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

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

If a small employer does not offer group health insurance coverage, it may provide a qualified small employer health reimbursement arrangement (QSEHRA) instead.

With a QSEHRA, employers with fewer than 50 full-time employees can provide tax-free reimbursements for an employee’s qualifying medical expenses. Medical expenses include premiums, prescriptions, co-pays, and more.

Typically, employees receive health insurance through their employers, which is known as group health insurance. Yet for small businesses, purchasing group health insurance can be costly. A QSEHRA offers small employers a cost-effective way to help cover employees’ health insurance expenses without needing to sponsor a group health insurance plan.

Typically, in order to offer a QSEHRA, employers must meet the following requirements:

• Don’t offer a group health plan or a flexible spending account (FSA)
• Have fewer than 50 employees
• Provide the same health reimbursement arrangement to all full-time employees

Which Employees Are Eligible For a QSEHRA?

Businesses are required to inform employees that they’re eligible for a QSEHRA.

Employers must provide employees with a written notice regarding their QSEHRA eligibility at least 90 days before the beginning of a new plan year. However, if an employee is not eligible at that time, a business is required to notify the employee when they first become eligible.

Some employees may not be eligible for QSEHRA even if their employer offers one. The following types of employees may not qualify:

• Employees who have not completed 90 days of service
• Employees who are not at least age 25 before the beginning of the plan year
• Part-time or seasonal employees
• Employees covered by a collective bargaining agreement, if health benefits were the subject of good faith bargaining
• Employees who are nonresident aliens with no earned income from sources within the United States

How Does a QSEHRA Work?

In order to receive tax-free reimbursements for medical expenses through a QSEHRA, employees must be enrolled in a health insurance plan that meets the Affordable Care Act’s (ACA) Minimum Essential Coverage (MEC) requirements. Typically, health insurance plans available on the exchange meet the MEC requirements, too.

Employees are required to provide proof of MEC for themselves and any dependents whose expenses will be reimbursed. Acceptable proof includes:

• Third-party documentation, such as an insurance card or Explanation of Benefits (EOB), along with an employee attestation confirming that the coverage qualifies as MEC; or
• An employee attestation stating that they (and any covered dependents) have MEC, including details like the coverage start date and the name of the insurance provider.

This proof must be submitted before any reimbursements can be made. For each subsequent reimbursement request, employees must prove MEC is still in place for the period during which the medical expense was incurred.

Similar to Health Savings Accounts (HSAs), employees must provide documentation to substantiate their medical expenses to receive reimbursements from their employers. This documentation should detail the nature of the expense and confirm that it was not already covered by insurance.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Contribution Limits

Small businesses can choose how much they want to reimburse, but each full-time employee must be eligible for the same reimbursement amount.

While there’s no minimum amount that employers must reimburse, there is a maximum amount. For 2025, the maximum amount is $6,350 for self-only coverage and $12,800 for family coverage.

If an employee becomes eligible for a QSEHRA after the beginning of the year, the amount of reimbursements that the employee is eligible for is prorated based on when they became eligible.

If an employee doesn’t use their full QSEHRA allowance, the employer keeps the unused funds, but they can roll them over to the next year.

The Bottom Line

A QSEHRA lets small businesses that don’t provide traditional group health insurance offer tax-free reimbursements for employees’ medical expenses. To qualify, employers must have fewer than 50 employees and can’t offer a group plan or an FSA.

Not all employees are eligible, as they may have to meet certain age and employment criteria. For 2025, reimbursement limits are capped at $6,350 for individuals and $12,800 for families.