QSEHRA Employer Requirements: The Laws, Rules, and Amendments That Govern Your Plan

A QSEHRA is governed by rules drawn from multiple federal laws, IRS notices, and amendments passed over nearly a decade. Most guides cover one or two of these. This one organizes the complete legal structure in one place and explains what each rule requires, giving small employers a reliable, comprehensive point of reference.

This article covers:

• The 2016 law that created QSEHRAs and the problem it solved for small employers
• The core requirements every employer must meet to offer a valid QSEHRA
• How to operate your QSEHRA compliantly on a day-to-day basis
• The employee notice and W-2 reporting obligations that protect your plan
• How your QSEHRA affects your employees' premium tax credits

QSEHRA Employer Requirements at a Glance

Where QSEHRAs Come From

Before the Affordable Care Act (ACA), many small employers reimbursed employees for individual health insurance premiums on a pre-tax basis. After 2013 ACA guidance, those standalone reimbursement arrangements no longer worked outside a compliant framework, creating meaningful tax exposure for employers that continued them. [1] Congress addressed that problem in 2016 by creating QSEHRA: a structured, compliant way for small employers to reimburse employees for health coverage without offering a traditional group health plan. [2]

Read More: What Is a QSEHRA, and Why Does It Exist?

The Core QSEHRA Employer Requirements

The core QSEHRA requirements come from one section of the tax code: IRC §9831(d). Together, they define who can offer a QSEHRA, who must be covered, how the plan must be funded, and how much can be reimbursed.

1. Employer eligibility. To offer a QSEHRA, an employer must not be an "applicable large employer" as defined in IRC §4980H, which in practical terms means having fewer than an average of 50 full-time equivalent employees in the prior calendar year. [3] There is a second condition that catches some employers off guard: the employer cannot currently offer a group health plan to any employees, including HRAs, FSAs, and dental or vision plans. [9]
2. Employee eligibility. A QSEHRA must be offered to all eligible employees, with some key exceptions: employers may exclude employees under age 25, those with fewer than 90 days of service, part-time/seasonal workers, employees covered by a collective bargaining agreement that includes health benefits, and foreign residents without U.S. income. Non-employee owners and independent contractors also do not qualify as employees for QSEHRA eligibility purposes.A common mistake is excluding employees based on anticipated utilization. Employees who appear to have spousal coverage, or younger workers an employer assumes will never file a claim, do not qualify for exclusion on that basis. The permitted exclusion categories above are exhaustive: any employee who does not fall within one of them must be offered the QSEHRA on the same terms as every other eligible employee.
3. The same-terms rule. Allowances can vary, but only by the employee's age and number of people covered. Age-based allowances cannot decrease by age, and the allowance for the oldest employee cannot exceed three times the allowance of the youngest.
4. Employer-only funding. A QSEHRA is funded entirely by the employer; employees cannot contribute through salary reduction, direct payment, or any other mechanism. [3] This is one of the features that distinguishes a QSEHRA from a flexible spending account. The employer sets the allowance and bears that cost alone.
5. What can be reimbursed. A QSEHRA can reimburse any medical expense the IRS recognizes as deductible under IRC §213(d), at the employer’s discretion: individual health insurance premiums, deductibles, copays, coinsurance,, prescriptions, dental and vision care, and most other out-of-pocket medical costs. [4] The 2020 CARES Act also added over-the-counter medicines (no prescription required) and menstrual care products to the list. [5]. Cosmetic procedures and non-medical purchases generally do not qualify. For a more detailed explanation of which medical expenses qualify for reimbursement under a QSEHRA, see What Expenses Are QSEHRA Eligible? 
6. Annual dollar limits. The law caps how much a QSEHRA can reimburse each year, prorated by month for employees who join mid-year. [6] These limits are tied to inflation through the chained Consumer Price Index measure, updated by the Tax Cuts and Jobs Act of 2017, which accounts for the modest annual increases employers see from one plan year to the next. [7]
7. The minimum essential coverage requirement. A QSEHRA reimbursement is only tax-free in months when the employee holds minimum essential coverage (MEC), which includes most major medical insurance plans: marketplace plans, employer-sponsored plans, Medicaid, and Medicare. [8] The QSEHRA itself does not count as MEC. If an employee lacks coverage in a given month and the employer reimburses an expense anyway, that reimbursement becomes taxable income; employers must verify MEC status before issuing reimbursements, and employees must show MEC before they can participate.

How these rules have been updated since 2016

Two notable changes to the QSEHRA framework have taken effect since the original legislation:

• Inflation indexing (Tax Cuts and Jobs Act, 2017): The TCJA updated the indexing formula for QSEHRA annual limits to use the chained Consumer Price Index under IRC §1(f)(3), producing the modest annual increases in contribution limits seen since 2018.
• Expanded eligible expenses (CARES Act, 2020): The CARES Act added over-the-counter medicines without a prescription and menstrual care products to the list of reimbursable expenses, retroactive to December 31, 2019; this change applied to all HRAs, not just QSEHRAs.

Operating Your QSEHRA Plan: Day-to-Day Compliance

While knowing QSEHRA eligibility criteria lays a good foundation, a deeper understanding is necessary to maintain month-to-month compliance. In November 2017, the IRS published Notice 2017-67, a detailed 79-question guidance document that translates the QSEHRA requirements into operational standards. [9] The sections below draw on that guidance to explain what employers must do to keep their plan valid.

Verifying minimum essential coverage

Employees must provide proof of minimum essential coverage before they can participate in a QSEHRA. [9] If reimbursements are made during a month when the employee lacks MEC, those amounts become taxable income and must be reflected as wages in the employee's W-2.

Substantiating reimbursement requests

Every reimbursement requires substantiation: documentation that the expense qualifies under IRC §213(d) and that it was actually incurred. [9] Acceptable documentation includes receipts or invoices showing the date, amount, provider, and the individual covered, as well as Explanations of Benefits from the employee's insurer.

The HSA interaction

A standard QSEHRA that permits reimbursement of out-of-pocket medical expenses typically triggers HSA disqualification, because it constitutes "other coverage" under IRC §223(c)(1)(A)(ii). [9] However, several alternative designs preserve HSA eligibility. Through Salusion, employers can preserve HSA eligibility by having their QSEHRA cover only premiums. 

Employee notice requirements

For a newly established QSEHRA, employers must provide written notice to all eligible employees on or before the date the plan first takes effect. For later plan years, employers generally must provide the notice at least 90 days before the start of the plan year. New hires and other employees who become eligible mid-year must receive the notice by their first day of eligibility. [9] The notice must cover three specific topics: the employee's permitted benefit amount for the year; a statement that the employee must report the QSEHRA to the marketplace when applying for a premium tax credit; and a reminder that reimbursements are only tax-free during months when the employee holds MEC. 

Plan document and summary plan description

QSEHRA employers must maintain a formal written Plan Document and distribute a Summary Plan Description (SPD) to plan participants. [13] The Plan Document is the governing legal instrument for the arrangement, recording the plan year, eligible employees, benefit amounts, reimbursable expenses, and claims procedures. The SPD is the employee-facing version, written in plain language; participants must receive it within 90 days of becoming eligible. Both documents must be updated whenever material changes are made to the plan.

W-2 reporting

At the end of each year, employers must report the employee's total QSEHRA permitted benefit in Box 12, Code FF of their W-2; the amount reported is the maximum benefit the employee was eligible to receive, not the amount actually reimbursed. [10] This is informational reporting: it does not create taxable income for the employee, but it ensures employees have the figures they need to accurately calculate their premium tax credit eligibility when filing their taxes. Omitting this step, or reporting an incorrect amount, can create reconciliation issues for employees and draw IRS scrutiny to the employer's plan.

PCOR Fees

QSEHRA employers are subject to the Patient-Centered Outcomes Research (PCOR) fee under IRC §4376, assessed annually. [14] The fee is calculated based on the number of enrolled employees and reported on IRS Form 720, due by July 31 of the following year. The rate adjusts each year based on national health expenditure data; the IRS publishes the current rate in its annual revenue procedure updates.

QSEHRA compliance failures vary significantly in their consequences. Structural failures, such as maintaining a group health plan alongside the QSEHRA or accepting employee contributions, can reclassify the entire arrangement as a non-compliant group health plan under IRC §4980D, carrying a potential excise tax of $100 per affected employee per day. [12] Operational mistakes within an otherwise valid QSEHRA carry different consequences: a missed employee notice triggers the IRC §6652(o) penalty; a reimbursement made without MEC proof becomes taxable income; a substantiation error may require repayment or correction. Understanding the differences helps employers take compliance seriously without overestimating the risk of ordinary administrative issues.

Frequently Asked Questions

Can I offer a QSEHRA if I also provide dental or vision coverage?

No. IRS Notice 2017-67 explicitly extends the definition of "group health plan," for QSEHRA purposes, to include dental and vision plans, even those that qualify as excepted benefits under the ACA. An employer that sponsors any health plan, including a standalone dental or vision plan, is not eligible to offer a QSEHRA. [9]

What happens if my business grows past 50 employees?

QSEHRA eligibility is based on ALE status, not raw headcount. The ALE calculation under IRC §4980H(c)(2) counts full-time employees directly and converts part-time hours into fractional equivalents; employers with large part-time workforces can have significantly more people on payroll than their ALE count reflects. [11] An employer whose average reaches 50 or more in the prior year becomes an ALE on January 1 of the following year, and must discontinue the QSEHRA before the new plan year begins. Employers who cross the threshold often transition to an ICHRA, which carries no size restriction.

Do the annual dollar limits apply to what I put in, or to what actually gets reimbursed?

The limits cap the permitted benefit: the maximum amount the employer makes available for the year. Box 12, Code FF on the W-2 reflects that figure regardless of how much the employee actually claimed, and the limit applies per employee, not per plan. [3]

The Bottom Line

QSEHRA's requirements may seem like a lot on paper, but they are also consistent and well-documented. A small-business employer who understands the full framework is in a much better position to implement and maintain these systems with confidence. For those who need a hand navigating the day-to-day, Salusion is here to help.

Last updated: July 14, 2026

Sources

1. IRS Notice 2013-54, "Application of Market Reform and Other Provisions of the Affordable Care Act to HRAs, Health FSAs, and Certain Other Employer Healthcare Arrangements." Internal Revenue Service, September 2013. https://www.irs.gov/pub/irs-drop/n-13-54.pdf
2. 21st Century Cures Act, Pub. L. No. 114-255, §18001, 130 Stat. 1033 (2016). https://www.congress.gov/114/plaws/publ255/PLAW-114publ255.pdf
3. IRC §9831(d) [all subsections governing QSEHRA requirements, employer and employee eligibility, funding, and dollar limits]. https://www.law.cornell.edu/uscode/text/26/9831
4. IRC §213(d) [definition of deductible medical expenses]. https://www.law.cornell.edu/uscode/text/26/213
5. Coronavirus Aid, Relief, and Economic Security Act (CARES Act), Pub. L. No. 116-136, §3702 (2020). https://www.congress.gov/116/plaws/publ136/PLAW-116publ136.pdf
6. IRS Revenue Procedure 2025-19 [2026 QSEHRA contribution limits]. https://www.irs.gov/pub/irs-drop/rp-25-19.pdf
7. Tax Cuts and Jobs Act of 2017, Pub. L. No. 115-97, §11002; amended IRC §1(f)(3) to use chained Consumer Price Index for inflation adjustments. https://www.congress.gov/bill/115th-congress/house-bill/1/text
8. IRC §106(g) [tax exclusion for QSEHRA reimbursements]; IRC §5000A(f) [definition of minimum essential coverage]. https://www.law.cornell.edu/uscode/text/26/106
9. IRS Notice 2017-67, "Guidance on Qualified Small Employer Health Reimbursement Arrangements." Internal Revenue Service, November 2017 [covers MEC verification, expense substantiation, HSA interaction, and employee notice requirements]. https://www.irs.gov/irb/2017-47_IRB
10. IRC §6051(a)(15) [W-2 reporting of QSEHRA permitted benefit]. https://www.law.cornell.edu/uscode/text/26/6051
11. IRC §4980H(c)(2) [applicable large employer timing rule]. https://www.law.cornell.edu/uscode/text/26/4980H
12. IRC §4980D [excise tax for non-compliant group health plans]. https://www.law.cornell.edu/uscode/text/26/4980D
13. ERISA §102 [Summary Plan Description requirements]; ERISA §402(a) [Plan Document requirements]; ERISA §104(b)(1) [90-day distribution deadline for new participants]. https://www.law.cornell.edu/uscode/text/29/1022
14. IRC §4376 [Patient-Centered Outcomes Research fee for self-insured health plans]. https://www.law.cornell.edu/uscode/text/26/4376