What Is the Source for Funding a QSEHRA?

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers a structured health benefit solution for small businesses. It allows employers to reimburse employees for qualified medical expenses and health insurance premiums. The primary intent of a QSEHRA is to enable smaller companies, those typically unable to offer traditional group health insurance, to provide valuable health benefits to their workforce. This arrangement helps bridge the gap in healthcare access, supporting employees in managing their health costs.

The Nature of QSEHRA Funding

QSEHRAs are fundamentally distinct from traditional health insurance plans because they are exclusively employer-funded, meaning employees do not contribute their own money. This design ensures the benefit is provided solely by the business, differentiating it from arrangements involving employee salary deferrals.

A QSEHRA operates as a reimbursement arrangement, not a pre-funded account. Employers do not pre-load funds into individual employee accounts or directly pay insurance providers. Instead, funds are disbursed only after an employee incurs an eligible medical expense and submits a valid claim for reimbursement.

The employer establishes an annual allowance, representing the maximum amount available to each employee for reimbursement. This allowance defines the employer’s financial commitment under the QSEHRA. Setting this allowance allows businesses to tailor the benefit to their budget while providing meaningful support for healthcare costs.

Unlike traditional group health insurance, a QSEHRA empowers employees to select and purchase their own health coverage. The employer’s role shifts from providing a specific group plan to offering an allowance that employees can use for individual health insurance premiums or other qualified medical expenses. This approach offers employees greater choice and personalization in their healthcare decisions.

Eligible Expenses and Reimbursement Procedures

QSEHRA funding can be used for a wide range of medical expenses. These include health insurance premiums for individual plans, out-of-pocket costs like deductibles, co-pays, and prescription medications. Eligible expenses also include medical services, dental care, vision care, over-the-counter medicines, and menstrual care products. Employers can limit reimbursements to premiums only, or include both premiums and other qualified medical expenses, but not medical expenses only.

The process for employees to receive reimbursement involves several steps. An employee incurs an eligible medical expense or pays a health insurance premium. The employee then submits documentation to the employer or a designated QSEHRA administrator. This documentation typically includes receipts, an Explanation of Benefits (EOB) from their insurance provider, or proof of premium payment.

Upon receiving the claim, the employer or administrator reviews the submitted documentation to verify the expense’s eligibility. Once approved, the employer reimburses the employee for the verified amount, up to the employee’s available annual allowance.

To receive tax-free reimbursements from a QSEHRA, employees must maintain Minimum Essential Coverage (MEC). MEC is a health insurance plan meeting Affordable Care Act requirements, such as individual plans, job-based plans, Medicare, or Medicaid. Employees are often required to provide proof of MEC before receiving reimbursements and may need to re-attest periodically.

Funding Limits and Tax Considerations

The Internal Revenue Service (IRS) establishes annual maximum reimbursement limits for QSEHRAs. For taxable years beginning in 2025, the maximum amount an employer can provide is $6,350 for single employees and $12,800 for employees with family coverage. These limits are set by IRS Revenue Procedure 2024-40. Employers can set allowances up to these maximums, and if an employee becomes eligible mid-year, the annual limit must be prorated based on eligible months.

For employees, QSEHRA reimbursements are generally considered tax-free income. This favorable tax treatment applies as long as the employee maintains Minimum Essential Coverage (MEC) throughout the period for which they receive reimbursements. If an employee lacks MEC, any reimbursements become taxable income, which is reported on their W-2 form.

From the employer’s perspective, QSEHRA reimbursements are treated as a deductible business expense. This deduction helps offset the cost of providing the benefit, making it a tax-efficient way for small businesses to support their employees’ health needs. The tax advantages for both parties contribute to the attractiveness of QSEHRAs as a health benefit solution.

Employers also have specific reporting obligations related to QSEHRAs. The total QSEHRA benefit available to an employee for the year must be reported on their Form W-2. This reporting is done in Box 12, using code FF, and includes the full permitted benefit amount, regardless of how much the employee actually used. This requirement is detailed in IRS Notice 2017-67.