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

Underneath the bullets, the rules that make a QSEHRA a QSEHRA are in Section 9831(d) of the Internal Revenue Code. The arrangement must be funded entirely by the employer — no salary-reduction contributions — and it must be offered on the same terms to every eligible employee, with the allowance allowed to vary only by age and by family size. The statute lets an employer leave out specific groups without breaking the same-terms rule: employees with fewer than 90 days of service, those under 25, part-time and seasonal workers, union employees whose benefits are collectively bargained, and certain nonresident aliens.

Two more mechanics matter in practice. Reimbursements are tax-free only for months in which the employee has minimum essential coverage, which is why a QSEHRA collects proof of coverage before paying. And the employer reports the total permitted benefit on each employee's Form W-2 in Box 12 with code FF, which is how the IRS reconciles the arrangement against any premium tax credit the employee claims.

• 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. For 2026, the caps are $6,450 for self-only coverage and $13,100 for family coverage, per IRS Publication 15-B (2026). 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. The figures adjust annually, so confirm the current year's numbers when you set your allowance.

The caps are indexed by the IRS each year and published in a revenue procedure, so they move; check the current figures before setting a plan year. They are prorated for anyone eligible for only part of the year, and unused allowance is not paid out — it simply goes unclaimed, so an employer's real spend is often below the cap. A QSEHRA cannot be combined with a group health plan, and it cannot be funded through salary reduction: every dollar is employer money.

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 qualified medical expenses under IRS Publication 502 — the same master list that governs HSAs and FSAs. The categories are broad: physician and hospital care, prescriptions, dental and vision care, mental health care such as psychiatric and psychologist services, medical equipment like hearing aids and wheelchairs, and transportation for medical care. Publication 502 also treats certain premiums as qualified expenses, including Medicare Parts B and D. Employees must have minimum essential coverage, as defined in section 5000A(f), for reimbursements to be excluded from their income — that requirement comes straight from the IRS employer guidance.

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.

The coordination works in two steps under Section 36B. First, the marketplace tests whether the QSEHRA makes coverage affordable for that employee — essentially whether the benchmark silver premium minus the allowance falls under the IRS affordability percentage for the year. If it does, the employee gets no premium tax credit at all for those months. If it does not, the employee can still claim the credit, but it is reduced dollar-for-dollar by the monthly QSEHRA amount. That second path is what distinguishes a QSEHRA from an ICHRA, where accepting the arrangement forecloses the credit entirely.

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.