Qualified Small Employer Health Reimbursement Account

What is a QSEHRA?

QSEHRA is a way for small businesses and non-profits to offer health insurance to their employees.

A QSEHRA allows small employers to set aside a fixed amount of money each month that employees can use to purchase individual health insurance or use on medical expenses, tax-free. This means within the QSEHRA structure, employers get to offer benefits in a tax-efficient manner without the hassle or headache of administering a traditional group plan and employees can choose the plan they want.

At the time of this writing, QSEHRA is still fairly new in the marketplace and many people haven’t heard of them. Or if they have, they’re not sure where to start.  We believe QSEHRAs can unlock huge value for small employers.  .

The mechanics of a QSEHRA are surprisingly simple. At a high-level, employees pay for their own health expenses and you reimburse them. Here’s how a QSEHRA works:

  1. Employers design their QSERHA and set reimbursement allowances
  2. Employees pay for their own health insurance and medical bills
  3. Employees provide proof of their expenses
  4. Employers reimburse the employee up to the set limit

A QSEHRA is a reimbursement. Employees will pay the insurance company or doctor’s office directly and then submit a claim to get reimbursed for their expenses tax-free.

A QSEHRA is not a bank account. This can be a little confusing at first, but it’s actually much simpler. Unlike Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) that are accounts, the “HRA” in QSEHRA stands for Health Reimbursement Arrangement. The money stays with the employer until an employee makes a claim that qualifies for reimbursement. If employees never make claims or don’t claim the full amount, the employer keeps it all! 

Under the old system, if an employer wanted to reimburse employees for individual health insurance the IRS treated those reimbursements as income and insist that the employer pay payroll taxes and the employees recognize income tax. Under the new guidelines of QSEHRA, an employer can now set up a qualified plan and reimburse employees for their individual insurance plan and receive tax advantages

Implementing a QSEHRA can unlock several big benefits for a small business or non-profit compared to other options. Here are some of the benefits and reasons why we love QSEHRA:

  • Optimized Benefits
  • Tax Efficiency
  • Flexible Design
  • Budget Control

Implementing a QSEHRA puts company reimbursements on nearly the same tax playing field as traditional small group plans, but without all the hassles and requirements. Before QSEHRA, a big advantage for group plans was that they were deductible expenses for employers and were taken out of employee paychecks on a pre-tax basis.

With QSEHRA, employers can make reimbursements without having to pay payroll taxes and employees don’t have to recognize income tax. In addition, reimbursements made by the company count as a tax deduction. Pretty awesome!

The only reason QSEHRA is not on the exact same level as group plans is if an employee wants to “buy up” to higher coverage. For example, if an employer offers employees $400/mo through a QSEHRA but an employee wants to buy the $600/mo health plan, the remaining $200/mo comes from the employee using his or her after-tax dollars, whereas on some group plans employees could buy up with pre-tax dollars.

For companies that help employees with health insurance by offering a “health stipend” or by “adding to employee salaries”, QSEHRA will typically have a huge tax advantage. For example, compare the tax consequences of a 10 person company offering employees $300/mo by increasing salaries versus through a QSEHRA:

Taxes & Fees

“Health Stipend”


Reimbursement Amount



Employee Income Tax (~25%)



Employer Payroll Tax (~15%)



Total Monthly Taxes



Table 1: QSEHRA Tax Savings Example

The result is that offering reimbursements though salary crush the value of the “stipend”, with over 30% of the value ($1,150/mo in this example) being wiped out in taxes. Ouch. With a QSEHRA, employees get to use the full value for their health insurance and medical expenses.

Flexible Design

QSEHRA provides immense flexibility over other benefit options. We’ll cover some of the mechanics in the requirement section and here will focus on the benefits. For starters, in most states, group plans require employers to contribute at least 50% of the employee-only costs and require at least 75% of employees to participate. This approach can be extremely burdensome and “group savings” typically don’t kick in until an employer has over 100 employees. With a QSEHRA, there are no minimum contributions required or participation rates to maintain the QSEHRA.

In addition, employers can typically design their QSEHRA to fit their business needs. While employers have to treat full-time employees fairly, there are a lot of levers they can pull on how much to reimburse and who gets to participate. For example, employers can vary reimbursement rates by age or by married status. They can also chose whether to include or exclude part-time and seasonal workers. For more design options, see Reimbursement Rules below.


Traditional small group plan premiums have gone up an average of 30% over the last few years. When we surveyed business owners, they mentioned they felt “hopeless” and “frustrated” at this expense that was out of their control and always going up. In many states ,the minimum contribution required to maintain a group plan is up to $400/mo per employee. In fact, you can see employers have been dumping their group plans and according to KFF, the largest reason is cost:



Employer Requirements to Offer QSEHRA

To use a QSEHRA, a small business or non-profit must meet two primary requirements:

  1. Be “small”: The business or non-profit must be a “small employer” in the eyes of the IRS with less than 50 full-time employees (defined in IRS section 4980H(c)2).
  2. Not have a group health plan: The small business or non-profit cannot have a traditional group health plan (defined in IRS section 5000(b)). This makes sense—the purpose of a QSEHRA is to reimburse for individual health insurance, so a business cannot have a group health plan at the same time. This restriction does not apply to non-health group benefits like life insurance or disability insurance.

Employee Requirements to Participate in QSEHRA

To receive tax-free reimbursements from a QSEHRA, an employee must:

  1. Be covered by an insurance plan: Employees can be covered by their spouse’s plan, their parent’s plan or purchase their own individual insurance plan. Plans must provide Minimum Essential Coverage (MEC) as defined by the IRS in Section 106(g). MEC plans include major medical plans, Medicare, Medicaid, etc. Faith-based sharing ministries, short-term plans, and indemnity plans are not MEC but may be able to be supplemented with a MEC offering in order to qualify. 
  2. Submit a claim for reimbursement: This may seem obvious but often gets overlooked! Employees have to prove they spent money on an eligible health expense before they can be reimbursed.

In addition, it’s worth noting that an eligible employee must also actually be an employee of the company providing the QSEHRA. In 99% of cases, this means someone that receives a W-2 from the company. Retirees of the company, friends of the company, contractors, and owners that are not actually employees cannot receive a tax-free reimbursement through a QSEHRA.


Can Owners Participate in QSEHRA?

In order for small business owner to be able to participate in a QSEHRA, the owner must also be an employee of the business. Employee status for owners is often determined by the corporate structure of the business. 

Reimbursement Rates

In general, employers have a lot of flexibility with how they design and implement a QSEHRA. An overarching rule though is that employees must be treated fairly. That means you can’t offer some employees more money than others unless they can be fairly separated using the design criteria below. The IRS calls this “same terms requirements” and provides details in Section C of IRS Notice 2017-67.

All reimbursements are subject to annual maximums and become available to employees on a monthly basis. This means employees can’t take the full annual amount in January—instead, the funds become available to employees each month. Here are the maximum contribution amounts and what they translate to on a monthly basis:



















Table 2: QSEHRA Reimbursement Rates for 2018 and 2017.

In the law, these amounts are tied to inflation, so we expect them to go up a little bit every year. If an employee joins the company or becomes eligible for the QSEHRA in the middle of the year, the employee is eligible for a prorated amount based on the month they became eligible. (Example: John joins ACME Corp in October and is immediately eligible for ACME’s QSEHRA. For math’s sake, let’s say ACME reimburses $200/mo ($2,400 annually). John is eligible for 3 months (October, November, December) and therefore can receive up $600 for that plan year.)

Two other key points:

  • Unclaimed funds stay with the employer. An employer may offer a QSEHRA reimbursement, but if an employee is not eligible or does not make a claim on the QSEHRA in a given plan year, the employer keeps the money.

  • QSEHRAs have to be funded solely by the employer. This makes sense when you think about it because QSEHRA is a reimbursement of expenses the employee is paying out of pocket. This can be a little confusing at first for small business owners that had traditional group health plans in the past and would deduct employee contributions on the employee’s paycheck. Just to be clear though—employees cannot contribute to a QSEHRA.



  • Reimburse all the same amount. This is pretty simple. Just pick a rate up to the individual maximum to give all employees.  
    (Example: all employees get $300/mo)

  • Reimburse all the maximum amount. Give all employees the maximum amount they are eligible for under the “singe” or “family” categories. 
    (Example: for 2018 all single employees would get $420/mo and all employees with dependents would get $854/mo.)

  • Reimburse different amounts based on family size. Employers can set different rates based on an employee’s dependents. The IRS requires that employers choose a reference plan or offer a fair percentage of the maximum. 
    (Example: Single employees get $200/mo, married employees get $300/mo, and employees with families get $400/mo)

  • Reimburse different amounts based on employee age. Employers can vary rates by age but they must be tied to a reference plan on the individual market. To save you significant hassle though, most marketplace plans offer premiums in a 1:3 ratio for individuals ages 26 to 64.
    (Example: You could set reimbursement rates for a 26 year old $100/mo and a 64 year old $300/mo using the 1:3 ratio. A 37 year old employee gets whatever amount on the linear line in between the 26 and 64 year old—Get ready to dust off your old algebra skills! The answer for the 37 year old in this example is $158/mo).

    Setting up a QSEHRA can be simple, if using an experienced provider.   Consult an experienced benefits specialist or plan provider before proceeding.   To learn more about these plans and options, please contact us at 281-448-3040, or fill out the form on this page.