How to Set Up a Qualified Small Employer HRA (QSEHRA)

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers small businesses a way to support employees with healthcare costs. Employers contribute funds for eligible medical expenses, including health insurance premiums. Unlike traditional group health plans, a QSEHRA provides flexibility, allowing employees to choose individual health insurance plans and receive tax-free reimbursements. This can be a cost-effective alternative for small employers seeking to provide health benefits.

QSEHRA Eligibility

To qualify for a QSEHRA, a business must be a “small employer,” generally having fewer than 50 full-time equivalent employees.

The employer cannot provide a traditional group health plan to any employees. The QSEHRA must be offered on the same terms to all eligible employees. However, variations based on family status or age are permitted.

Employers can exclude specific employee categories, including those under 25, part-time employees, or those with less than 90 days of service. Employees covered by a collective bargaining agreement or non-resident aliens with no U.S.-source income may also be excluded.

Understanding QSEHRA Operational Rules

The Internal Revenue Service (IRS) sets annual maximum reimbursement limits, adjusted for inflation each year. For 2025, employers can reimburse up to $6,350 for individual coverage and $12,800 for family coverage. Employers have discretion to set lower limits.

QSEHRAs can reimburse eligible medical expenses, including health insurance premiums, deductibles, co-pays, and prescription drugs, as defined by IRS Code Section 213. To receive tax-free reimbursements for non-premium expenses, employees must have minimum essential coverage (MEC) and attest to it.

The reimbursement process involves employees submitting claims for incurred medical expenses. The employer or plan administrator verifies eligibility and MEC before disbursing funds. Reimbursements are generally tax-free for employees and tax-deductible for the employer. However, if an employee receives reimbursement for expenses incurred without MEC, that reimbursement becomes taxable income.

Information Needed to Set Up Your QSEHRA

Employers must gather specific information and make key decisions to design their QSEHRA. These include the effective date of the arrangement and the annual reimbursement limits, which may differ for self-only versus family coverage.

Employers need to specify which types of eligible medical expenses the QSEHRA will cover, such as insurance premiums or other out-of-pocket costs. Confirming which employees will be covered is another step, considering criteria like full-time status or length of service. A decision must be made whether the employer will self-administer the QSEHRA or utilize a third-party administrator (TPA). TPAs can handle compliance, claims processing, and record-keeping.

Collecting employee information, such as names and family status, is important for accurate record-keeping. A formal, written QSEHRA plan document is legally required. This document must detail the effective date, reimbursement limits, eligible expenses, the process for claim submission, and the requirement for MEC attestation.

Establishing and Administering Your QSEHRA

Implementing the QSEHRA involves setting up its ongoing administration. A formal written plan document must be created. If a third-party administrator is engaged, they typically provide this document.

Employers are required to provide a mandatory written notice to all eligible employees annually. This notice informs employees about the QSEHRA, its reimbursement limits, and the requirement for minimum essential coverage. The notice must include the dollar amount of the permitted benefit and state that the employee must inform the Health Insurance Marketplace of this amount if they receive advance premium tax credits. For employees who become eligible mid-year, the notice must be provided on or before their eligibility date.

Setting up the reimbursement process involves establishing clear procedures for employees to submit claims. The employer or administrator must verify the eligibility of expenses and confirm the employee’s MEC before reimbursements are made. Funds are then disbursed to employees within a specified timeframe.

Ongoing administration includes maintaining accurate records of contributions, reimbursements, and employee MEC attestations. Employers must ensure employees attest to their MEC annually and with each reimbursement request. QSEHRA benefits must be reported on employees’ Form W-2, indicating the total permitted benefit available for the year. The employer also has an annual Patient-Centered Outcomes Research Institute (PCORI) fee responsibility, reported on IRS Form 720.