Get Your QSEHRA Health Plan in Place Now
- Viktoriya Barsukova, EA, MBA
- Nov 19
- 8 min read
As a small employer (fewer than 50 employees), you are exempt from the requirements of the Affordable Care Act and need not offer your employees medical coverage.
But if you desire to give your employees medical coverage, consider the qualified small-employer health reimbursement arrangement (QSEHRA) as one of four good ways to help your employees with their medical expenses.
In this first article of four on small-business health plans, you will learn how the QSEHRA medical plan benefits both the employer and employees, as well as who qualifies and who doesn’t.
Key point. The QSEHRA enables an employer to reimburse individually purchased insurance without suffering the $100-a-day-per-employee penalty. This makes the QSEHRA an attractive plan (no penalties and employees buy their own insurance).
Here’s what it means, simply:
If an employer reimburses employees for individually purchased health insurance outside of a compliant plan, the IRS can impose a penalty of $100 per day per employee.
That equals $36,500 per employee per year.
A QSEHRA is specifically designed to avoid that penalty by making the reimbursement legal and compliant.
Benefits for You, the Business Owner
When deciding on health plans for yourself and your employees, you have a variety of considerations depending on how you conduct your business.
Sole Proprietors and Single-Member LLCs
Schedule C taxpayers with no employees.
If you operate as a self-employed individual or as a single-member LLC, you file your business income and expenses on Schedule C of your Form 1040.
You, the owner, are not an employee of your Schedule C business. But you, the owner, might qualify to deduct self-employed health insurance on your Form 1040. Your other medical expenses are itemized deductions.
Schedule C business, spouse is the only employee.
If you operate a Schedule C business and your spouse is your only employee, your best and a really good choice for a medical plan is the 105-HRA that we describe in Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement).
Schedule C business with employees.
The QSEHRA described in this article is a good choice for the Schedule C business with employees because the law limits your exposure to high medical costs.
Key point. If you employ your spouse and other employees, your spouse could enroll in a family-coverage QSEHRA and use that to cover you and your family. But since the law limits the benefits, you are likely better off claiming your health insurance as a self-employed health insurance deduction.
S Corporation
Shareholder-employees who own more than 2 percent of the S corporation are not employees for purposes of the QSEHRA.1 The same applies to spouses and family members.2 But the QSEHRA works well for rank-and-file employees.
For the treatment of the S corporation owner apart from the treatment of employees, see Health Insurance for S Corporation Owners: An Update.
Partnership
Spouse is the only employee of the partnership.
With the spouse as the sole employee of the partnership, your best and a really good choice is the 105-HRA that we describe in Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement).
Partners.
For the partner, the self-employed health insurance deduction on page 1 of your Form 1040 is the only choice for your health insurance deduction. Your other medical expenses are itemized deductions.
To make this Form 1040 deduction a possibility, you need the partnership to pay for or reimburse the cost of the partner’s health insurance and then you can treat the cost of the health insurance as a guaranteed payment.3 The guaranteed payment treatment for the health insurance of the partner models that of the S corporation, so follow the basics as you see them in Health Insurance for S Corporation Owners: An Update.
C Corporation
· If you operate your business as a C corporation and you, the owner, are the only employee, use the 105-HRA for maximum benefits. For how you benefit with this plan, see Blueprint for Employee-Spouse 105-HRA (Health Reimbursement Arrangement).
· If you operate your business as a C corporation and you are an owner-employee with other employees, the QSEHRA is a good plan for your employees. But with an employee plan, your benefits will match only what you give your employees.
QSEHRA Basics
Eligible employer.
To be an eligible employer, you must have fewer than 50 eligible employees and not offer group health or a flexible spending arrangement to any employee.4 For the QSEHRA, group health includes excepted benefit plans such as vision and dental, so don’t offer them either.5
Key point. If you want the QSEHRA, group health is out.
Eligible employees.
All employees are eligible employees, but the QSEHRA may exclude6
· employees who have not completed 90 days of service with the employer,
· employees who have not attained age 25 before the beginning of the plan year,
· part-time or seasonal employees,
· employees covered by a collective bargaining agreement if health benefits were the subject of good-faith bargaining, and
· employees who are non-resident aliens with no earned income from sources within the United States.
Dollar Limits.
Tax law indexes the dollar limits for inflation.7 The 2025 limits are $6,350 for self-only coverage and $12,800 for family coverage.8 For part-year coverage, you prorate the limit to reflect the number of months the QSEHRA covers the individual.9
In the case of an individual who is not covered by a QSEHRA for the entire year, IRC Section 9831(d)(2)(D)(i) requires the employer to prorate the statutory dollar limits to reflect the number of months that the individual is covered by the QSEHRA.10
Written Notice.
The tax code requires the eligible employer to furnish written notice to each eligible employee at least 90 days before the beginning of each year11 or, for an employee who is not eligible to participate at the beginning of the year, the date on which the employee is first eligible to participate in the QSEHRA.12
For a sample written notice that you can use,
Minimum Essential Coverage.
The QSEHRA may reimburse the employee for qualified medical expenses only after the eligible employee provides proof of minimum essential coverage.13
For a reimbursement request that meets the proof requirement, use this.
W-2 Rule.
You report the amount that the eligible employee is entitled to receive from the QSEHRA for the calendar year in box 12 of Form W-2 using code FF, without regard to the amount of the payments or reimbursements actually received.14 (Weird, but true—you report the “entitled” amount, not the amount paid.)
Essentials
To make your QSEHRA work easily in an audit-proof manner:
Modify this sample plan notice to your needs, and make sure that you and your employees sign it. Keep the signed documents with your tax files.
Reimburse employees for qualified expenses based only on submission of this reimbursement request.
Penalties
If you fail to provide the written notice as required above, your penalty is not severe. It’s $50 per employee up to a maximum of $2,500 per calendar year, per eligible employee.15
But here’s a whopper. If an arrangement fails to qualify as a QSEHRA because one or more of the requirements to be a QSEHRA are not satisfied, the arrangement is a group health plan where violations such as reimbursing individually purchased insurance are subject to the Section 4980D excise tax of $100 a day per employee.16
Warning. If you fail to adhere to the QSEHRA rules, you will face the $100-a-day penalty because your QSEHRA follows the legislative design to require individually purchased insurance as a condition for reimbursement.
The QSEHRA fails and becomes a group health plan if17
· it is not provided by an eligible employer (such as an employer that offers another group health plan to its employees),
· it is not provided on the same terms to all eligible employees,
· it reimburses medical expenses without first requiring proof of minimum essential coverage, or
· it provides a permitted benefit in excess of the statutory dollar limits.
The QSEHRA failures above do not trigger taxable income to the employee for properly substantiated medical expenses.
But if the arrangement reimburses employees for expenses that (a) have not been substantiated, (b) are reimbursed in advance of substantiation, or (c) are not medical expenses, then the arrangement is neither a QSEHRA nor a group health plan, and all amounts paid under the arrangement are included in every employee’s gross income and wages.18
And, of course, this arrangement triggers exposure to the $100-a-day penalty for reimbursing individually purchased insurance.
Mistakes
Don’t make mistakes.
If your QSEHRA mistakenly reimburses an eligible employee for a medical expense that has not been substantiated, the arrangement fails to satisfy the requirements for the payments to be excluded from the employee’s income, and all payments to all employees under the arrangement, substantiated and unsubstantiated, on or after the date the mistaken reimbursement was made, become taxable.19
But if an employee timely substantiates or repays an unsubstantiated amount with after-tax funds, the QSEHRA will not be treated as failing to satisfy the substantiation requirements.20
To avoid reimbursement mistakes, require that your employees use this reimbursement request.
Pay the PCORI
This fee applies because the IRS treats a QSEHRA as a type of self-insured health plan.
What this means for you:
You must pay the PCORI fee for your 2025 QSEHRA.
You pay it by filing Form 720.
The payment is due July 31, 2026 (because it’s always due the July after the plan year ends).
Takeaways
If you want to help your employees with their medical insurance costs, the QSEHRA is a good option because it
· gives you control over your costs, and
· allows you to reimburse individually purchased health insurance without fear of the $100-a-day penalty.
To put your 2026 QSEHRA in place, use the sample plan notice as a guide, and make sure you have this in place by the close of business on October 2, 2025, with both your signature and those of your employees.
To keep your life easy, use the dollar limits as your maximums. If you want lower maximums, simply apply the same percentage to both the individual and the family limits, such as 70 percent, 80 percent, or any other percentage.
As your second step in avoiding trouble and making sure your QSEHRA works properly, require that employees submit all reimbursement requests using this
. With this request, you create total compliance with the reimbursement rules.
1 IRC Section 1372; Notice 2017-67, Q&A 9.
2 IRC Section 318.
3 Rev. Rul. 91-26.
4 Notice 2017-67, Background and Section A.
5 Notice 2017-67, Section A.
6 Notice 2017-67, Section B.
7 IRC Section 9831(d)(2)(D)(ii).
8 Rev. Proc. 2022-38.
9 IRC Section 9831(d)(2)(D)(i).
10 Ibid.
11 IRC Sections 9831(d)(4); 6652(o). When counting days for this purpose, exclude the day of the notice.
12 IRC Section 9831(d)(4).
13 Notice 2017-67, Section G.
14 Notice 2017-67, Q&A 57; General Instructions for Forms W-2 and W-3 (2023), p. 12.
15 IRC Section 6652(o).
16 Notice 2017-67, Section L. Failure to satisfy the requirements to be a QSEHRA.
17 Notice 2017-67, Q&A 72.
18 Notice 2017-67, Q&A 73.
19 Notice 2017-67, Q&A 45.
20 Ibid.
*Some dates in this article refer to 2023 because they come from the original guidance; however, the underlying rules are still current, and deadlines that have changed have been updated in this version.
Disclaimer: Portions of the material in this article are adapted from resources published by the Bradford Tax Institute (www.bradfordtaxinstitute.com). Their content is used for educational and informational purposes only. This article does not constitute legal, tax, or accounting advice. Readers should consult a qualified professional regarding their specific situation.
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