QSEHRA for Small Businesses: How It Works and What It Costs

What a QSEHRA is

QSEHRA stands for Qualified Small Employer Health Reimbursement Arrangement. Congress created it in 2016 so small businesses could help employees pay for individual health insurance without setting up a group plan. The employer sets an allowance. Employees buy their own coverage and submit proof. The company reimburses premiums and, if the plan allows, other medical costs up to the allowance.

To offer one, a business generally has to meet two tests:

• Fewer than 50 full-time equivalent employees. That is the same headcount line that separates small employers from applicable large employers under the ACA.
• No group health plan. A QSEHRA cannot sit next to a group plan. It replaces one.

The money comes only from the employer. Employees cannot fund a QSEHRA through salary reduction, and the arrangement has to be in writing.

The 2026 limits

The IRS adjusts the maximum allowance every year. For 2026, Rev. Proc. 2025-32 caps total payments and reimbursements at $6,450 for self-only coverage and $13,100 for family coverage. Those are annual figures. An employee who is eligible for only part of the year gets a prorated limit by month.

As of this update, the IRS has not published the 2027 limits. They usually come out in the fall revenue procedure that covers inflation adjustments. I will update this page when they do. Until then, don't build a 2027 budget on a number you saw on a blog.

Who has to be offered it

A QSEHRA has to be offered on the same terms to all eligible employees. You can generally leave out a few groups, such as:

• Employees under 25.
• Employees who have not finished 90 days of service.
• Part-time and seasonal employees.
• Employees covered by a union agreement that bargained over health benefits.

The allowance can vary in only limited ways. It can differ by the price of a reference plan based on the employee's age or the number of people covered. It cannot be richer for managers and thinner for everyone else. If you want different amounts for different groups of staff, that is a sign an ICHRA may fit better.

The written notice

This is the step small employers forget. You have to give each eligible employee a written notice at least 90 days before the plan year starts. New hires get it by the date they become eligible. The notice tells employees the allowance and reminds them to report it to the Marketplace if they apply for a premium tax credit. The IRS can charge a penalty for each missed notice, so put it on the calendar.

Employees need minimum essential coverage

An employee has to have minimum essential coverage for QSEHRA reimbursements to be tax-free. Marketplace plans count. Coverage through a spouse's employer usually counts. Some types of coverage don't, so I check whether a specific plan qualifies before an employee relies on the allowance to pay for it. Benefits vary by plan, and the paperwork has to line up with the arrangement. General information, not tax advice — confirm with your CPA based on your specific entity structure.

How it works with the Marketplace tax credit

This is the part employees care about most. A QSEHRA does not automatically take away the Marketplace credit, the way an affordable ICHRA does. Instead, the IRS runs an affordability test. In plain terms:

• If the allowance makes the benchmark Marketplace plan affordable for the employee, they generally cannot get a credit for those months.
• If it does not, they can still get a credit, but it is reduced by the monthly allowance.

Employees have to report the allowance when they apply on HealthCare.gov or a state exchange. The IRS spells out the rules in its question-and-answer guidance, Notice 2017-67. The math is settled on the employee's tax return, so a wrong estimate can mean paying credit back at tax time. The guide to paying back the premium tax credit covers how that works. General information, not tax advice — confirm with your CPA based on your specific entity structure.

For employees with household income above 400 percent of the poverty level, none of this matters much. There is no 2027 credit to reduce, so the allowance is simply money toward a plan they were going to pay for anyway.

How it is taxed

For the business, QSEHRA payments are generally a deductible business expense, like wages. For employees with minimum essential coverage, reimbursements are generally tax-free. The employer reports the permitted benefit on each employee's W-2, in Box 12 with code FF, even when the employee did not use all of it. General information, not tax advice — confirm with your CPA based on your specific entity structure.

Owners usually cannot use it for themselves

A QSEHRA is for employees. Sole proprietors, partners and more-than-2-percent S-corporation shareholders are generally not treated as employees for this purpose, so they cannot reimburse their own premiums through it. Those owners usually pay for their own coverage another way, such as the self-employed health insurance deduction. The S-corp owner guide covers the shareholder side, and the LLC owner guide covers partnerships. C-corporation owners who are on payroll are treated differently. General information, not tax advice — confirm with your CPA based on your specific entity structure.

QSEHRA vs ICHRA

Both reimburse individual health insurance. The differences come down to size, budget and flexibility.

• QSEHRA: under 50 full-time equivalents, no group plan, annual IRS cap, same terms for everyone, and it reduces rather than ends the Marketplace credit.
• ICHRA: any size, no dollar cap, different amounts by employee class, and if it is affordable the employee cannot take a credit at all.

A team of people with modest household income who already get large credits is often better off with a QSEHRA. A business that wants to spend more per person, or treat full-time and part-time staff differently, usually lands on an ICHRA. The ICHRA and QSEHRA stipend guide walks through the ICHRA side in more depth.

When a QSEHRA makes sense

• You have a handful of employees and a fixed monthly budget.
• Your staff live in different places, so one group network would not work for everyone.
• Some employees already have coverage through a spouse and don't need a full plan.
• You want to stop renewing a group plan that keeps going up.

It is a weaker fit when you want to spend more than the annual cap per person, when you have employees with health conditions who need the protections of a group plan, or when you are close to 50 full-time equivalents.

Helping employees pick a plan

The allowance is only half of it. Each employee still has to choose a plan, and that is where I come in. I compare Marketplace plans and private plans for each person. Private plans are priced on health, can start any month if approved, and some come with PPO networks. Employees with health conditions can always go to the Marketplace, which accepts everyone regardless of health during open enrollment or a special enrollment period.

I work by phone and video with businesses and their staff in Florida, North Carolina and the rest of the 31 states where I am licensed.

Common QSEHRA mistakes

I see the same handful of problems with small employers year after year:

• Sending the notice late, or not at all, for a new hire.
• Setting different allowances for people in the same role because one asked for more.
• Reimbursing an employee before they show proof of qualifying coverage.
• Forgetting to put the permitted benefit on the W-2.
• Starting a small group plan for one manager while the QSEHRA is still running.
• Telling employees the allowance does not affect their Marketplace credit.

None of these are hard to avoid. Most come from running the arrangement out of a spreadsheet instead of a written plan with an administrator. If you already made one of them, your CPA or HRA administrator can tell you how to clean it up.

Setup checklist

1. Confirm you have fewer than 50 full-time equivalents and no group plan.
2. Pick an allowance at or below the IRS limit for the year.
3. Decide which groups, if any, you will exclude.
4. Put the arrangement in a written plan document. Most employers use an HRA administrator.
5. Send the written notice at least 90 days before the plan year.
6. Have employees prove minimum essential coverage before reimbursing them.
7. Report the permitted benefit on each W-2.

When you are ready to see what plans your team would pick, request a quote and I will run the options for each employee.