How to Set Up a QSEHRA: Plan Document, Notice, and Reporting

Setting up a QSEHRA — a Qualified Small Employer Health Reimbursement Arrangement — takes six practical steps: confirm your business qualifies, decide who is eligible, set your reimbursement amounts, put the plan in writing, give employees a 90-day notice, and handle ongoing verification and tax reporting. For plan years beginning in 2026, you can reimburse employees up to $6,450 for self-only coverage or $13,100 for family coverage, tax-free.¹

Confirm Your Business Qualifies

Two conditions must both be true before you can offer a QSEHRA. First, you cannot be an applicable large employer. That means you averaged fewer than 50 full-time employees, including full-time equivalents, on business days during the preceding calendar year.² Second, you cannot offer a group health plan to any employees.³

The no-group-plan rule means you cannot maintain major medical coverage, a group HRA, or any other arrangement that qualifies as a group health plan alongside the QSEHRA. Standalone dental or vision plans that qualify as “excepted benefits” generally do not count against you, but any plan providing broad medical coverage will.³

If you own multiple businesses, related entities under common ownership are combined and treated as a single employer for the 50-employee count.⁴ Three companies of 20 employees each under a common parent cross the threshold together, and every entity in the group loses QSEHRA eligibility.

Finally, the plan must be funded entirely by you. Employees cannot contribute through salary reduction or any other mechanism.⁵

Decide Who Can Participate

A QSEHRA must be offered on the same terms to all eligible employees. The statute lets you exclude three specific groups if you choose: employees under age 25, part-time and seasonal employees, and employees covered by a collective bargaining agreement where health benefits were subject to good-faith bargaining. For everyone else, the maximum waiting period is 90 days of service, and you cannot add eligibility conditions beyond what the statute permits.⁶

Can the Owner Participate?

Whether you can enroll yourself depends on how the business is organized. If you are a W-2 employee of a C-corporation, you participate on the same terms as any other employee. If you own more than 2 percent of an S-corporation, you are treated as self-employed for fringe benefit purposes and cannot participate.⁶ Sole proprietors and partners are not common-law employees of their businesses and are also ineligible, though family members employed by the business may qualify if a genuine employer-employee relationship exists.

Set Your Reimbursement Amounts

You can set any benefit up to the annual cap. For 2026, that is $6,450 for self-only coverage and $13,100 for arrangements that also cover family members.¹ The IRS adjusts these figures each year.

The same-terms rule still allows the actual dollar amount to differ by employee based on two factors: age of the covered individuals and number of family members covered. Any variation must track the pricing of a single reference insurance policy you pick from the relevant individual market.⁵ Many employers avoid that complexity by setting one flat amount for individual coverage and a higher flat amount for employees with families, which also satisfies the rule.

For employees who join partway through the plan year, whether through mid-year hire or after completing the waiting period, prorate the annual limit by the number of months of coverage divided by twelve.⁵

Draft a Written Plan Document

The tax code requires the arrangement to be documented in writing. A QSEHRA is not a group health plan, so it escapes the standard group health plan rules under ERISA and the Public Health Service Act, but a clear plan document is what protects the tax-free status of your reimbursements during an IRS audit.⁷

The document should identify the employer and plan effective date, list the plan year, spell out which medical expenses are reimbursed (typically those qualifying under Section 213(d), such as insurance premiums, doctor visits, and prescriptions), state the maximum annual reimbursement for individual and family tiers, define eligibility and any permitted exclusions along with the waiting period, and describe how employees submit claims, what documentation they must provide, and when they will be paid.

Benefits administration software, legal counsel, and template providers can help you build the document, but the eligibility rules and dollar amounts have to reflect your actual decisions. Generic language on its own will not hold up.

Keep the plan document, employee attestations, and reimbursement substantiation for as long as they may be relevant to any tax law — practically, at least seven years after each plan year ends covers most audit windows.⁷

Give Employees the 90-Day Notice

You must deliver a written notice to every eligible employee at least 90 days before the plan year begins. New hires who become eligible after the plan year has already started must receive the notice on their first day of eligibility.⁶

The notice has to state the dollar amount of the benefit available to that employee and tell them to share the notice with any Health Insurance Marketplace where they apply for coverage. Miss the deadline and you owe $50 per affected employee, capped at $2,500 for the calendar year.⁶

The Marketplace point matters because a QSEHRA affects an employee’s premium tax credit. If the QSEHRA is “affordable” under the IRS test, the employee gets no premium tax credit while the QSEHRA is in effect. If it is unaffordable, the employee can still claim a credit, but it is reduced by the monthly QSEHRA benefit even if they never use the full amount.⁸ Late or incomplete notices can lead employees to claim credits they later have to repay.

Verify Coverage Before Reimbursing

Before you release any reimbursement, the employee has to show proof of minimum essential coverage (MEC) for the month the expense was incurred. A signed attestation confirming active health insurance is the usual format.⁵ For each request, you also review receipts, explanation-of-benefits statements, or proof of premium payment to confirm the expense qualifies under your plan.

If you reimburse an expense for a month when the employee did not have MEC, that payment is not tax-free. The amount goes into the employee’s gross income and gets reported in Box 1 of their W-2 as other compensation, though it stays out of FICA and FUTA wages and is not subject to federal income tax withholding.⁷

Handle Year-End and Ongoing Reporting

W-2 Reporting

At year-end, report each employee’s total permitted benefit in Box 12 of Form W-2 using Code FF. The figure is the amount the employee was entitled to receive, not the amount actually reimbursed. If the plan offered $3,000 and the employee used $2,000, Box 12 still shows $3,000.⁹

PCORI Fee

As the plan sponsor, you owe an annual fee to the Patient-Centered Outcomes Research Trust Fund. It equals the average number of lives covered during the plan year multiplied by an IRS-published rate. For plan years ending after September 30, 2025, and before October 1, 2026, the rate is $3.84 per covered life.¹⁰

Report and pay the fee on the second-quarter Form 720, due July 31 of the year after the plan year ends. If you file Form 720 only for the PCORI fee, you do not need to file it for the other three quarters.¹¹

1
Internal Revenue Service. Publication 15-B, Employer’s Tax Guide to Fringe Benefits (2026)
2
Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage
3
Office of the Law Revision Counsel. 26 USC 9831 – General Exceptions
4
Internal Revenue Service. Determining if an Employer Is an Applicable Large Employer
5
GovInfo. 26 USC 9831 – General Exceptions
6
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues
7
Internal Revenue Service. Notice 2017-67 – Qualified Small Employer Health Reimbursement Arrangements
8
Internal Revenue Service. Questions and Answers on the Premium Tax Credit
9
Internal Revenue Service. General Instructions for Forms W-2 and W-3 (2026)
10
Internal Revenue Service. Patient-Centered Outcomes Research Trust Fund Fee – Questions and Answers
11
Internal Revenue Service. Instructions for Form 720 (Rev. December 2025)