QSEHRA: a defined-contribution reimbursement for eligible small employers

A QSEHRA is not a group health plan, and it is not an ICHRA. The two arrangements have different eligibility tests, different contribution rules, and different interactions with the premium tax credit. If you are choosing between them, use ICHRA vs QSEHRA.

For many companies with 2 to 50 employees that do not want to sponsor a group medical plan, a QSEHRA is the reimbursement design written specifically for that situation — provided the employer is not an applicable large employer.

The employer tests

A QSEHRA is written for a small employer that:

1. Is not an applicable large employer under the ACA (generally, the company averaged fewer than 50 full-time employees, including full-time equivalents, in the prior calendar year), and
2. Does not offer a group health plan to any employees.

The arrangement must be funded solely by the employer. Employees cannot contribute through salary reduction. After an eligible employee provides proof of coverage, the QSEHRA pays or reimburses medical expenses incurred by the employee or the employee's family members.

See Do employers under 50 have to offer health insurance? if you are close to the 50-employee threshold. Crossing that line changes which reimbursement design you can use.

Contribution caps for 2026 and 2027

The IRS indexes the annual QSEHRA caps. If your plan year is not a calendar year, the annual cap is prorated. You may offer less than the cap. You may not go above it and still treat the arrangement as a QSEHRA.

Those figures come from IRS Revenue Procedure 2025-32 (for 2026) and Revenue Procedure 2026-35 (for 2027). IRS Publication 15-B for 2026 also states the 2026 amounts.

Same terms, and who you may leave out

A QSEHRA generally must be provided on the same terms to all eligible employees. Federal rules do allow you to exclude:

• Employees who have not completed 90 days of service
• Employees who have not reached age 25 before the beginning of the plan year
• Part-time or seasonal employees
• Employees covered by a collective bargaining agreement, if health benefits were the subject of good-faith bargaining
• Nonresident aliens with no U.S.-source earned income

Those are the statutory exceptions, not a menu of informal carve-outs. If you want to cover part-time staff rather than exclude them, you can; the rule tells you what you may leave out, not what you must leave out.

How employees use the funds

Employees can generally use a QSEHRA for qualifying medical expenses, including premiums, once they have qualifying health coverage such as a plan from the Individual Marketplace. Reimbursements that follow the rules are not included in the employee's taxable wages.

Unlike an ICHRA, employees cannot fund the rest of a premium through a salary-reduction cafeteria plan into the QSEHRA itself. The arrangement must be funded solely by the employer.

How this interacts with the premium tax credit

A QSEHRA offer can affect an employee's premium tax credit.

• If the QSEHRA is affordable, a premium tax credit is not allowed.
• If it is not affordable, the employee must reduce any advance premium tax credit by the QSEHRA permitted benefit.

That interaction is different from an ICHRA, where an unaffordable offer can be declined so the employee can, if otherwise eligible, take the credit. The distinction belongs in the employee notice. Compare the two designs on ICHRA vs QSEHRA.

Notices and W-2 reporting

Give eligible employees a written notice at least 90 days before the beginning of the plan year. For employees who become eligible mid-year, the notice is generally due on or before the first day the QSEHRA may become effective. The notice must include the permitted benefit, other information the statute requires, and a statement about the interaction with the premium tax credit.

You must report the amount of payments and reimbursements the employee is entitled to receive — the permitted benefit, not only what was actually paid — in box 12 of Form W-2, using code FF.

Standing a QSEHRA up

We will confirm that the company is not an applicable large employer, that no group health plan is being offered, and that the contribution is inside the IRS cap for the plan year. We will draft the employee notice, set the substantiation process, and coordinate W-2 reporting with your payroll provider. If a group plan or an ICHRA is the better structure, we will say so before you adopt the arrangement.

Request a QSEHRA proposal