QSEHRA — the Qualified Small Employer HRA — lets a business with under 50 full-time-equivalent employees reimburse workers tax-free for individual health premiums and medical expenses. No group plan. No insurance broker. No ACA reporting nightmare. Just a written plan, an allowance, and a reimbursement.
Before 2017, a small business owner who wanted to help employees pay for their own ACA marketplace coverage got punished for it — $100/day/employee in ACA penalties. The 21st Century Cures Act fixed it, creating the Qualified Small Employer HRA (QSEHRA) under IRC §9831(d) and the income exclusion under §139H.
How it works: The employer sets an annual allowance (up to the §9831(d) cap). Employees submit proof of qualifying individual health insurance + receipts for eligible medical expenses (§213(d)). The employer reimburses them — tax-free on both sides. Employer deducts it as a §162 ordinary business expense. Employee doesn't pay income tax, FICA, or Medicare on it.
The 2026 caps (rev. proc. annual update): $6,450 individual coverage / $13,100 family coverage. (2025 was $6,350 / $12,800.) Monthly equivalents: $537.50 individual, $1,091.67 family.
Eligibility for the employer: Must have fewer than 50 full-time equivalent employees (under ACA aggregation rules) AND must not offer a group health plan to any employee. You can't run a group plan and a QSEHRA in parallel. Pick one.
Eligibility for the employee: Must have qualifying minimum essential coverage (MEC) — typically an ACA marketplace plan or coverage through a spouse's plan. Without MEC, reimbursements become taxable income.
Set annually via revenue procedure. The caps are maximums — you can offer less. Once chosen, they apply to the plan year, prorated for mid-year hires.
Why QSEHRA beats "just pay them more": a $13,100 raise costs the employer $13,100 + $1,002 employer FICA = $14,102, and the employee receives only ~$8,400 net after their FICA + 22% federal + state. Same gross check, but QSEHRA delivers the full $13,100 of value to the employee tax-free. The mismatch is real.
FTE count uses ACA aggregation rules — full-time + (part-time hours/120). If you offer (or are about to offer) any kind of group health insurance, you're out. QSEHRA is mutually exclusive with group plans.
The §9831(d) requirement: a written document specifying the plan year, allowance amounts, eligible expenses, and claim procedure. Don't wing this. Use a TPA (PeopleKeep, Take Command Health, etc.) or template.
All eligible employees get the same terms. You can vary the allowance by self-only vs family coverage and by age (subject to limits — older employees can't get more than 3× younger ones), but you can't offer your favorite employee $13,100 and the rest $1,000.
At least 90 days before the start of each plan year (or for a new plan, by the date of the plan year), give every eligible employee written notice describing the allowance, telling them about the MEC requirement, and reminding them to report the allowance when applying for premium tax credits on the marketplace.
Get attestation of qualifying coverage. Without MEC, any reimbursement is W-2 income — and you've blown the §139H exclusion. Most TPAs handle this automatically.
Insurance premiums (the big one), copays, deductibles, prescriptions, dental, vision, lots of other qualified medical expenses. Reimburse on documentation — receipt, EOB, premium statement.
The annual permitted benefit goes in Box 12 with code FF — informational only, NOT included in taxable wages. Failure to report doesn't disqualify the plan but is a minor employer error penalty.
The "no group health plan" rule is absolute. You can't run a partial group plan, a "carve-out," or even a wellness benefit that constitutes a group health plan. Pick a lane.
Reimbursements to an employee who doesn't have minimum essential coverage are taxable. They go on the W-2 as wages, and FICA applies. Verify MEC each year.
2%-or-more S-corp shareholders are NOT eligible employees for QSEHRA. Their premiums go through the separate §1372 / Notice 2008-1 framework (W-2 wages + above-the-line §162(l) deduction). Don't reimburse them through QSEHRA.
If you're a W-2 owner-employee and you give yourself $13,100 but rank-and-file get $4,000, the reasonable-consistency rule is violated. Same terms for everyone in a category.
The 90-day notice and written plan document are both statutory. Skipping them creates a $50/employee/violation penalty plus risks disqualifying the §139H exclusion entirely.
If you grow past 49 FTEs (counted under the ACA aggregation rules), you become an ALE and can no longer offer QSEHRA the next plan year. Plan the transition (most go to ICHRA or group coverage).
Books logs each reimbursement to a dedicated §162 line, ties documentation to the receipt, and produces the W-2 Box 12 Code FF report at year end. The plan-document and 90-day-notice templates are ready to send.
Limits reflect 2026 plan year (Rev. Proc. 2025-32). 2025: $6,350 / $12,800. QSEHRA setup typically involves a TPA — PilePilot helps with bookkeeping, not plan administration.