleKeep account.
• Automatically generate required legal plan documents and distribute employee notices.
• Review and approve claim documentation and reimbursement requests for eligible medical expenses while maintaining IRS and HIPAA compliance.
• Securely store reimbursement records and supporting documentation for compliance purposes.
• Stay on top of important deadlines with built-in reminders, including Form 720 PCORI fees and other IRS reporting requirements.
• Seek help from a responsive customer support team whenever you have questions about your benefit.
• Spend only a few minutes each month administering your QSEHRA.

Whether you're offering health benefits for the first time or replacing an expensive small group health plan, PeopleKeep makes it simple to implement a QSEHRA that can help you keep costs low and reduce administrative burden, while giving your employees and their families more control over their finances and healthcare outcomes.

Conclusion

A QSEHRA is an affordable healthcare option for small business owners to help attract and keep their employees without breaking their budget. But like all employee benefits, it’s vital to understand its pros and cons before adding one to your compensation package. After considering the information in our article, you’ll be on your way to making an informed decision about offering a personalized QSEHRA at your company.

If you want to implement a personalized QSEHRA at your company, PeopleKeep by Remodel Health can help! With our team and HRA administration software, you can easily design, set up, and manage your benefit in just a few minutes each month so you have more time to focus on running your business. Schedule a call with an HRA specialist to learn more.

This article was originally published on November 29, 2018. It was last updated on July 7, 2026.

References

1. IRS Notice 2017-67