What Is a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)?
If you're a small employer who doesn't offer group health insurance, you can provide a qualified small employer health reimbursement arrangement, or QSEHRA, as an alternative.
With a QSEHRA, if your business has fewer than 50 full-time employees, you can offer tax-free reimbursements for your employees' qualifying medical expenses, which include premiums, prescriptions, co-pays, and similar costs.
You know how employees typically get health insurance through their jobs in the form of group plans, but for small businesses like yours, buying group health insurance can get expensive. That's where a QSEHRA comes in—it gives you a cost-effective option to help cover your employees' health insurance expenses without having to set up a full group plan.
Key Takeaways on QSEHRAs
QSEHRAs provide small businesses like yours a straightforward way to assist employees with healthcare expenses when you don't offer group health insurance. To get reimbursements, your employees need to submit documentation of their expenses. You can decide on the reimbursement amounts, but remember there's an annual maximum set by the IRS.
To offer a QSEHRA, you must not provide a group health plan or a flexible spending account (FSA), have fewer than 50 employees, and make the same arrangement available to all full-time employees.
Fast Fact About QSEHRA Origins
The QSEHRA was established by the 21st Century Cures Act, which became federal law in 2016.
Which Employees Are Eligible for a QSEHRA?
As an employer, you have to inform your employees about their eligibility for a QSEHRA. You need to give them a written notice at least 90 days before the new plan year starts. If an employee isn't eligible then, you must notify them as soon as they become eligible.
Not every employee qualifies for a QSEHRA, even if you offer one. For instance, employees who haven't completed 90 days of service, those under age 25 at the start of the plan year, part-time or seasonal workers, employees under a collective bargaining agreement where health benefits were bargained in good faith, and nonresident aliens without U.S.-sourced earned income may not be eligible.
How Does a QSEHRA Work?
For your employees to receive tax-free reimbursements through a QSEHRA, they must be enrolled in a health insurance plan that meets the Affordable Care Act's Minimum Essential Coverage (MEC) requirements. Plans from the exchange usually qualify as well.
Employees have to provide proof of MEC for themselves and any dependents they're claiming expenses for. This proof can be third-party documents like an insurance card or Explanation of Benefits, combined with an employee attestation that it's MEC, or just an attestation with details like the coverage start date and provider name.
Submit this proof before any reimbursements, and for each request after that, confirm MEC was active when the expense happened. Like with Health Savings Accounts, employees must document their medical expenses, showing what they were for and that insurance didn't cover them already.
Fast Fact on Reporting
You, as the employer, must report the reimbursement amount an employee is eligible for on their W-2 form for the year, even though it's not taxable.
QSEHRA Contribution Limits
You can choose how much to reimburse, but every full-time employee must get the same amount. There's no minimum, but for 2025, the maximum is $6,350 for self-only coverage and $12,800 for family coverage.
If an employee joins mid-year, prorate their eligible amount based on when they became eligible. Unused funds stay with you, the employer, but you can roll them over to the next year if you want.
The Bottom Line
A QSEHRA allows small businesses that skip traditional group health insurance to give tax-free reimbursements for employees' medical expenses. To qualify, you need fewer than 50 employees and can't offer a group plan or FSA. Not all employees meet the criteria, like age and service requirements. For 2025, caps are $6,350 for individuals and $12,800 for families.
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