QSEHRA: IRS Rules and Reporting Requirements

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a formal plan established by small businesses to provide tax-advantaged funds to employees for medical care expenses. This structure allows employers to reimburse workers for costs like health insurance premiums without the complexities of administering a traditional group health plan. IRS guidelines govern these arrangements, ensuring benefits are tax-free to employees and a deductible expense for the employer. A QSEHRA is funded entirely by the employer, with no employee salary deferrals permitted.

Employer Eligibility and Contribution Rules

To offer a QSEHRA, an employer must meet two primary conditions. The first is a size requirement: the business must have fewer than 50 full-time equivalent employees. This calculation includes full-time employees and an aggregation of hours worked by part-time employees. The second condition is that the employer cannot simultaneously offer a group health plan to any of its employees.

The IRS establishes annual limits on employer contributions, which are adjusted for inflation. For 2025, an employer can provide up to $6,350 for an employee with self-only coverage and up to $12,800 for family coverage. Employers are not required to contribute the maximum amount and can set their own allowance levels.

A QSEHRA must be provided on the same terms to all eligible employees. However, allowances can vary by age or family size if the difference is tied to the actual cost of a specific health insurance policy in the local market. If an employee becomes eligible mid-year, their contribution limit must be prorated.

Employee Participation and Reimbursement Process

For an employee to receive tax-free reimbursements from a QSEHRA, they must be enrolled in a health plan that provides Minimum Essential Coverage (MEC). An employer’s initial QSEHRA offer can trigger a 60-day Special Enrollment Period, allowing employees to purchase a qualifying health plan on the marketplace. MEC is a standard of health insurance defined by the Affordable Care Act (ACA) and includes most marketplace plans, employer-sponsored plans from another job, Medicare, and Medicaid. If an employee receives QSEHRA funds without MEC, those reimbursements are considered taxable income.

QSEHRA funds can be used for a wide range of medical expenses as defined in IRS Publication 502. Eligible costs include:

• Health insurance premiums
• Payments for deductibles, co-pays, and coinsurance
• Dental and vision care
• Prescription drugs
• Other qualified medical services not covered by a standard health plan

To receive funds, an employee must submit proof that they incurred a valid medical expense, such as an invoice, receipt, or an Explanation of Benefits (EOB) from an insurance company. The employee must also attest annually that they and any family members being reimbursed have MEC.

IRS Notice and Reporting Requirements

Employer Requirements

Employers are subject to specific IRS notice and reporting mandates to maintain a compliant QSEHRA. At least 90 days before each plan year, the employer must provide a written notice to every eligible employee. This notice must include the employee’s permitted benefit amount for the year, a statement that the employee must inform any Health Insurance Marketplace of this amount, and a warning that the QSEHRA may reduce any potential Premium Tax Credit.

The employer’s reporting responsibilities extend to the employee’s annual Form W-2. The total permitted benefit an employee is entitled to receive for the calendar year must be reported in Box 12 using code FF. This amount is the total available allowance, not the amount the employee actually used. If an employee’s eligibility changes during the year, such as a mid-year start date, the reported amount must be prorated accordingly.

Employee Responsibilities

The information on the Form W-2 is used by the employee during tax filing. The QSEHRA amount reported in Box 12 with code FF directly impacts an employee’s eligibility for the Premium Tax Credit (PTC) if they purchase health insurance through a government marketplace. The PTC is a tax credit designed to help make health insurance premiums more affordable for individuals and families with modest incomes.

When an employee completes their federal income tax return, they must use IRS Form 8962, “Premium Tax Credit (PTC),” to reconcile any advance credit payments or to claim the credit. On this form, the employee is required to reduce their monthly PTC eligibility by the amount of their monthly QSEHRA benefit. This calculation ensures that the employee does not receive a duplicative tax benefit, as the QSEHRA amount effectively lowers the net premium cost used to calculate the final tax credit.