Fewer than 50 full-time equivalent employees and no group health plan. That is the profile of a QSEHRA-eligible employer, and it describes a significant share of the small employer clients brokers advise. A QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) lets those employers reimburse employees tax-free for individual health insurance premiums without the administrative complexity and cost of a group plan. The catch: the same reimbursement that makes coverage more affordable for the employee can eliminate the APTC that was already making coverage affordable on their own.
Key Takeaways
- A QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) lets employers with fewer than 50 full-time equivalents reimburse employees tax-free for individual health insurance premiums and qualified medical expenses, without offering group coverage.
- For plan year 2025, the IRS set QSEHRA maximums at $6,350 for self-only coverage and $12,800 for family coverage. These limits are indexed annually. Verify the current-year amounts in the IRS revenue procedure for the applicable plan year before advising clients.
- If a QSEHRA offer makes Marketplace coverage affordable under the ACA affordability test, the employee loses APTC eligibility for that plan year. This is the most important interaction brokers must explain before a small employer sets up a QSEHRA.
- QSEHRA differs from ICHRA in two key ways: QSEHRA is restricted to employers under 50 FTE and has an IRS annual contribution cap. ICHRA has no size restriction and no contribution limit.
- Employees must have minimum essential coverage (MEC) to receive tax-free QSEHRA reimbursements. An employee without coverage can still receive the reimbursement, but it becomes taxable income.
What a QSEHRA is and who can offer one
A QSEHRA is an employer-funded health reimbursement arrangement established under (d), added by the 21st Century Cures Act in 2016. Employers with fewer than 50 full-time equivalent employees who do not offer group health insurance to any employee class can reimburse employees for individual health insurance premiums and other qualified medical expenses up to the IRS annual limits.
The reimbursements are excluded from the employee's taxable income as long as the employee maintains minimum essential coverage (MEC) for the month in which the reimbursement is made. An employee who receives a QSEHRA reimbursement while lacking MEC must report the reimbursement as taxable income. This is the documentation requirement brokers should explain to employer clients before they set up the arrangement.
Unlike a group health plan, the employer does not select or sponsor a specific health plan under a QSEHRA. The employee shops for individual coverage through the Marketplace, directly from a carrier, or through any compliant individual market source. The employer sets a monthly reimbursement cap within the IRS limits and reimburses the employee for premiums and eligible expenses upon documentation.
QSEHRA vs ICHRA: where the two diverge
ICHRA (Individual Coverage Health Reimbursement Arrangement) is a related but distinct arrangement created in 2019. Many brokers encounter both in the same conversation. The two have enough in common that agency management tools like AgencyBloc sometimes group them under the same HRA category, which can cause confusion when the specific rules of each apply differently to a client.
| Factor | QSEHRA | ICHRA |
|---|---|---|
| Employer size | Fewer than 50 full-time equivalents only | Any employer size, including 50+ FTE |
| Contribution limits | Yes. IRS sets annual maximums (indexed). Verify for the plan year. | No limit. Employer sets the contribution amount. |
| Employee classes | Limited variation allowed. Must cover all eligible employees uniformly with minor permitted differences by family status. | Full class-based design allowed. Different contribution amounts for different employee categories. |
| Group health plan | Cannot offer QSEHRA if group health plan exists for any class. | Certain ICHRA classes can coexist with group coverage for other classes. |
| APTC interaction | Affordable QSEHRA offer eliminates employee APTC eligibility for months covered. | Affordable ICHRA offer also eliminates APTC. Same ACA affordability test applies. |
For small employers who want a simple reimbursement arrangement with uniform contribution across employees, QSEHRA is the more straightforward option. For employers who want to differentiate by employee class or exceed the QSEHRA contribution caps, ICHRA is the appropriate structure. For a full breakdown of how ICHRA commissions flow and where brokers lose the deal, read ICHRA explained for brokers.
The APTC interaction: the conversation brokers cannot skip
The most consequential QSEHRA issue for ACA brokers is its interaction with the Advance Premium Tax Credit. Under the ACA, an employee who is offered coverage that is affordable and provides minimum value cannot claim APTC. For QSEHRA purposes, the IRS applies the same affordability test: if the QSEHRA offer reduces the employee's cost for the lowest-priced self-only Silver plan in their rating area to below the ACA affordability threshold, the employee loses APTC eligibility for months they are eligible for the QSEHRA.
The affordability percentage for 2025 was 9.02 percent of household income. To illustrate: an employee with $36,000 in projected household income has an affordability threshold of approximately $3,247 per year, or $271 per month. If the gross self-only Silver premium in their rating area is $400 per month, and the employer offers a QSEHRA of $150 per month, the employee's net cost drops to $250 per month, which is below the $271 affordability threshold. That employee is no longer eligible for APTC. The APTC would have otherwise covered a significant portion of that $400 premium.
The employee can decline the QSEHRA to preserve APTC eligibility, but the decision is irrevocable for the plan year. If they enroll in the QSEHRA and later lose their Marketplace plan for another reason, they cannot elect out mid-year. Brokers should walk through this math with each employer client before the QSEHRA contribution amount is set, not after employees start enrolling. The employer affordability test and its APTC implications are explained in detail at ACA employer coverage affordability test.
Notice requirements and the $50-per-day penalty
Employers must provide eligible employees with written notice at least 90 days before the start of each plan year. New employees who become eligible mid-year must receive notice within 90 days of their eligibility date. The notice must include the maximum reimbursement amount, a statement directing the employee to report the QSEHRA to the Marketplace when applying for APTC, and a statement about the tax treatment of reimbursements without MEC.
The penalty for failing to provide timely notice is $50 per employee per day, capped at $2,500 per employee per year. Small employers setting up a QSEHRA for the first time frequently underestimate the notice requirements. The broker who flags the 90-day window before the employer finalizes the start date keeps the client out of a penalty situation that has nothing to do with coverage quality.
What brokers should do before a small employer sets a QSEHRA
Run the affordability test for each employee. Collect household income and find the lowest-cost Silver plan premium for self-only coverage in each employee's rating area. Calculate the ACA affordability threshold using the current plan-year percentage. Compare that threshold to what the employee would pay net of the proposed QSEHRA reimbursement.
If the QSEHRA makes the plan affordable for some employees and not others, present that breakdown to the employer before they finalize the contribution. Some employers will adjust the contribution down to keep key employees eligible for APTC. Others may decide the tax-free reimbursement benefit outweighs the APTC loss. That is the employer's decision, but they need the data to make it correctly.
FAQ
Questions brokers ask about QSEHRA rules, eligibility, and the APTC interaction.
What is the difference between a QSEHRA and an ICHRA?
Both are health reimbursement arrangements that allow employers to reimburse employees tax-free for individual health insurance premiums. The key differences are size and contribution limits. QSEHRA is restricted to employers with fewer than 50 full-time equivalent employees and has annual IRS contribution caps. ICHRA has no employer size restriction and no cap on reimbursements. ICHRA also allows employers to define eligibility classes, meaning different contribution amounts for different employee groups. QSEHRA must be offered uniformly to all eligible employees with limited variation. For small employers who want a simple, capped reimbursement arrangement, QSEHRA is the less complex option.
How does a QSEHRA affect a Marketplace employee's APTC?
If an employee is offered a QSEHRA and the reimbursement amount makes the lowest-cost Silver plan at the applicable coverage tier affordable under the ACA affordability test, the employee is ineligible for APTC during months they are eligible for the QSEHRA. Affordability is tested using the employee's household income and the plan-year affordability percentage (9.02 percent for 2025). If the QSEHRA reduces the employee's net premium cost for a self-only Silver plan to below that threshold, they cannot claim APTC. Employees can decline the QSEHRA to preserve APTC eligibility, but the decision must be made at the start of the plan year and cannot be reversed mid-year.
Does an employee have to use a QSEHRA only for Marketplace plans?
No. Employees can use QSEHRA reimbursements for any individual health insurance plan that qualifies as minimum essential coverage, including plans purchased on the Marketplace, directly from a carrier, or through an association. The plan must be compliant individual coverage, not a short-term limited-duration plan, health care sharing ministry membership, or other non-MEC arrangement. The employer cannot restrict QSEHRA use to specific carriers or plans, but employees do need to provide documentation of their coverage and eligible expenses to receive reimbursement.
Can a small employer offer both a QSEHRA and a group health plan?
No. An employer offering a group health plan to any employee class cannot offer a QSEHRA. The QSEHRA was designed specifically as an alternative to group coverage for employers who do not offer group health benefits. If a small employer decides to add group coverage after running a QSEHRA, they must terminate the QSEHRA and provide employees at least 90 days notice before doing so. The two arrangements cannot run concurrently.
What notice requirements apply to a QSEHRA?
Employers must provide employees with written notice of the QSEHRA at least 90 days before the start of each plan year, or within 90 days of becoming newly eligible if the employee joins mid-year. The notice must include the maximum reimbursement amount for the year, a statement that the employee should report the QSEHRA to any Marketplace when applying for APTC, and a statement that the tax treatment of reimbursements depends on whether the employee maintains MEC. Failure to provide timely notice triggers excise taxes of $50 per employee per day, up to $2,500 per year per employee.
