What Is a QSEHRA, and Why Does It Exist?

QSEHRAs are turning 10 this year; not bad for a benefit that began as a rescue operation. When Congress created QSEHRA in 2016, it was not inventing something new so much as restoring something old: a small-employer reimbursement practice that ACA market reforms had exposed to substantial penalties. Every element of how the benefit works today, from its size limits to its annual caps, was shaped by Congress’s attempt to restore that reimbursement practice without undermining ACA framework.

This article covers:

• What small employers used to do before the ACA
• Why the rules created a problem for small businesses
• The bipartisan path that produced QSEHRA
• The policy logic behind each design feature
• How QSEHRA has evolved since 2016

What Is a QSEHRA?

A QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) is an employer-funded health benefit that lets small employers set a fixed annual budget for employee health costs; employees can use their QSEHRA plan budget tax-free for health insurance premiums and qualified medical expenses. [1] Each word in the name carries meaning: "qualified" refers to the statutory requirements the arrangement must meet, "small employer" sets the eligibility threshold, and "health reimbursement arrangement" describes the mechanism itself.

The Problem QSEHRA Was Built to Solve

Before the 2013 ACA guidance, small employers could reimburse employees for substantiated individual health insurance premiums tax-free to the employee under longstanding IRS rules. [2]

The ACA's market reforms set new requirements for group health plans, but the law did not directly target this reimbursement practice. That changed when federal agencies classified standalone HRAs as group health plans subject to those reforms; since a standalone HRA caps reimbursements at a fixed amount by design, it could not satisfy the prohibition on annual benefit limits, and small employers using them were suddenly out of compliance.

The imposed penalties made the situation considerably worse. Continuing to reimburse individual premiums after the 2013 guidance exposed employers to an excise tax of $100 per affected employee per day (up to $36,500 per employee per year), and the disparity was hard to justify: large employers who violated the ACA employer mandate faced lower overall penalties than small employers who were trying, voluntarily, to help their employees. [2] Small employers were not required to offer any coverage at all, yet they faced harsher consequences than large employers who were required to offer it and did not.

The Legislative Path to QSEHRA

In 2015, a group of Senators (Chuck Grassley and Heidi Heitkamp) and Representatives (Charles Boustany and Mike Thompson) introduced companion bills aimed at reversing the agency guidance that had eliminated the small-employer reimbursement path. [5] In 2016, that effort produced the Small Business Health Care Relief Act (H.R. 5447), whose stated purpose was "to provide an exception from certain group health plan requirements for qualified small employer health reimbursement arrangements." [2] That provision is what would eventually lead to QSEHRA.

H.R. 5447 was later incorporated into the 21st Century Cures Act, under a division focused on health choice and access. The Cures Act is best known for its biomedical research and mental health provisions, but it also carried smaller health policy fixes with wide bipartisan support; [6] the act passed the House 392-26 and the Senate 94-5. President Obama signed it on December 13, 2016, and QSEHRA rules took effect January 1, 2017. [1]

Why QSEHRA Was Designed the Way It Was

Every structural rule in the QSEHRA statute was a direct response to a specific policy concern; taken together, they describe a benefit that restores the pre-ACA small-employer reimbursement practice within a framework shaped by the ACA's logic. [2][7]

The first fix was legal reclassification: the original problem was that agencies had classified standalone HRAs as group health plans, and the Cures Act resolved this by amending the Internal Revenue Code, ERISA, and the Public Health Service Act to exclude QSEHRAs from those definitions. [1] Without that change, the benefit could not legally exist. From there, each structural rule addresses a separate concern:

• Small employers only. The eligible employer must have fewer than 50 full-time equivalent employees, the same threshold as the ACA employer mandate; the benefit was designed for non-mandated employers, not for larger businesses seeking to avoid group coverage obligations. [7]
• No group health plan allowed. An employer offering any group health plan cannot establish a QSEHRA; the benefit is a substitute for group coverage, not a supplement to it. [7]
• Employer-funded only. Ways and Means report noted that HRA amounts cannot include salary-reduction contributions; [2] allowing employees to contribute via salary deferral would turn QSEHRA into an employee-funded pre-tax account.
• Same terms for all eligible employees. Employers may vary benefit amounts by age and family size, since individual-market premiums legitimately differ along those dimensions; any other variation risks violating the same-terms rule, which exists to prevent benefits from being selectively offered to favored workers. [7]
• Annual dollar caps. QSEHRA contribution limits are set annually and adjust for inflation; they preserve the defined-contribution character of the benefit and prevent QSEHRAs from becoming an unlimited tax-free reimbursement benefit. [2]
• Minimum essential coverage required. Employees must have minimum essential coverage to be eligible for a QSEHRA. In the event that reimbursements are paid out in a month where an employee’s coverage has lapsed, that income is treated as taxable. [1] The idea was to restore small-employer reimbursements while preserving the ACA’s goal of maintaining health insurance coverage.
• Premium tax credit coordination. If QSEHRA meets the affordability threshold, the employee cannot claim the premium tax credit for that month; if it falls below, the credit is reduced by the QSEHRA benefit amount. [1] Required employee notices and W-2 reporting make this coordination work in practice. [7]

Read together, these rules describe a benefit that is intentionally narrow: they define exactly how much of the pre-ACA small-employer reimbursement practice Congress was willing to restore, and on what terms.

How QSEHRA Has Evolved Since 2016

In the nearly ten years since QSEHRA rules first took effect, the core structure has remained largely intact. The most significant post-enactment development was IRS Notice 2017-67, issued in November 2017, which set out the full compliance framework for MEC verification, expense substantiation, W-2 reporting, and premium tax credit coordination (the core responsibilities of a QSEHRA administrator). [7]

The CARES Act in March 2020 expanded eligible medical expenses for all health accounts, including HRAs, to include over-the-counter medicines without a prescription and menstrual care products. [9]

The most meaningful expansion in this space came from the 2019 HRA Final Rules, which created the Individual Coverage HRA (ICHRA). ICHRA extended the individual-market reimbursement concept to employers of any size through a separate regulatory framework, and introduced structural differences, particularly in how employee eligibility and premium tax credits work. QSEHRA remains the more narrow statutory option for employers with fewer than 50 employees.

Frequently Asked Questions

Does a QSEHRA count as a group health plan?

No. The 21st Century Cures Act amended the Internal Revenue Code, ERISA, and the Public Health Service Act to exclude QSEHRAs from the group health plan definitions that trigger ACA market-reform requirements; [1] that exclusion is the legal foundation that makes QSEHRA possible.

Can an employer offer a QSEHRA and a group health plan at the same time?

No. An employer offering any group health plan to any employees is not eligible to establish a QSEHRA; the two are mutually exclusive by law. [7]

What's the difference between a QSEHRA and an ICHRA?

Both are employer-funded health reimbursement arrangements, but they serve different use cases. QSEHRA is limited to employers with fewer than 50 employees and covers any employee with minimum essential coverage; ICHRA is available to employers of any size but is limited to employees with individual health insurance or Medicare. See a full comparison of QSEHRA vs. ICHRA.

What happens if an employee doesn't have health insurance?

Before an employee can receive QSEHRA reimbursements, they must substantiate minimum essential coverage for the month the expense was incurred. If a reimbursement is mistakenly paid for a month without MEC, that amount must be treated as taxable income. [1]

Can employees contribute to a QSEHRA?

No. QSEHRA amounts must come entirely from the employer; employee salary-reduction contributions are prohibited by statute. [1]

From Problem to Practice

For nearly a decade, QSEHRA has given small employers a way to support employee health costs without the overhead of a group health plan, with rules designed to fit within the broader health coverage framework (rather than work around it). For small employers looking to support their team without the cost or complexity of group coverage, QSEHRA remains one of the most practical tools available.

Sources

[1] 21st Century Cures Act, Pub. L. 114-255, §18001 (2016). https://www.govinfo.gov/content/pkg/PLAW-114publ255/html/PLAW-114publ255.htm

[2] House Ways and Means Committee Report on H.R. 5447, CRPT-114hrpt634 (2016). https://www.govinfo.gov/content/pkg/CRPT-114hrpt634/pdf/CRPT-114hrpt634-pt1.pdf

[3] IRS Notice 2013-54. https://www.irs.gov/pub/irs-drop/n-13-54.pdf

[4] U.S. Department of Labor, FAQ Part 33. https://www.dol.gov/agencies/ebsa/about-ebsa/our-activities/resource-center/faqs/aca-part-33

[5] Senator Chuck Grassley, press release: Grassley, Heitkamp, Boustany, and Thompson Introduce Health Reimbursement Arrangement Bills (2015). https://www.grassley.senate.gov/news/news-releases/grassley-heitkamp-boustany-and-thompson-introduce-health-reimbursement

[6] Congressional Research Service, Report R44720: 21st Century Cures Act. https://www.everycrsreport.com/reports/R44720.html

[7] IRS Notice 2017-67. https://www.irs.gov/pub/irs-drop/n-17-67.pdf

[8] IRS Revenue Procedure 25-32 (2026 QSEHRA limits). https://www.irs.gov/pub/irs-drop/rp-25-32.pdf

[9] CARES Act, Pub. L. 116-136, §3702 (2020). https://www.govinfo.gov/content/pkg/PLAW-116publ136/html/PLAW-116publ136.htm