What Is QSEHRA and How It Works for Employers: Limits and Reimbursement

A Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, is a way for a small business to pay employees back, tax-free, for the cost of their own health insurance and out-of-pocket medical bills. The employer sets a monthly or annual allowance, the employee buys individual coverage and pays for care, and the employer reimburses qualifying expenses up to the limit. There is no group plan involved. For 2026, the reimbursement is capped at $6,450 for an employee with self-only coverage and $13,100 for an employee with family coverage.¹

Which Employers Can Offer One

Two conditions have to be true. The business must have had fewer than 50 full-time employees, including full-time equivalents, on average during the prior calendar year.² Full-time equivalents come from adding up the monthly hours worked by part-time staff and dividing by 120, then adding that number to the full-time headcount (employees averaging 30 or more hours per week).³

The employer also cannot offer any group health insurance to any employee. It’s one or the other. A business cannot run a group PPO for some workers and a QSEHRA for others, and it cannot pair a QSEHRA with a health FSA.⁴ If one owner controls multiple businesses, federal law treats them as a single employer for the 50-employee test, so their headcounts combine.³

Which Employees Qualify

By default, every full-time employee is eligible, and the plan must be offered on the same terms to all of them. Employers may choose to exclude a few defined groups:

Employees under age 25.
Part-time and seasonal workers.
Union employees whose health benefits were negotiated under a collective bargaining agreement.

These exclusions are optional. Any of these groups can be included if the employer wants to include them.⁵

To keep reimbursements tax-free, the employee must carry minimum essential coverage (MEC), which is any plan meeting the Affordable Care Act’s baseline. The same coverage requirement applies to a spouse or dependents whose expenses are being reimbursed.⁴ Marketplace coverage, a spouse’s employer plan, Medicare, Medicaid, and TRICARE all qualify as MEC.⁵ An employee newly offered a QSEHRA gets a special enrollment period on the Marketplace, so a new hire without insurance has a window to buy a qualifying plan.⁶

How Much Can Be Reimbursed

The IRS sets an annual ceiling that adjusts for inflation. For 2026, the maximum is $6,450 for self-only coverage and $13,100 for family coverage. The 2025 limits were $6,350 and $12,800; the 2024 limits were $6,150 and $12,450.¹ Nothing requires the employer to offer the full amount. Whatever amount is chosen must be offered on the same terms to every eligible employee, though the law does allow the allowance to vary based on the employee’s age and the number of family members covered, tracking how premiums naturally differ in the individual market.²

What Expenses Qualify

A QSEHRA can reimburse anything that counts as a medical expense under IRS Publication 502.⁷ In practice, that covers:

Health insurance premiums, including Marketplace plans and Medicare Part B and Part D.
Out-of-pocket medical costs such as copays, deductibles, coinsurance, lab work, hospital services, and mental health care.
Dental and vision expenses, including cleanings, fillings, eye exams, glasses, and contact lenses.
Prescription drugs, including insulin.

Over-the-counter drugs generally don’t qualify unless prescribed, and vitamins and supplements don’t qualify unless a doctor prescribes them for a specific diagnosed condition. Life insurance premiums, cosmetic procedures, and gym memberships are also excluded.⁷

How Reimbursement Actually Works

Before any reimbursement can go out, the employee has to prove they had minimum essential coverage in the month the expense occurred. IRS Notice 2017-67 allows this through a written attestation, which is a signed statement confirming the employee (and any covered family members) had qualifying coverage.⁸ Some employers also accept a carrier coverage letter or a premium bill.

Each expense then has to be substantiated. Employees usually submit itemized receipts showing the date of service, the provider, and what the care was. For premiums, an insurer’s billing statement or payment confirmation does the same job. If the documentation isn’t there, the reimbursement becomes taxable income to the employee. Most employers use an online portal or a third-party administrator to collect receipts, review claims, and issue payment through direct deposit or payroll.

What It Does to Marketplace Premium Tax Credits

If an employee buys Marketplace coverage and receives a QSEHRA, the two interact. The IRS runs an affordability test: it takes the cost of the second-lowest-cost Silver plan in the employee’s area, subtracts the monthly self-only QSEHRA amount, and checks whether the remaining premium is more than 9.96% of monthly household income for 2026.⁹

If the leftover cost is under that threshold, the QSEHRA is affordable and the employee cannot claim a premium tax credit. If it’s over, the employee may still qualify for a credit, but the monthly QSEHRA amount is subtracted from that credit before it applies to the plan.¹⁰ Employers are required to tell employees their QSEHRA amount so it can be reported when applying for Marketplace coverage.

Employer Notice and W-2 Reporting

The employer has to give every eligible employee a written notice at least 90 days before the plan year starts. New hires who become eligible mid-year must receive the notice on their eligibility date.¹¹ The notice must state:

The employee’s permitted annual QSEHRA benefit in dollars.
That the employee should report this amount to the Marketplace when applying for a premium tax credit.
That reimbursements can become taxable if the employee doesn’t keep minimum essential coverage in force.

Missing this notice deadline carries a penalty of $50 per employee per violation, capped at $2,500 per calendar year, and the penalty can be waived for reasonable cause where the failure wasn’t willful.¹²

At year end, the employer reports the benefit on Form W-2, Box 12, Code FF. The reported figure is the total permitted benefit for the year, not the amount actually reimbursed.¹³ If the allowance was $3,000 and the employee claimed only $2,000, the W-2 still shows $3,000.¹⁴ Because a QSEHRA is not classified as a group health plan, it is exempt from ERISA reporting and from COBRA continuation coverage, so no Form 5500 is required and departing employees have no right to continue the benefit.⁸

When Coverage Lapses or an Employee Leaves

If an employee receives a reimbursement in a month they didn’t have minimum essential coverage, that reimbursement is no longer tax-free. The employer reports it as wages, and the employee owes income and payroll tax on it.⁴ Continuous coverage across the year is the only way to keep every dollar tax-free.

Whether unused funds carry into the next plan year is up to the employer. Federal law allows rollovers but doesn’t require them, so a plan without a rollover clause forfeits any year-end balance. When an employee leaves, benefits end, though the employer may offer a run-out period during which the former employee can submit claims for expenses incurred while still employed. Any reimbursements during that window can’t exceed the prorated annual limit for the months actually worked, and the run-out period, if offered, has to be available to all eligible employees on the same terms.⁸

What Happens If the Plan Doesn’t Comply

A QSEHRA that fails the statutory requirements, such as blowing past the dollar caps, not offering uniform terms, or reimbursing expenses without verifying coverage, gets reclassified as a group health plan. Once that happens, group plan rules apply, and violations trigger an excise tax of $100 per affected employee per day for as long as the violation lasts.¹⁵ Ten employees over a 30-day violation would generate a $30,000 excise tax.¹ That is why the documentation, the notice timing, and the uniform-terms rule matter as much as the dollar limits do.

1
Internal Revenue Service. S Corporation Compensation and Medical Insurance Issues – Section: Qualified Small Employer Health Reimbursement Arrangements
2
Office of the Law Revision Counsel. 26 USC 9831 – General Exceptions
3
Office of the Law Revision Counsel. 26 USC 4980H – Shared Responsibility for Employers
4
CMS: Agent and Brokers FAQ. What Is a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)
5
HealthCare.gov. Health Reimbursement Arrangements (HRAs) for Small Employers
6
CMS. Understanding Special Enrollment Periods
7
Internal Revenue Service. Publication 502 – Medical and Dental Expenses
8
Internal Revenue Service. Qualified Small Employer Health Reimbursement Arrangements Notice 2017-67
9
Internal Revenue Service. Questions and Answers on the Premium Tax Credit
10
Health Insurance Marketplace. Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) Worksheet
11
Internal Revenue Service. Affordable Care Act Tax Provisions for Employers
12
Office of the Law Revision Counsel. 26 USC 6652 – Failure to File Certain Information Returns, Registration Statements, Etc.
13
Internal Revenue Service. Publication 15-B (2026) – Employers Tax Guide to Fringe Benefits
14
Internal Revenue Service. General Instructions for Forms W-2 and W-3 – Section: Qualified Small Employer Health Reimbursement Arrangement
15
Office of the Law Revision Counsel. 26 USC 4980D – Failure to Meet Certain Group Health Plan Requirements