A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) allows eligible small businesses to reimburse employees for health insurance premiums and qualified medical expenses on a tax-advantaged basis.
Unlike traditional group health insurance, a QSEHRA does not involve the employer purchasing a health plan for employees. Instead, the employer sets a reimbursement allowance, and employees are reimbursed for eligible expenses up to that amount.
For many small businesses, a QSEHRA provides a predictable, flexible way to help employees pay for healthcare.
Step 1: The Employer Establishes a QSEHRA
The process begins with the employer adopting a QSEHRA plan.
The employer determines:
- Which employees are eligible
- The monthly or annual reimbursement allowance
- Whether the plan will reimburse insurance premiums only or both premiums and qualified medical expenses
- The effective date of the plan
The employer must also prepare the required plan documents and provide employees with the required notices.
Step 2: Employees Obtain Their Own Health Coverage
Unlike a traditional group health plan, employees generally obtain their own individual health insurance coverage.
Depending on their circumstances, employees may purchase coverage through:
- The Health Insurance Marketplace
- An insurance broker
- A private insurance carrier
- Medicare (if eligible)
Because employees choose their own coverage, they can often select the plan that best meets their family’s healthcare needs.
Step 3: Employees Incur Eligible Expenses
Once enrolled, employees may incur expenses that are eligible under the QSEHRA.
Depending on the employer’s plan design, reimbursable expenses may include:
- Individual health insurance premiums
- Medicare premiums
- Dental insurance premiums
- Vision insurance premiums
- Doctor visits
- Prescription medications
- Copayments
- Deductibles
- Coinsurance
- Other qualified medical expenses
Some employers choose to reimburse premiums only, while others allow reimbursement of both premiums and other qualified medical expenses.
Step 4: Employees Submit Documentation
Employees submit documentation showing that the expense is eligible for reimbursement.
Examples may include:
- Insurance premium invoices
- Explanation of Benefits (EOBs)
- Receipts for qualified medical expenses
A third-party administrator reviews the documentation to determine whether it qualifies under the plan and applicable IRS rules.
Step 5: The Employer Reimburses the Employee
Once an expense is approved, the employer reimburses the employee up to the amount of their available allowance.
For example:
- Employer monthly allowance: $400
- Employee submits an eligible premium payment of $350
- Employer reimburses $350
Or:
- Employer monthly allowance: $400
- Employee submits eligible expenses totaling $550
- Employer reimburses $400, with the remaining amount handled according to the terms of the plan.
The employer controls the maximum reimbursement amount, making benefit costs predictable throughout the year.
Who Pays for the QSEHRA?
The employer funds the entire benefit.
Employees do not contribute through payroll deductions like they would with a Flexible Spending Account (FSA).
Instead, the employer simply reimburses eligible expenses up to the established allowance.
Do Employees Receive the Full Allowance Automatically?
No.
A QSEHRA is a reimbursement arrangement.
Employees receive reimbursement only after submitting eligible expenses that comply with the plan.
If an employee does not incur eligible expenses, there is generally nothing to reimburse.
Does Every Employee Receive the Same Amount?
Generally, eligible employees must be offered the QSEHRA on the same terms.
However, employers may vary reimbursement amounts based on whether an employee has:
- Self-only coverage
- Family coverage
This allows employers to provide larger allowances to employees covering spouses or dependents.
Why Do Employers Like QSEHRAs?
Many small businesses choose a QSEHRA because it offers several advantages over traditional group health insurance.
Predictable Costs
The employer decides the reimbursement allowance rather than being subject to annual insurance premium increases.
Greater Employee Choice
Employees choose the individual health plan that works best for them instead of enrolling in a one-size-fits-all group policy.
Tax Advantages
Eligible reimbursements are generally tax-free to employees and tax-deductible for employers.
Simpler Budgeting
Because reimbursement amounts are established in advance, employers have greater control over healthcare benefit costs.
Is a QSEHRA Right for Every Employer?
No.
A QSEHRA works best for employers that:
- Have fewer than 50 full-time equivalent employees.
- Do not offer a traditional group health plan.
- Want to provide healthcare benefits without sponsoring group insurance.
If your business already offers group health insurance, or if you need different benefit options for different classes of employees, an Individual Coverage HRA (ICHRA) may be a better fit.
Why Work With a QSEHRA Administrator?
Although employers can administer a QSEHRA themselves, many choose to work with an experienced third-party administrator.
A QSEHRA administrator can assist with:
- Preparing plan documents
- Reviewing reimbursement requests
- Protecting employee medical information
- Tracking reimbursement balances
- Providing employee support
- Helping maintain compliance with applicable regulations
Professional administration helps reduce the burden on your HR or payroll staff while providing employees with a smoother experience.
How Empower Helps Employers Administer QSEHRAs
Empower helps small businesses implement and administer Qualified Small Employer Health Reimbursement Arrangements from initial setup through ongoing administration.
Our services include:
- QSEHRA implementation
- Plan documentation
- Claims administration
- Employee communications
- Compliance support
We also administer:
- Flexible Spending Accounts (FSAs)
- Health Reimbursement Arrangements (HRAs)
- Individual Coverage HRAs (ICHRAs)
- COBRA administration
- Lifestyle Spending Accounts (LSAs)
- Commuter benefits
If you’re considering offering a QSEHRA, Empower can help you understand how the arrangement works and determine whether it’s the right solution for your business.
