A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a tax-advantaged employee benefit that allows eligible small employers to reimburse employees for qualified medical expenses and, in many cases, individual health insurance premiums.
Unlike a traditional group health insurance plan, a QSEHRA allows employers to set a monthly reimbursement allowance instead of purchasing health insurance for their employees. Employees pay for eligible expenses, submit documentation, and receive tax-free reimbursements, provided they meet the applicable requirements.
For many small businesses, a QSEHRA offers a flexible and affordable way to help employees with healthcare costs.
How Does a QSEHRA Work?
A QSEHRA is funded entirely by the employer.
Here’s how the process typically works:
- The employer establishes a monthly or annual reimbursement allowance.
- Employees purchase their own individual health insurance or incur eligible medical expenses.
- Employees submit eligible expenses for reimbursement.
- The employer reimburses the employee up to their available allowance.
Unlike a Health Savings Account (HSA), employees do not contribute their own money to a QSEHRA.
Who Can Offer a QSEHRA?
A QSEHRA is designed specifically for smaller employers.
Generally, a business may offer a QSEHRA if it:
- Has fewer than 50 full-time equivalent employees.
- Does not offer a group health plan to its employees.
If an employer offers traditional group health insurance, a QSEHRA generally is not available.
What Can a QSEHRA Reimburse?
Depending on how the employer designs the plan, a QSEHRA may reimburse:
- Individual health insurance premiums
- Medicare premiums
- Dental insurance premiums
- Vision insurance premiums
- Qualified out-of-pocket medical expenses
- Prescription medications
- Copayments
- Deductibles
- Coinsurance
Employers can choose whether to reimburse premiums only or both premiums and other qualified medical expenses.
Who Is Eligible?
Generally, all eligible employees must be offered the QSEHRA on the same terms.
However, employers may exclude certain categories of employees if permitted under IRS rules, such as:
- Employees who have not completed a waiting period
- Part-time employees
- Seasonal employees
- Temporary employees
- Employees covered by a collective bargaining agreement (in certain circumstances)
- Certain nonresident aliens
The plan document should clearly define who is eligible.
How Much Can an Employer Contribute?
Unlike many employee benefits, the employer determines the reimbursement allowance.
The allowance may vary based on:
- Individual versus family coverage
- The employer’s chosen reimbursement limits
- Applicable IRS annual maximums
Employers are not required to contribute the maximum amount allowed.
Many businesses choose an allowance that fits both their budget and their employee benefit goals.
For the current maximums: see our Benefits Solutions Guide
What Are the Advantages of a QSEHRA?
Many small employers choose a QSEHRA because it offers flexibility and predictable costs.
Some advantages include:
Predictable Employer Costs
Instead of paying whatever the insurance carrier charges each year, employers decide how much they want to reimburse.
Tax Advantages
Employer reimbursements are generally tax deductible, and eligible employee reimbursements are generally received tax-free.
Employees Choose Their Own Coverage
Rather than enrolling everyone in the same group health plan, employees may select individual coverage that best fits their needs, subject to applicable QSEHRA requirements.
Easier Budgeting
Because the employer establishes the reimbursement allowance, annual benefit costs are easier to predict.
Are There Any Limitations?
A QSEHRA is an excellent solution for many employers, but it is not appropriate for every situation.
For example:
- Employers offering group health insurance generally cannot also offer a QSEHRA.
- Annual reimbursement limits apply.
- Employees generally must maintain qualifying health coverage to receive tax-free reimbursements.
- Certain notice and reporting requirements apply.
Because of these rules, employers should carefully evaluate whether a QSEHRA is the right benefit for their organization.
How Is a QSEHRA Different from an ICHRA?
Although both are Health Reimbursement Arrangements, they serve different purposes.
A QSEHRA:
- Is available only to eligible small employers.
- Cannot generally be offered alongside a traditional group health plan.
- Is subject to annual reimbursement limits.
An Individual Coverage HRA (ICHRA):
- May be offered by employers of any size.
- May be offered alongside a group health plan if employees are divided into permitted classes.
- Does not have annual employer contribution limits.
If you’re unsure which arrangement is appropriate, see our guide on QSEHRA Vs ICHRA.
Is a QSEHRA Right for My Business?
A QSEHRA is often a good fit for employers who:
- Have fewer than 50 full-time equivalent employees.
- Do not currently offer group health insurance.
- Want to help employees pay for healthcare expenses.
- Need a predictable healthcare benefit budget.
- Want an alternative to sponsoring a traditional group health plan.
However, businesses with existing group coverage or more complex benefit strategies may find that an ICHRA or another type of HRA is a better solution.
Do I Need a QSEHRA Administrator?
While it is possible for employers to administer a QSEHRA themselves, most choose to work with a third-party administrator.
A QSEHRA administrator can help with:
- Preparing required plan documents
- Reviewing reimbursement requests
- Maintaining HIPAA privacy
- Tracking employee allowances
- Providing employee support
- Helping employers remain compliant with applicable regulations
Professional administration can reduce the administrative burden on your HR or payroll staff while providing employees with a smoother experience.
How Empower Helps Small Businesses
Empower helps small employers implement and administer Qualified Small Employer Health Reimbursement Arrangements.
We assist with:
- QSEHRA plan implementation
- Required plan documentation
- Claims administration
- Employee communications
- Ongoing 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 or want to compare it with other benefit options, Empower can help you determine which solution best fits your business and your employees.
