What is a QSEHRA? Comparing HRA options for your business

Learn the meaning of QSEHRA, a type of health reimbursement arrangement (HRA) that empowers small businesses to offer flexible employee healthcare choices.

Jeremy Wolf

Written by

Jeremy Wolf

Dena Olyaie

Reviewed by

Dena Olyaie

Jim Kazliner

Edited by

Jim Kazliner

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7 min read
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TL;DR 

  • A QSEHRA is a tax-advantaged health benefit that allows your small business to reimburse employees for health insurance and medical expenses.

  • Employers set reimbursement limits; employees submit expenses for tax-free reimbursement.

  • QSEHRA is for businesses with fewer than 50 employees, while ICHRA offers more flexibility for all business sizes.

  • To implement an HRA successfully, set clear documents, communicate with employees, and ensure compliance.

Offering health benefits is one of the biggest challenges small businesses face. Thirty-six percent of small business owners say affordability is their top concern, and 93% worry their current benefits model isn’t sustainable long-term. A comprehensive health benefits plan can help you attract and retain top talent, eventually contributing to company growth.

That said, there are many health insurance alternatives to consider, like HRAs, including QSEHRAs and ICHRAs. Learn more about your options, including QSEHRA’s meaning, how it differs from ICHRA, and how to choose the right fit for your team and budget.

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What is a QSEHRA? 

A QSEHRA is a health benefit that allows small businesses with fewer than 50 full-time employees to reimburse employees for individual health insurance premiums and other qualified medical expenses on a tax-free basis. 

It offers a flexible and cost-effective alternative to traditional group insurance plans. This enables you to support your employees' healthcare needs without the complexities of managing a group plan.

Established under the 21st Century Cures Act of 2016, QSEHRAs provide you with a new way to offer health benefits. By reimbursing employees for eligible expenses, you can offer personalized health benefits that cater to individual needs, promoting employee satisfaction and retention.

Here are some key features of a QSEHRA:

  • Small employer-focused: Designed specifically for businesses with fewer than 50 full-time employees

  • Individual coverage: Employees purchase their own health insurance plans, offering greater flexibility and choice

  • Qualified expenses: Reimbursements can cover a range of medical expenses, including premiums, prescriptions, and co-pays

  • Tax-advantaged: Reimbursements are tax-free for both employers and employees, provided certain conditions are met

  • MEC requirement: Employees must have Minimum Essential Coverage (MEC) to receive tax-free reimbursements

While QSEHRAs are a great option for providing flexible coverage, ICHRAs are a similar plan that businesses with more than 50 full-time employees might find more fitting.

2. What is an ICHRA?

An ICHRA is a health benefit that allows employers of any size to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-free basis. With small businesses being less likely to offer health benefits, ICHRAs provide a flexible alternative to traditional group insurance, enabling employees to choose coverage that best fits their needs.

Data shows that small businesses are less likely to offer health coverage

With rising health insurance premiums — a 24% increase in employer-sponsored family plans since 2019 — 64% of small businesses are exploring ICHRAs as a cost-effective solution.

Here are some key features of ICHRA:

  • Any size employer: Available to businesses of all sizes, including part-time and seasonal workers

  • Individual coverage: Employees select their own health insurance plans, offering greater personalization

  • Greater flexibility in design: Employers can customize reimbursement amounts and eligibility criteria based on employee classes

  • Budget control: Employers set fixed reimbursement allowances, ensuring predictable healthcare spending

  • Tax advantages: Reimbursements are tax-free for both employers and employees, provided certain conditions are met

QSEHRAs vs. ICHRAs vs. traditional group insurance

QSEHRAs and ICHRAs offer tax-advantaged ways to support employee healthcare but differ in flexibility, eligibility, and design. For instance, QSEHRAs are for small employers, while ICHRAs work for businesses of any size and offer more customization options.

If you're choosing between the two, consider factors like your company's size, budget, and long-term benefits strategy. Both can replace traditional group plans, offering modern solutions for providing ICHRA insurance or QSEHRA eligible expenses without the high administrative burden.

Here’s a quick overview of the main differences between QSEHRA and ICHRA:

FeaturesQSEHRAICHRATraditional group insurance
EligibilityEmployers with fewer than 50 full-time employeesEmployers of any sizeEmployers of any size
Contribution rulesEmployer-funded, annual caps applyEmployer-funded, no capsEmployer-funded, which often includes employee premium sharing
Plan designSame benefit for all eligible employeesCan vary by employee classFixed plans for groups, limited customization
Administrative burdenMinimal; typically lower due to smaller teamsModerate; more complex employee classificationsHigh; includes plan negotiation, renewals, compliance
Coverage typeIndividual insurance + qualified medical expensesIndividual insurance + qualified medical expensesGroup insurance policies
Tax treatmentReimbursements are tax-free with MEC*Reimbursements are tax-free with MEC* for those with an individual planEmployer contributions are typically tax-deductible
FlexibilityLess flexible — uniform benefit requiredHighly flexible — can vary by class, amount, and eligibilityLimited flexibility based on group policy
Good fit forSmall businesses wanting a simpleBusinesses seeking customizable, scalable coverageCompanies with stable budgets and HR resources to manage a group plan

*Note: For reimbursements to be tax-free, employees must be enrolled in a health plan that provides minimum essential coverage (MEC).

How does a QSEHRA work?

As we mentioned, a QSEHRA lets small businesses offer tax-free reimbursements for individual health insurance premiums and qualified medical expenses. It’s a flexible tool for managing employee benefits without the cost or complexity of group insurance.

Here’s how the setup and management process works for employers:

  1. Determine eligibility: Your business must have fewer than 50 full-time equivalent employees and not offer a group health plan

  2. Set up the plan: Work with an HRA administrator or benefits advisor to create legal plan documents

  3. Notify employees: Provide written notice before the plan year starts or when new employees are eligible

  4. Set contribution limits: QSEHRA limits for 2025 are $6,350 ($529.17/month) for self-only coverage and $12,800 ($1,066.67/month) for family coverage

Once the QSEHRA is in place, employees follow a simple process:

  1. Enroll in individual health insurance

  2. Submit proof of eligible expenses, such as premium payments or qualified out-of-pocket costs

  3. Receive tax-free reimbursements, up to the maximum allowance set by the employer

Here are the QSEHRA contribution limits from 2019 to 2025:

YearMax individual contributionMonthly (individual)Max family contributionMonthly (family)
2019$5,150$429.17$10,450$870.83
2020$5,250$437.50$10,600$883.33
2021$5,300$441.67$10,700$891.67
2022$5,450$454.17$11,050$920.83
2023$5,850$487.50$11,800$983.33
2024$6,150$512.50$12,450$1,037.50
2025$6,350$529.17$12,800$1,066.67

QSEHRA and ICHRA benefits and considerations

As health insurance costs continue to rise, these types of HRAs offer a flexible, cost-effective alternative for businesses navigating limited benefits budgets. According to a recent report from Thatch, 63% of employees say benefits are a top reason they stay at a job, highlighting how the right health benefits strategy can directly support retention and satisfaction.

Benefits

QSEHRAs and ICHRAs provide a strategic balance between affordability and employee support. Here’s how they benefit both employers and employees:

Employer benefits:

  • Cost control and predictability over health insurance costs

  • Tax advantages — reimbursements are typically tax-deductible

  • Flexibility in setting reimbursement amounts and eligible expenses

  • Upper hand in attracting and retaining talent in a competitive hiring market

Employee benefits:

  • Choice and control over their health insurance

  • Tax-free reimbursements for eligible medical expenses

  • Potential for unused funds to roll over (if the employer allows it)

Key considerations

While QSEHRAs and ICHRAs are powerful tools, you should consider a few important factors when offering them as a type of company health benefit.

Eligibility summaries:

  • For QSEHRAs: Must have fewer than 50 full-time equivalent (FTE) employees and not offer a group health plan

  • For ICHRAs: Employers of any size can offer an ICHRA. Employees must be enrolled in an individual health plan

  • Can’t be offered alongside flexible spending accounts (FSAs) or health savings accounts (HSAs) to the same employees if the HRA is general-purpose

  • Generally available to all W-2 employees, though some exceptions, such as seasonal or part-time workers, may apply

Compliance overview:

  • Employees must maintain minimum essential coverage to receive tax-free reimbursements

  • Employers are required to follow IRS regulations and provide official plan documentation outlining how the HRA works

Choosing an HRA for your organization

Whether you’re looking for a more flexible health benefit or searching for health insurance alternatives to traditional plans, setting up an HRA requires careful planning. Understanding how to set up a QSEHRA or an ICHRA is key to ensuring compliance, clarity, and a positive employee experience.

Here are the essential steps to guide your implementation:

  1. Define reimbursement allowances: Decide how much your organization will reimburse employees — monthly or annually — and whether allowances will differ by employee class or be uniform (for QSEHRA)

  2. Maintain clear plan documents: Draft formal plan documents outlining who’s eligible, what expenses are reimbursable, how much is offered, and any key compliance rules

  3. Develop an employee communication strategy: Provide clear, timely notifications to employees, especially about enrollment timelines, and how reimbursements work

  4. Implement a streamlined reimbursement process: Use an HRA administration tool or service to handle claims submissions, receipts, and tax-free reimbursements efficiently

  5. Ensure compliance with notification requirements: Send required notices to eligible employees at least 90 days before the plan year starts (or when they become eligible), and keep documentation on file

  6. Train HR and payroll teams: Make sure internal teams understand how to process and report reimbursements, especially for tax and accounting purposes

  7. Monitor and adjust annually: Review reimbursement limits, employee needs, and any changes to IRS rules each year to keep your plan optimized and compliant

Empower your business and employees with HRAs

HRAs are a smart, flexible solution for small businesses looking to offer valuable health benefits without the high costs of traditional group insurance. By embracing HRAs, you can take control of healthcare spending while giving employees the freedom to choose their own insurance plans. This helps improve satisfaction and retention.

Whether you’re just exploring QSEHRA's meaning or looking to find the best small business health insurance, HRAs offer a tailored approach that benefits both employers and employees. Explore your options with Thatch to optimize your benefits strategy and empower your business with the right healthcare solution.

Download our one-page QSEHRA Guide as a quick reference. 

QSEHRA FAQ

How does a QSEHRA compare to offering no health benefits?

Offering no benefits may save money in the short term, but it can cost you top talent. A QSEHRA is a budget-friendly way to support employees' health and stay competitive without the expense of a full group plan.

What are the potential cost savings for my company?

QSEHRAs allow you to control health benefit costs by setting reimbursement limits and avoiding unpredictable premiums. Since reimbursements are tax-deductible, they often provide significant savings compared to traditional group insurance.

Can QSEHRA funds roll over?

Yes, employers can allow unused QSEHRA funds to roll over yearly. This flexibility supports long-term employee value while giving employers greater control over benefit design.

jeremy
Written by
Jeremy Wolf /Customer Success and Broker Operations Lead at Thatch

Jeremy Wolf, former professional athlete, is dedicated to enhancing healthcare access. As Customer Success and Broker Operations Lead at Thatch, Jeremy focuses on providing customers with everything they need to navigate the complex health insurance space.

Learn more about Thatch's team

This article is for general educational purposes and is not legal advice. The opinions shared here belong to the author and are not official statements from Thatch. For legal and tax questions, please feel free to consult with a qualified professional.

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