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

More than half of small businesses don’t offer health benefits, not because they don’t want to, but because traditional group plans are expensive, complicated, and often not built for smaller teams. But here’s the thing: offering meaningful health coverage isn’t just possible for small employers — it can be simple, affordable, and flexible, too. That’s where the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) comes in.

A QSEHRA lets small businesses reimburse employees for medical expenses and health insurance premiums tax-free. It’s a smarter way to provide real healthcare support without the headache of managing a group insurance plan.

In this article, we’ll break down what a Qualified Small Employer HRA is, how a QSEHRA plan works, who qualifies, how it stacks up against other HRA plans like Individual Coverage HRA (ICHRA), and why choosing the right HRA administrator can make all the difference.

Defining a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is a specific type of Health Reimbursement Arrangement (HRA) plan built for small businesses with fewer than 50 full-time equivalent employees. This is a flexible health benefit option specifically for small businesses. Unlike traditional group health insurance, a QSEHRA allows employers to reimburse employees for health insurance premiums and qualified medical expenses.

This arrangement gives both employers and employees more flexibility. The employer decides how much to contribute each year (within IRS limits), and employees choose the health plan or medical services that make sense for them and their families. Best of all, these reimbursements are tax-free for employees, as long as they have minimum essential coverage (MEC).

A QSEHRA is sometimes called a Qualified Small Employer HRA, a QSEHRA plan, or simply a small business HRA — but it always refers to the same benefit: helping small employers support their teams without the complexity of traditional insurance.

How Does a Qualified Small Employer HRA Work?

QSEHRA plans operate on a simple premise: employers reimburse, employees choose.

Instead of offering a group insurance policy, the employer sets a monthly or annual allowance, within IRS-established limits, and employees can use those funds to pay for health insurance premiums or eligible medical expenses. Employees submit proof of their expenses, and the employer reimburses them, tax-free.

To keep things compliant and running smoothly, there are a few key requirements:

• The employer must provide the same terms to all eligible employees. Employers can adjust reimbursement amounts to account for employee ages and the number of individuals covered.
• Employees must maintain minimum essential coverage (MEC).
• Employers must follow IRS reporting rules and provide timely notice to employees.

This setup gives employees autonomy to find plans that suit their needs — whether that’s a marketplace plan, coverage through a spouse, or another qualifying option.

Eligibility Criteria for QSEHRA Plans

QSEHRA plans are designed for small businesses, but not every employer qualifies. Here’s what you need to know:

To offer a QSEHRA, an employer must meet specific criteria:

• The employer must be a small business with fewer than 50 full-time equivalent employees.
• The employer cannot offer a group health plan to any employee.
• The employer must offer all eligible employees the QSEHRA on the same terms.

Employees are eligible for QSEHRA reimbursements if they:

• Are full-time employees (part-time employees may be eligible under certain circumstances).
• Have minimum essential coverage (MEC).

‍

Benefits of Implementing a QSEHRA Plan

A QSEHRA plan offers several benefits for both employers and employees, including cost savings, flexibility, and dual tax advantages. These combined benefits make QSEHRA an attractive option for both employers and employees seeking affordable and flexible healthcare coverage.

Cost

Employers: QSEHRA plans give small businesses control over their healthcare spend. You set a budget-friendly monthly reimbursement allowance that fits your bottom line — no surprises, no runaway costs. Since there are no insurance premiums to manage, you get predictability and cost control while still offering a competitive health benefit.

Employees: With a QSEHRA, employees can get reimbursed for qualified medical expenses and health insurance premiums tax-free. This reduces their out-of-pocket costs and puts money back in their pockets for the care they actually use, without being tied to one-size-fits-all group coverage.

Flexibility

Employers: You’re no longer locked into a single group health plan or forced to manage provider networks. QSEHRA plans give you the ability to offer real health benefits without the administrative lift.

Employees: QSEHRA plans empower employees to choose the health insurance and services that best match their needs and budget. Whether it's an individual policy, a family plan, or a combination of medical expenses, they’re in control of how they use their benefit.

Tax Advantages

Employers: Reimbursements made through a QSEHRA are tax-deductible, which helps reduce your business’s overall tax liability. It's a smart way to support your team while keeping your expenses efficient.

Employees: As long as employees maintain minimum essential coverage (MEC), their reimbursements are tax-free, meaning that money is not subject to income or payroll taxes. That’s real money saved on both sides.

Access

Employers: A QSEHRA is more than a reimbursement tool—it’s a pathway to coverage. It qualifies as a life event, allowing employees to enroll in health insurance mid-year and access Marketplace subsidies. For businesses that can’t afford group coverage, it’s a cost-effective way to support enrollment and encourage employee wellbeing.

Employees: QSEHRAs expand access to coverage and financial support. If the allowance is unaffordable, employees can still claim tax credits (reduced by the QSEHRA amount). If it’s affordable, the QSEHRA covers a meaningful share of premiums. Either way, it helps employees get and stay covered on their terms.