Business operations
QSEHRA: How Small Businesses Reimburse Employees for Health Insurance Tax-Free
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) lets businesses with fewer than 50 employees reimburse employees for individual health insurance premiums and medical expenses — tax-free to employees, deductible to the business. No group plan required.
Written by Matt Reese, CPA · 5 min read · Published April 2026·Share on LinkedIn
Key Takeaways
- A QSEHRA lets businesses with fewer than 50 full-time employees reimburse employees for individual health insurance premiums and qualified medical expenses — without offering a group health plan.
- 2025 contribution limits: $6,350 per year for single employees, $12,800 per year for employees with families. Reimbursements are tax-free to employees (not included in wages) if the employee has minimum essential coverage.
- The reimbursement is fully deductible by the business as a compensation expense. No payroll taxes apply to the reimbursement (unlike adding cash to wages).
- QSEHRA cannot be offered alongside a group health plan. If you have a group plan for any employees, you cannot use QSEHRA. It's an alternative — not a supplement.
The small business health insurance problem
Group health insurance is expensive and complex to administer. For a 5-person business, the per-employee cost of a group plan can be $700–$1,200/month. For very small businesses with mostly healthy young employees who prefer to buy individual coverage on the marketplace, a group plan may be inefficient.
The QSEHRA solves this by allowing small employers to reimburse employees for individual coverage they choose themselves — without the complexity of a group plan.
QSEHRA turns individual health insurance into a tax-advantaged employer benefit. The employee picks their own plan; the employer reimburses up to the annual limit tax-free.
How QSEHRA works
- Establish the arrangement: Adopt a written QSEHRA plan document before the effective date. Set the annual reimbursement amount (must be the same for all employees, but can vary for single vs family coverage).
- Notify employees: Send required written notice to each eligible employee at least 90 days before the beginning of the plan year (or when first eligible). Include the annual reimbursement amount and a note that it affects marketplace premium tax credits.
- Employees purchase coverage: Each employee buys their own individual health plan (marketplace, COBRA, spouse’s employer plan, etc.) — whatever works for them.
- Employees submit claims: Employees provide receipts or premium documentation. The employer reimburses up to the annual limit.
- Report on W-2: Report total QSEHRA reimbursements in Box 12, Code FF.
QSEHRA vs ICHRA vs group plan
| QSEHRA | ICHRA | Group Health Plan | |
|---|---|---|---|
| Employer size limit | Under 50 FT employees | Any size | Any size |
| Annual contribution limit (2025) | $6,350 / $12,800 | No limit | N/A |
| Offered alongside group plan? | No | Yes (for employees not eligible for the group plan) | N/A |
| Employee coverage required? | Yes — must have MEC | Yes — must have individual coverage | Employees enrolled in group plan |
| Complexity | Low — simple plan document and notice | Medium — classes of employees, variable amounts | High — renewal, compliance, COBRA administration |
| Tax treatment (employer) | Deductible as compensation expense | Deductible | Deductible |
| Tax treatment (employee) | Tax-free reimbursement if MEC maintained | Tax-free reimbursement | Premiums paid with pre-tax dollars |
| Best for | Very small businesses (2–20 employees) wanting flexibility | Larger businesses wanting employee choice | Businesses that want comprehensive group coverage |
The QSEHRA delivers comparable benefit to a group plan (up to $44,650 in health coverage benefits) at lower administrative cost and with full deductibility. Employees get flexibility to choose their own plan; the business gets a predictable, capped annual expense.
Use a QSEHRA administrator to handle the paperwork
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Frequently asked
Questions owners actually ask
- Can an S-corp owner use a QSEHRA for themselves?
- No — QSEHRA is an employer benefit for employees. An S-corp owner who is more than 2% shareholder is not eligible to receive QSEHRA benefits as an employee. The S-corp owner uses the self-employed health insurance deduction instead. QSEHRA can benefit W-2 employees of an S-corp who are not 2%+ shareholders.
- What's the difference between a QSEHRA and an HRA?
- A QSEHRA is a specific type of HRA designed for small businesses (under 50 employees). It has statutory contribution limits and specific notice requirements. An Individual Coverage HRA (ICHRA) is another type that has no employer size limitation, no contribution limits, and can be offered alongside certain group plans. ICHRAs are more flexible but more complex. QSEHRAs are the simpler, contribution-limited version for truly small businesses.
- What qualifies for QSEHRA reimbursement?
- Premiums for individual health insurance (marketplace plans, COBRA, student health plans, short-term plans), Medicare Part B/D, and qualified medical expenses defined in IRS Section 213 — including deductibles, copays, prescriptions, dental, vision, mental health, and many other out-of-pocket expenses. Employees must have minimum essential coverage (MEC) for the reimbursements to be tax-free.
- Are QSEHRA reimbursements subject to payroll taxes?
- No — reimbursements made under a QSEHRA are not wages for federal income tax or FICA purposes, as long as the employee has MEC. They don't appear in Box 1 of the W-2 as taxable wages. However, they must be reported in Box 12 of the W-2 with Code FF, so employees can properly calculate their marketplace premium tax credit adjustment.
- What if an employee receives premium tax credits from the marketplace?
- Employees who receive marketplace premium tax credits must reduce those credits by the QSEHRA benefit they could have received, up to the amount of the premium tax credit. If the QSEHRA benefit is equal to or greater than the credit, the employee gets no premium tax credit. This must be disclosed — employers are required to give employees written notice of their QSEHRA allowance so they can properly claim (or not claim) marketplace subsidies.
Take the next step
Turn tax questions into a plan. Talk with Matt or see how we work with operating business owners.
Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.