QSEHRA Health reimbursement arrangement guide

Understanding the QSEHRA opportunity

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) represents a valuable tax strategy for small businesses seeking to provide health benefits to employees while maximizing tax deductions. Established by the 21st Century Cures Act in 2016, QSEHRA allows small employers to reimburse employees for medical expenses and individual health insurance premiums tax-free.

This arrangement enables businesses with fewer than 50 full-time employees to compete with larger companies in attracting and retaining talent by offering meaningful health benefits. Unlike traditional group health plans, QSEHRA provides flexibility for both employers and employees while delivering significant tax advantages for the business.

The QSEHRA strategy has become increasingly popular as healthcare costs continue to rise and small businesses seek cost-effective ways to support their workforce. Understanding proper implementation ensures compliance with IRS requirements while maximizing available tax benefits.

Essential eligibility requirements for QSEHRA

QSEHRA eligibility involves specific requirements that businesses must meet to qualify for this tax-advantaged arrangement. The IRS has established clear criteria to ensure that only qualifying small employers can implement these plans.

Small employer requirement

The primary eligibility requirement is that your business must be a "small employer," defined as having fewer than 50 full-time equivalent employees during the preceding calendar year. This calculation includes:

1. Full-time employees working 30 or more hours per week
2. Part-time employees are calculated on a full-time equivalent basis
3. Seasonal employees during their active work periods

The employee count is determined on the last day of each month during the prior year, and the monthly averages determine qualification status.

Examples of QSEHRA-eligible, tax-free reimbursements include:

• Monthly insurance premiums
  
  • For individual ACA plans, Medicare Parts B and D, Medicaid (where premiums apply), dental or vision insurance, and—in some cases—a spouse’s group health plan (as a taxable benefit if the plan isn’t MEC)
• Prescription drugs and certain over-the-counter medicines (must be medically necessary; some may require a doctor’s note)
• Dental or vision coverage
• Preventive care services (e.g., screenings, immunizations)
• Mental health services
• Alternative treatments
  
  • E.g., acupuncture, chiropractic care, dietitian or nutritionist services (if medically necessary), etc.

No group health plan restriction

Businesses offering QSEHRA cannot simultaneously maintain a group health plan for their employees. This means:

• No traditional employer-sponsored health insurance
• No Health savings account (HSA) contributions from the employer
• No other group health arrangements that would conflict with QSEHRA

However, employees can maintain their health insurance policies and receive QSEHRA reimbursements for premiums and qualifying medical expenses.

Written plan document requirement

The IRS requires businesses to maintain a written plan document that outlines:

• Plan eligibility requirements
• Reimbursement procedures and limitations
• Claims submission and processing protocols
• Maximum annual benefit amounts
• Plan year dates and renewal procedures

This documentation serves as the foundation for plan administration and helps ensure compliance during IRS examinations.

QSEHRA contribution limits and restrictions

Understanding QSEHRA contribution limits is crucial for proper plan design and tax compliance. The IRS sets annual limits that businesses cannot exceed when reimbursing employee medical expenses.

Annual contribution limits

For 2025, QSEHRA contribution limits are:

1. Individual coverage: $6,350 annually
2. Family coverage: $12,800 annually

These limits apply to the total amount an employer can contribute toward an employee's medical expenses and health insurance premiums. The limits are indexed for inflation and typically increase annually.

Age-based adjustments

QSEHRA plans can provide higher contribution amounts for older employees, with increases allowed for each five-year age bracket above age 25. However, the age-adjusted amounts cannot exceed 200% of the base contribution limit.

Proration for partial-year participation

Employees who participate for less than a full plan year receive prorated contribution limits based on their period of eligibility. This ensures fair treatment for new hires and employees with coverage changes during the year.

Qualifying medical expenses under QSEHRA

QSEHRA arrangements can reimburse employees for a broad range of qualifying medical expenses, similar to those eligible under health savings accounts and flexible spending arrangements.

Individual health insurance premiums

One of the most valuable QSEHRA benefits is the ability to reimburse employees for individual health insurance premiums. This includes:

• Individual health insurance policies purchased through state exchanges
• Private individual health insurance policies
• Short-term medical insurance premiums
• COBRA continuation coverage premiums

Premium reimbursements help employees afford individual coverage while providing the employer with a tax deduction for the reimbursement amounts.

Medical, dental, and vision expenses

QSEHRA can reimburse employees for qualifying medical expenses, including:

1. Medical expenses: Doctor visits, prescription medications, medical procedures, and hospital services
2. Dental expenses: Routine cleanings, fillings, orthodontics, and other dental treatments
3. Vision expenses: Eye exams, prescription glasses, contact lenses, and vision correction procedures

Preventive care services

The arrangement can cover preventive care services such as:

• Annual physical examinations
• Preventive screenings and tests
• Immunizations and vaccinations
• Wellness programs and health assessments

These reimbursements encourage employees to maintain their health while providing valuable tax benefits to the employer.

Setting up a QSEHRA plan

Implementing a QSEHRA requires careful planning and proper documentation to ensure compliance with IRS requirements and maximize available benefits for both employers and employees.

Plan design considerations

Before establishing a QSEHRA, businesses should consider:

1. Contribution amounts: Determine appropriate reimbursement levels based on budget and employee needs
2. Eligibility requirements: Establish criteria for employee participation
3. Plan year structure: Choose a calendar year or a fiscal year basis
4. Administration method: Decide between self-administration and third-party administration

Required plan documentation

Essential documentation for QSEHRA implementation includes:

• Plan document: A Comprehensive written plan outlining all terms and conditions
• Summary plan description: Employee-friendly explanation of plan benefits and procedures
• Enrollment forms: Documentation of employee participation in elections
• Claims procedures: Detailed process for expense submission and reimbursement

Employee notification requirements

Employers must provide written notice to eligible employees at least 90 days before the beginning of each plan year. The notice must include:

• Description of plan benefits and limitations
• Maximum annual contribution amounts
• Requirement for employees to maintain minimum essential coverage
• Potential impact on premium tax credit eligibility

QSEHRA administration and compliance

Proper administration ensures QSEHRA plans operate effectively while maintaining compliance with federal requirements and maximizing tax benefits.

Claims processing procedures

Establishing efficient claims processing involves:

1. Substantiation requirements: Ensuring all reimbursements are supported by appropriate documentation
2. Timely processing: Implementing procedures for prompt review and payment of eligible claims
3. Record keeping: Maintaining detailed records of all reimbursements and supporting documentation
4. Communication: Providing clear guidance to employees about submission requirements

Substantiation documentation

Employees must provide adequate substantiation for all reimbursement requests, including:

• Itemized receipts showing service provider, date, and amount
• Explanation of benefits (EOB) statements from insurance companies
• Prescription labels or pharmacy receipts
• Provider statements for medical services

IRS reporting requirements

While QSEHRA reimbursements are generally not subject to payroll taxes, employers must report the arrangements on employees' Form W-2 in Box 12 using code FF. This reporting helps ensure employees understand the value of their health benefits when filing tax returns.

Tax implications for employers and employees

Understanding the tax treatment of QSEHRA arrangements is essential for maximizing benefits while ensuring proper compliance with federal tax requirements.

Employer tax benefits

For employers, QSEHRA provides significant tax advantages:

1. Business deduction: All qualifying reimbursements are deductible as ordinary business expenses
2. No payroll taxes: QSEHRA reimbursements are not subject to Social Security, Medicare, or unemployment taxes
3. Simplified administration: Less complex than traditional group health plans

The business deduction applies to the full amount of qualifying reimbursements, directly reducing taxable income dollar-for-dollar.

Employee tax treatment

For employees, QSEHRA reimbursements offer valuable tax benefits:

• Tax-free reimbursements: Qualifying medical expense reimbursements are not included in taxable income
• Premium tax credit coordination: Employees must reduce premium tax credits by QSEHRA amounts when filing tax returns
• Individual coverage requirement: Employees must maintain minimum essential coverage to receive tax-free reimbursements

Special considerations for business owners

Business owners participating in QSEHRA arrangements may face additional considerations:

1. S Corporation owners: More than 2% shareholders are treated as employees and can join in QSEHRA
2. Partnership owners: Partners cannot attend as employees, but may be eligible under certain circumstances
3. Sole proprietors: Cannot establish QSEHRA for themselves, but can cover employees

Common QSEHRA implementation mistakes

Avoiding common mistakes helps ensure successful QSEHRA implementation while preventing potential compliance issues and penalties.

Inadequate plan documentation

Many businesses fail to maintain proper written plan documents, creating compliance risks. Essential documentation includes detailed plan terms, employee communications, and administrative procedures.

Improper eligibility determination

Mistakes in determining employee eligibility can result in discrimination issues or plan disqualification. Businesses must carefully track employee hours and ensure consistent application of eligibility rules.

Insufficient employee communication

Failing to provide required notices or adequate employee education can result in compliance problems and reduced plan effectiveness. Regular communication helps employees understand and utilize their benefits effectively.

Inadequate record-keeping

Poor record-keeping can create problems during IRS examinations and make plan administration more difficult. Comprehensive documentation supports all aspects of plan operation and compliance.

QSEHRA vs other health benefit options

Understanding how QSEHRA compares to other health benefit arrangements helps businesses choose the most appropriate option for their specific circumstances.

QSEHRA vs traditional group health insurance

Key differences include:

1. Size requirements: QSEHRA is limited to small employers, while group plans can serve businesses of any size
2. Employee choice: QSEHRA allows employees to choose individual coverage, while group plans provide standardized options
3. Cost predictability: QSEHRA provides fixed contribution limits, while group plan costs can vary significantly
4. Administrative complexity: QSEHRA generally requires less administration than group health plans

QSEHRA vs ICHRA (Individual Coverage HRA)

The Individual Coverage Health Reimbursement Arrangement offers different advantages:

• Size limitations: ICHRA has no minor employer restrictions
• Contribution limits: ICHRA has no annual contribution limits
• Plan complexity: ICHRA requires more complex administration and compliance

QSEHRA integration with HSA

While businesses cannot offer both QSEHRA and HSA contributions simultaneously, employees may maintain individual HSAs funded through their contributions or their spouse's employer plans.

How can employees spend their QSEHRA allowance?

Depending on which QSEHRA plan you choose to set up, employees can spend their QSEHRA allowance on their individual market coverage premiums, such as health, vision, and dental insurance premiums, and more than 200 out-of-pocket expenses.

A few popular expenses include:

• Individual health insurance premiums
• Doctor's visits
• Eyeglasses
• Prescription and drugs
• Mental health counseling

Maximizing QSEHRA tax benefits

Strategic implementation of QSEHRA arrangements can significantly enhance tax benefits while providing valuable employee benefits.

Optimal contribution strategies

Consider these strategies for maximizing benefits:

1. Contribution timing: Align reimbursements with business cash flow and tax planning objectives
2. Employee categories: Design contribution levels appropriate for different employee groups
3. Integration planning: Coordinate with other employee benefit programs

Home office deduction coordination

Businesses operating from Home offices can combine QSEHRA benefits with home office deductions to maximize overall tax savings.

Business meal expenses and travel coordination

QSEHRA arrangements complement other business deductions, creating comprehensive tax planning opportunities for small businesses.

Professional guidance and compliance support

Given the complexity of QSEHRA requirements and the potential for significant tax benefits, many businesses benefit from professional guidance during implementation and ongoing administration.

When to seek professional help

Consider professional assistance when:

• Designing the initial plan structure and documentation
• Navigating complex eligibility determinations
• Ensuring ongoing compliance with changing regulations
• Coordinating with other employee benefit programs

Technology solutions for QSEHRA management

Modern tax planning platforms like Instead can streamline QSEHRA implementation and ongoing compliance through:

• Automated eligibility tracking and documentation
• Integrated expense substantiation and reimbursement processing
• Compliance monitoring and reporting capabilities
• Seamless integration with payroll and accounting systems

The platform's AI-powered approach helps businesses optimize their Health reimbursement arrangements while ensuring full compliance with IRS requirements.

Frequently asked questions

Q: Can a business with exactly 50 employees establish a QSEHRA?

A: No, QSEHRA is limited to businesses with fewer than 50 full-time equivalent employees during the preceding calendar year. Businesses with exactly 50 or more employees must explore other health benefit options.

Q: What happens if an employee doesn't maintain minimum essential coverage?

A: QSEHRA reimbursements become taxable income to the employee if they don't maintain minimum essential coverage. The employer must include these amounts in the employee's taxable wages.

Q: Can QSEHRA reimburse over-the-counter medications?

A: Yes, QSEHRA can reimburse over-the-counter medications when purchased with a prescription or used to treat a specific medical condition, following the same rules as other health reimbursement arrangements.

Q: How does QSEHRA affect employees' premium tax credit eligibility?

A: Employees must reduce their premium tax credit calculations by the amount of QSEHRA benefits available to them, potentially affecting their eligibility for marketplace premium tax credits.

Q: Can seasonal employees participate in QSEHRA?

A: Yes, seasonal employees can participate if they meet the plan's eligibility requirements, but their participation affects the employer's full-time equivalent employee count for qualification purposes.