8824 / What happens if a QSEHRA fails to satisfy the requirements that apply to this type of savings vehicle?

For example, a QSEHRA can fail to satisfy the requirements if it is not provided by an eligible employer, if it is not provided to all eligible employees on the same terms, if it reimburses medical expenses without first requiring proof that the individual has minimum essential coverage or if it provides benefits that exceed the annual contribution limit. Failure to provide the required notices does not cause the QSEHRA to fail to be a QSEHRA, but instead triggers application of the penalty discussed in Q .

Failing to satisfy the QSEHRA requirements does not cause reimbursements for properly substantiated medical expenses to be included in the employee’s income, but if the arrangement is actually designed to reimburse non-medical expenses (even if in addition to medical expense reimbursement), all reimbursements will be included in the employee’s income.

Essentially, all QSEHRA reimbursements will be included in employee income if any of the following are true: (1) the QSEHRA reimburses medical expenses without proper substantiation, (2) the QSEHRA reimburses medical expenses in advance of receiving substantiation or (3) the QSEHRA reimburses non-medical expenses.

1.  IRC § 4980D.