8808 / What is a qualified small employer health reimbursement arrangement (QSEHRA)? Can a QSEHRA be used by employers to reimburse employees for the cost of individual health insurance premiums?

The 21st Century Cures Act introduced a new health reimbursement arrangement (HRA) that allows small employers to continue to reimburse employees for the cost of individual health insurance premiums. Small business employers are able to offer qualified small employer health reimbursement arrangements (QSEHRAs) beginning in 2017 without incurring ACA penalties. QSEHRAs allow a small employer who is not an applicable large employer under the ACA (i.e., one that has fewer than 50 full-time employees) to reimburse employees for the purchase of individual health insurance policies using an HRA if the small employer does not also offer its employees group health coverage.

The employer can contribute a maximum of $6,350 in 2025 ($6,150 for 2024, $5,850 for 2023 and $5,450 for 2022) for employees who purchase individual coverage, and a maximum of $12,800 for 2025 ($12,450 for 2024, $11,800 in 2023 and $11,050 for 2022).¹ if the employee purchases family coverage (both contribution limits are indexed for inflation and pro-rated amounts are used for years in which only partial coverage is offered).

QSEHRAs must generally be offered on the same basis to all comparable employees, though the employer can exclude employees who have yet to work 90 days, employees who have not reached age 25, employees who are covered by a collective bargaining agreement and employees who are nonresident aliens and have no earned income from U.S. sources. Small business employers who choose to offer QSEHRAs must provide a written notice to employees 90 days before the beginning of the year (the IRS extended the notice deadline for 2017 QSEHRAs²) that specifies the amount of the benefit that will be provided by the QSEHRA and informs participating employees that they must inform the health insurance exchanges of the benefit provided by the QSEHRA if the employee intends to apply for premium assistance.

The notice must also clearly inform the employee that if he or she does not purchase health insurance, ACA penalties may apply and any reimbursements from the QSEHRA may be included in gross income. Small employers must report the QSEHRA coverage on Form W-2, Box 12 (for informational purposes). Further, the employer must provide participating employees with Form 1095-B, and send the same data to the IRS on Form 1094-B.³

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1. Rev. Proc. 2019-44, Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-34, Rev. Proc. 2023-34.