What is a QSEHRA?

QSEHRA definition

A QSEHRA is a type of HRA created for small employers. The business sets a monthly allowance — up to an annual IRS cap — and reimburses employees tax-free for individual health insurance premiums and qualified medical expenses. It is designed to be simple and is only available to employers with fewer than 50 full-time-equivalent employees that don't offer a group health plan.

Think of it as the small-employer entry point to health reimbursement: capped and straightforward, where ICHRA is uncapped and more flexible.

Where QSEHRA came from

QSEHRA was created by the 21st Century Cures Act, signed in December 2016 and effective in 2017. It restored a compliant way for small businesses to reimburse employees for individual health insurance after earlier guidance had effectively penalized informal premium reimbursement. ICHRA followed in 2020, removing QSEHRA's cap and size limit — but QSEHRA remains popular for its simplicity.

How a QSEHRA works

• The employer sets a monthly allowance, up to the annual IRS cap (separate self-only and family limits).
• Employees obtain minimum essential coverage and incur eligible expenses.
• Employees submit proof; the employer reimburses them tax-free, usually via payroll.
• All eligible employees are generally offered the QSEHRA on the same terms, though amounts can vary by age and family size.

QSEHRA contribution limits

QSEHRA contributions are capped at an annual IRS maximum, with separate limits for self-only and family coverage, adjusted each year for inflation. You can set any allowance up to the cap — there is no minimum. This cap is the defining difference from ICHRA, which has no contribution limit at all. Always confirm the current year's figures, since they change annually.

QSEHRA eligibility

To offer a QSEHRA you must have fewer than 50 full-time-equivalent employees and not offer a group health plan (you can't run both at once). Employees need minimum essential coverage to receive reimbursements tax-free.

Unlike ICHRA, QSEHRA doesn't use the 11-class system — terms are generally the same for all eligible employees, with amounts varying only by age and family size. Owner eligibility depends on business structure, as with any HRA.

The required QSEHRA notice

Employers must give eligible employees a written notice, generally at least 90 days before the start of the plan year, stating the benefit amount and explaining how it affects any ACA premium tax credit. New hires are notified before their eligibility begins. Missing the notice carries penalties, so it's a step not to overlook.

What a QSEHRA reimburses

A QSEHRA can reimburse individual health insurance premiums and a broad range of IRS Publication 502 qualified medical expenses — copays, deductibles, prescriptions, dental, and vision. Employees must have minimum essential coverage for premium reimbursements to be tax-free.

QSEHRA and ACA subsidies

This is a key difference from ICHRA. A QSEHRA reduces (rather than eliminates) an employee's ACA premium subsidy by the benefit amount. An affordable ICHRA, by contrast, generally disqualifies the subsidy entirely. For lower-income employees who qualify for large subsidies, this interaction matters — a broker can model it per employee.

QSEHRA vs ICHRA

• Company size: QSEHRA is for under-50 employers; ICHRA has no size limit.
• Cap: QSEHRA is capped at an annual IRS limit; ICHRA has no cap.
• Classes: QSEHRA offers the same terms to all; ICHRA supports 11 employee classes.
• Subsidies: QSEHRA reduces an ACA subsidy; an affordable ICHRA replaces it.
• Many businesses start with QSEHRA and move to ICHRA as they grow past 50 employees or want to contribute more.

Pros and cons of a QSEHRA

• Pro: simple to run, with low administrative overhead.
• Pro: tax-free, no group plan, no participation minimum.
• Pro: can preserve partial ACA-subsidy eligibility.
• Con: capped at the annual IRS limit — you can't contribute more.
• Con: limited to employers under 50 employees and no employee classes.
• Con: employees must obtain minimum essential coverage and submit proof.

How to set up a QSEHRA

The path: confirm eligibility (under 50 FTEs, no group plan), set a monthly allowance up to the IRS cap, provide the required notice, and reimburse tax-free with substantiation once employees enroll in coverage. A broker or administrator handles the plan document, notice, and substantiation. If you're approaching 50 employees or want to contribute more than the cap, consider ICHRA instead.

Common QSEHRA mistakes

• Offering a QSEHRA while also maintaining a group plan (not allowed).
• Exceeding the annual contribution cap.
• Skipping or mistiming the required employee notice.
• Reimbursing employees who lack minimum essential coverage.
• Not accounting for how the benefit reduces an employee's ACA subsidy.