IRS Notice 2017-67: QSEHRA Caps, Employee Notice, and W-2 Reporting

The QSEHRA rules for small employers, set out in IRS Notice 2017-67, let a business with fewer than 50 full-time employees and no group health plan reimburse workers tax-free for health insurance premiums and medical expenses, up to $6,450 for self-only coverage or $13,100 for family coverage in 2026. To keep those payments tax-free, the arrangement has to satisfy a set of structural, notice, and reporting requirements that run through the calendar year.

Which Businesses Can Offer a QSEHRA

Two thresholds have to be met before you can set one up.

First, your company cannot be an applicable large employer under the ACA. That means you averaged fewer than 50 full-time employees, including full-time equivalents, on business days during the prior calendar year. Anyone working 30 or more hours per week counts as full-time, and part-time hours are aggregated into full-time equivalents.¹

Second, you cannot offer a group health plan to any employee while running a QSEHRA. The prohibition is broader than traditional group medical insurance. Health flexible spending arrangements, other HRAs, and plans providing only excepted benefits all disqualify you.² If any of those are in place, they have to be terminated first.

The arrangement must also be funded entirely by the employer. Salary reduction contributions and payroll deductions are not allowed.³

Annual Reimbursement Caps

The statute set base caps of $4,950 for self-only coverage and $10,000 for family coverage, with inflation adjustments each year.³ For 2026, the adjusted caps are $6,450 (self-only) and $13,100 (family).

When an employee is only eligible for part of a year, the cap must be prorated by month. Someone who becomes eligible on July 1 receives six-twelfths of the annual maximum for that year.² Blowing past the caps or violating the same-terms rule described below can cause the entire arrangement to be treated as a non-compliant group health plan, which triggers a separate set of ACA penalties.

Same Terms for All Eligible Employees

A QSEHRA has to be offered on the same terms to every eligible employee. You cannot give a top performer a larger benefit than a receptionist, and you cannot reward tenure with a bigger reimbursement.³ A violation can cost the whole plan its tax-advantaged status.

Two narrow exceptions are allowed. Benefit amounts can vary by the employee’s age and by the number of family members covered. The variation must mirror the price variation in a real individual health insurance policy in the local market, and every employee’s benefit must be measured against the same reference policy.²

Verifying Minimum Essential Coverage

Employees can only receive tax-free reimbursements for months in which they carry minimum essential coverage. Qualifying coverage includes marketplace plans, Medicare, Medicaid, CHIP, TRICARE, and most employer-sponsored group plans. Proof has to be provided to the employer before any reimbursement is paid.³

If an employee is reimbursed during a month when they lacked coverage, the payment loses its tax-free treatment. The employer has to reclassify those amounts as taxable wages, with income tax withholding and payroll taxes, for every month the employee was uncovered.² Verification is not a one-time step. A monthly or quarterly check keeps a mid-year insurance lapse from turning into a year-end correction.

Eligible Expenses and Substantiation

A QSEHRA can reimburse anything that qualifies as medical care under Section 213(d) of the Internal Revenue Code.⁴ That covers doctor visits, lab work, prescription drugs, dental and vision care, mental health services, and insurance premiums. Expenses of covered family members are eligible if the plan documents specify family coverage.

Every claim must be substantiated before funds are released. The employee submits receipts, invoices, or an Explanation of Benefits showing the date, type, and amount of the expense, and the employer or its administrator confirms it meets the Section 213(d) definition. Paying claims without documentation can retroactively disqualify reimbursements if the IRS audits the plan.

The 90-Day Employee Notice

Before the plan year begins, every eligible employee must receive a written notice at least 90 days in advance. For new hires who become eligible after the plan year has started, the notice goes out on the date they first become eligible.² The notice has to state:

The total annual permitted benefit for the employee.
That the employee must carry minimum essential coverage to receive tax-free reimbursements.
That the QSEHRA benefit may reduce or eliminate the employee’s premium tax credit on the marketplace.

Missing the deadline costs $50 per affected employee, capped at $2,500 per calendar year.² The bigger risk is not the penalty. It’s employees who over-claim marketplace subsidies because they were never warned about the interaction, then face a surprise tax bill.

Interaction With Marketplace Premium Tax Credits

A QSEHRA benefit directly affects any premium tax credit an employee claims for marketplace coverage.⁵ The IRS tests whether the benefit makes coverage affordable by comparing it to the lowest-cost silver plan in the employee’s area and the employee’s household income.

If the QSEHRA brings the employee’s share of the premium below the applicable percentage of household income, the employee is ineligible for premium tax credits for those months.² If it does not make coverage affordable, the employee can still claim a credit but must reduce it by the monthly permitted benefit. An employee with a $400 monthly benefit whose calculated monthly credit would otherwise be $600 can only claim $200.⁶

W-2 Reporting

The QSEHRA benefit is reported in Box 12 of the employee’s Form W-2 using Code FF.⁷ The amount reported is the total permitted benefit for the year, not what was actually reimbursed.² If the plan offered $6,450 for the year and the employee only submitted $3,000 in claims, the W-2 still shows $6,450, or the prorated amount for a partial year of eligibility.

The Code FF entry does not make the benefit taxable. It tells the IRS how much employer-funded healthcare support the employee had available, which feeds into the premium tax credit calculation on their return.

PCORI Fee

A QSEHRA is a self-insured health plan for federal excise tax purposes, so the employer owes the Patient-Centered Outcomes Research Institute fee each year. For plan years ending after September 30, 2025, and before October 1, 2026, the rate is $3.84 per covered life.⁸ Multiply that rate by the average number of covered lives during the plan year.

The fee is reported on Form 720 for the second quarter, due by July 31 of the year after the plan year ends.⁹ No advance deposit is required. If the PCORI fee is the only reason you file Form 720, you do not have to file in other quarters. For a 10-person arrangement, the annual bill runs under $40.

What Happens When Employees Leave or the Company Grows

QSEHRA funds are not portable and do not vest. When an employee separates, their eligibility ends and any unclaimed portion of the annual benefit stays with the employer. Reimbursements paid before termination for expenses incurred during coverage do not have to be clawed back. If the plan includes a run-out period for post-departure claims, the total for the year still cannot exceed the prorated maximum based on months of actual eligibility.²

If your headcount crosses the 50 full-time-employee threshold in a calendar year, you become an applicable large employer on January 1 of the next year and can no longer provide a QSEHRA.² A run-out period can be built into the plan so employees can still submit claims for medical expenses incurred while the arrangement was active.

Effect on Employee HSA Eligibility

A general-purpose QSEHRA that reimburses both premiums and medical expenses makes the employee ineligible to contribute to a Health Savings Account, because the IRS treats it as disqualifying coverage that can pay expenses before the high-deductible health plan’s deductible is met. A plan can be designed to reimburse only insurance premiums, which preserves HSA eligibility for employees enrolled in a qualifying high-deductible plan, but doing so strips out reimbursement for copays, deductibles, and other out-of-pocket costs.

1
Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers Regarding Health Coverage
2
Internal Revenue Service. IRS Notice 2017-67 – Qualified Small Employer Health Reimbursement Arrangements
3
Office of the Law Revision Counsel. 26 USC 9831 – General Exceptions – Section: (d) Exception for Qualified Small Employer Health Reimbursement Arrangements
4
Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses
5
Internal Revenue Service. Questions and Answers on the Premium Tax Credit
6
Centers for Medicare & Medicaid Services. Application Spotlight: Employer-Sponsored Coverage, ICHRAs, and QSEHRAs
7
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3 – Section: Box 12 Codes
8
Internal Revenue Service. Patient-Centered Outcomes Research Trust Fund Fee: Questions and Answers
9
Internal Revenue Service. Instructions for Form 720 (Rev. March 2026)