What is a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)?

A QSEHRA is a qualified small employer health reimbursement arrangement, also known as a small business HRA. It is a health coverage subsidy plan designed for employees of businesses with fewer than 50 full-time employees.

The money reimbursed is tax-free for employees and is tax-deductible by employers.

How a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Works

A company that offers a QSEHRA reimburses employees for healthcare-related costs up to a maximum amount each year. In this way, an firm can contribute to its employees' healthcare costs.

To qualify to use a QSEHRA, a business must have fewer than 50 full-time employees, provide the QSEHRA on the same terms to all full-time workers, and not have a group health plan or a flexible spending arrangement (FSA). (A QSEHRA is not a group health plan.)

Key Takeaways

  • A QSEHRA is a health cost reimbursement plan that can be offered by small business employers.
  • The costs reimbursed are tax deductible by businesses and tax free for employees.
  • The plan can be used to offset health insurance coverage or repay uncovered medical expenses.

In tax year 2020, a company with a QSEHRA may reimburse single employees up to $5,250 per year and employees with families up to $10,600 per year. These are up from the 2019 tax year maximums of $5,150 for individual coverage and $10,450 for family coverage.

The limits are set by the Internal Revenue Service (IRS) because the employer is eligible to take a business tax deduction for its costs and the benefit to employees is tax-free.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Allowable Uses

Reimbursements may be used to pay the premiums for health insurance purchased on the market and to pay for qualified medical expenses. Employees must provide proof of their actual medical costs to receive reimbursement.

Employees must have qualifying health coverage in order to use their QSEHRA.

Employees not covered by a QSEHRA for a full year (e.g., mid-year hires) receive a prorated amount of the full-year maximum reimbursement amount.

Former President Barack Obama signed the QSEHRA into law on Dec. 13, 2016, as part of the 21st Century Cures Act. The plans became available to employees on March 13, 2017.

The act corrected a problem for small businesses offering health reimbursement arrangements (HRAs) between 2014 and 2016. During this period, small businesses could be hit with penalties of $100 per employee per day for being out of compliance with the requirements of the Affordable Care Act (ACA).

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Eligibility

Medium and large companies may offer HRAs only as an option alongside group health insurance coverage such as a preferred provider organization (PPO) or health maintenance organization (HMO) plan. 

Sole proprietors, partners in partnerships, and self-employed employers are not eligible for HMO and PPO plans.

An HRA is an optional benefit that smaller employers use to reimburse employees for qualified medical costs. Employers may narrow the list of eligible expenses but cannot expand it.

Examples of qualified medical expenses include copayments for doctor’s office visits, prescriptions, and lab work.

Employers fund HRAs solely, and the benefits are tax-free to the employees. Eligible employees may enroll during open enrollment season or after experiencing a qualifying life event, such as a marriage or divorce.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Compliance

To comply with the law, all employees covered by a QSEHRA must benefit from it equally. Employer contributions to each employee's account must be equal.

Employers are not required to include new, part-time, or seasonal workers in the benefits they provide. However, if they offer a QSEHRA to full-time employees, they must cover all of them. If an employer makes another form of group health insurance available, they cannot offer a QSEHRA plan.

Because the ACA governs these arrangements, participating employees must provide proof that they carry the minimum essential health coverage required by the ACA.

QSEHRA plans receive oversight from the Employee Retirement Income Security Act (ERISA). Following ERISA regulation, employers must give employees a summary plan description that describes their plan benefits.