QSEHRA for Small Business: How It Works and Who Qualifies

By Heather Sprague, Licensed Health Insurance Agent · Reviewed by Michael Sprague, Licensed Health Insurance Agent A QSEHRA for small business is one of the simplest ways to help workers pay for health insurance. The business sets a monthly allowance. Then employees buy their own plans, and the business reimburses them tax-free, up to a yearly limit. This guide explains who can offer a QSEHRA, how it affects tax credits and how it compares with other options. For more on coverage when you work for yourself, see our self-employed health insurance guide. Questions? Call 888-730-6031 for free help.

What Is a QSEHRA for Small Business?

A QSEHRA is a health reimbursement arrangement built for small employers. Congress created it in 2016. The business doesn't buy a group plan. Instead, it reimburses employees for health insurance premiums and, if it chooses, other eligible medical costs. The payments are generally tax-free to the employee, as long as the employee has minimum essential coverage. For the business, the reimbursements are generally deductible as a business expense.

Which Businesses Can Offer a QSEHRA?

A business qualifies if it meets two tests. First, it must have fewer than 50 full-time equivalent employees. Second, it can't offer a group health plan to any employee. That makes a QSEHRA a good fit for small offices, shops and family businesses that find group plans too costly. The business must offer the QSEHRA on the same terms to all eligible employees. It may exclude some groups, such as employees who work less than 25 hours a week or have worked there less than 90 days. In addition, the allowance can vary only by age and family size, based on plan prices.

How Much Can a QSEHRA Pay?

The IRS sets a maximum each year for self-only and family coverage. The limit usually rises a little each year with inflation. The business can choose any amount up to that cap, and it can prorate the amount for employees who join mid-year. Because the cap changes, check the current IRS figure before you set your budget. Your accountant or QSEHRA administrator can confirm it.

How Does a QSEHRA Affect Marketplace Tax Credits?

This is the key rule for employees. A QSEHRA reduces the premium tax credit dollar for dollar. If the QSEHRA is considered affordable, the employee can't get a premium tax credit at all. In either case, the employee must report the QSEHRA amount when applying on the marketplace. Otherwise, they may owe money back at tax time. Learn more in our guide to health insurance subsidies.

QSEHRA vs ICHRA vs Group Health Insurance

Small businesses usually compare three paths. Here's how they differ in plain terms:

• QSEHRA: Fewer than 50 employees, no group plan, yearly IRS cap, simple to run.
• ICHRA: Any size business, no federal cap, can set different classes of workers.
• Group plan: One plan chosen by the business, often with higher costs and participation rules.

A QSEHRA is often the easiest place to start. However, if you want to give part-time and full-time staff different amounts, an ICHRA may fit better. Our ICHRA and enrollment FAQs answer common questions.

When Can Employees Enroll?

Being newly offered a QSEHRA is a qualifying life event. So employees can enroll in a marketplace plan outside open enrollment. They generally have 60 days. The business must also give written notice at least 90 days before the plan year begins. Read more about the special enrollment period.

How to Set Up a QSEHRA for Small Business

• Confirm you have fewer than 50 full-time equivalent employees and no group plan.
• Pick an annual allowance at or below the IRS cap.
• Write a plan document and decide which costs you'll reimburse.
• Send the required written notice to eligible employees.
• Collect proof of coverage and receipts before paying reimbursements.
• Report the amount on employees' W-2 forms.

Many small businesses use an outside administrator for the plan document and tracking. That keeps the paperwork simple and helps you stay compliant.

An Example of a QSEHRA in Action

Picture a small dental office with eight employees and no group plan. The owner sets a monthly allowance for single employees and a higher one for employees with families. Each worker then shops for an individual plan. One employee picks a silver plan with a low deductible. Another picks a bronze plan and puts the leftover allowance toward dental premiums, because the plan document allows it. Each month, they send proof of payment, and the office reimburses them through payroll, tax-free. For the owner, the cost is fixed and easy to budget. For the employees, each person gets a plan that fits their own doctors and needs. This example is for illustration only, and real allowances depend on your budget and the IRS cap.

Questions to Ask Before You Offer a QSEHRA

• How much can the business afford each month, per employee?
• Do most employees need single or family coverage?
• Will the allowance cover a basic plan in your area, or just part of it?
• Do any employees currently get marketplace tax credits that a QSEHRA would reduce?
• Who will handle notices, receipts and W-2 reporting?

The tax credit question matters most for lower-income workers. In some cases, a modest QSEHRA can leave an employee worse off than their current credit. So run the numbers first. A licensed agent can help your team compare plans after you set the allowance. Call 888-730-6031 to talk it through. If you'd rather start with the basics, our subsidy guide explains how credits are figured. Then you can decide whether a QSEHRA, an ICHRA or simply letting employees shop on their own makes the most sense. Questions along the way? Call 888-730-6031 anytime during business hours.

QSEHRA vs Other Small Business Options

See how a QSEHRA stacks up in our ICHRA vs QSEHRA vs group health insurance comparison, check small business health insurance costs and read our full small business health insurance guide.

QSEHRA for Small Business: FAQ

Can a sole owner with no employees use a QSEHRA?

Generally no. A QSEHRA is for employees. Self-employed owners usually use the self-employed health insurance deduction instead.

Do employees have to buy an ACA plan?

They need minimum essential coverage for the money to be tax-free. Most buy an ACA plan, but other qualifying coverage can count.

Can the QSEHRA pay for dental or vision?

Yes, if the plan document allows it. Many businesses include dental and vision premiums.

Next Steps for a QSEHRA for Small Business

A QSEHRA for small business gives workers real help without the cost of a group plan. Set your budget, send notices on time and help employees choose plans that fit. Want help? Call 888-730-6031, Monday through Friday, 9 a.m. to 6 p.m. Eastern, or request a free quote. You can also read about deductions in our guide to self-employed health deductions.

Sources

1. HealthCare.gov: QSEHRA for small employers
2. IRS: Health Reimbursement Arrangements
3. IRS Notice 2017-67: QSEHRA guidance

Related Guides

• Self-employed health insurance
• Small business health insurance in Pompano Beach
• Health insurance without an employer plan
• Health insurance subsidies

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