Quick answer: A QSEHRA (Qualified Small Employer Health Reimbursement Arrangement) lets a business with fewer than 50 full-time-equivalent employees that doesn’t offer a group health plan reimburse employees tax-free for individual health insurance premiums and other qualified medical costs. For 2026, the IRS caps reimbursements at $6,450 for self-only coverage and $13,100 for family coverage (IRS Rev. Proc. 2025-32). Employees must have minimum essential coverage, you must give written notice at least 90 days before the plan year starts, and the QSEHRA reduces any Marketplace premium tax credit an employee receives.
Who this is for
- Arizona small business owners with fewer than 50 full-time-equivalent employees who don’t offer health benefits today
- Owners priced out of a group plan after renewal increases
- Businesses with mixed teams where employees live in different areas or need different networks
- Employees who were offered a QSEHRA and want to understand how it works with Marketplace coverage
The problem most small businesses run into
Small employers want to offer health benefits to hire and keep good people, but a traditional group plan can be hard to budget for. Premiums change every renewal, everyone is on the same plan whether it fits them or not, and with Arizona facing some of the largest proposed 2027 rate increases in the country, many owners are looking for a more predictable option.
A QSEHRA flips the model. Instead of buying one plan for everyone, you set a monthly allowance, each employee buys the individual plan that fits them, and you reimburse them tax-free up to that allowance.
How a QSEHRA works, step by step
- You set an allowance. Pick a monthly amount up to the IRS limit. You can offer different amounts for self-only and family coverage, and allowances can vary based on age and family size.
- You send the required notice. Eligible employees get a written notice at least 90 days before the plan year starts (or when they first become eligible).
- Employees buy their own coverage. They choose an individual plan on or off the Marketplace that counts as minimum essential coverage.
- Employees submit proof. They show proof of coverage and submit premiums or other qualified expenses for reimbursement.
- You reimburse tax-free. Reimbursements up to the allowance are generally free of income and payroll taxes for both you and the employee.
- You report it. The permitted benefit amount is reported on each employee’s W-2.
QSEHRA rules to know before you start
- Eligible employers only. You must have fewer than 50 full-time-equivalent employees and offer no group health plan to anyone.
- Employer-funded only. Employees can’t contribute to the QSEHRA through salary reductions.
- Same terms for all eligible employees. You can exclude employees who have worked fewer than 90 days, are under 25, are part-time or seasonal, or are covered by certain union agreements. Everyone else must be offered the benefit on the same terms, with allowed variation for age and family size.
- Minimum essential coverage required. Employees need qualifying coverage for reimbursements to stay tax-free.
- Written notice. The notice must go out at least 90 days before the plan year. Missing it can trigger a penalty of $50 per employee, up to $2,500 a year.
- Detailed rules live in IRS guidance. IRS Notice 2017-67 covers eligibility, notice content, substantiation, and reporting.
How a QSEHRA affects Marketplace subsidies
This is the part most owners and employees miss. According to HealthCare.gov, the QSEHRA amount generally reduces the premium tax credit an employee can get on Marketplace coverage. If the QSEHRA makes coverage “affordable” under IRS rules, the employee won’t get a tax credit. If it doesn’t, the employee may still get a tax credit, reduced by the QSEHRA amount.
Employees must tell the Marketplace about the QSEHRA when they apply. HealthCare.gov offers a QSEHRA worksheet that walks through how much tax credit to take. Being offered a QSEHRA also gives employees a Special Enrollment Period to enroll in Marketplace coverage, even outside Open Enrollment.
QSEHRA vs. ICHRA vs. small group plan
| Feature | QSEHRA | ICHRA | Small group plan |
|---|---|---|---|
| Employer size | Fewer than 50 FTEs | Any size | Usually 1–50 employees in the small group market |
| Annual limit | $6,450 / $13,100 (2026) | No federal cap | Set by plan premiums |
| Can also offer a group plan? | No | Yes, to different employee classes | N/A |
| Who picks the plan? | Each employee | Each employee | Employer picks for everyone |
| Works with Marketplace subsidies? | Yes, subsidy reduced by QSEHRA amount | Only if employee opts out and ICHRA is unaffordable | Generally no, if coverage is affordable |
| Cost predictability | Fixed allowance | Fixed allowance | Changes at each renewal |
Many business owners also need to sort out their own household coverage, which works differently. We cover that in how high-income business owners should structure household health coverage.
Timing for 2027
If you wanted a QSEHRA starting January 1, 2027, the 90-day notice deadline fell in early October 2026. That doesn’t rule out a QSEHRA. HealthCare.gov notes small employers can set one up at any time, so a later start date with properly timed notices may still work. The IRS also publishes new reimbursement limits each year, so confirm the 2027 limits before you set allowances.
Real-world scenarios
A Tempe marketing agency with 8 employees
The owner can’t budget for a group plan but wants to offer something. She sets a $400 monthly self-only allowance. Each employee picks a Marketplace or individual plan that covers their own doctors, and she knows her exact cost every month.
A Scottsdale employee comparing Marketplace plans
He gets a $300 monthly QSEHRA and his household income is modest. He applies on HealthCare.gov, reports the QSEHRA, and finds that he still qualifies for a reduced premium tax credit. Combined with the QSEHRA, his Silver plan costs far less than it would at full price.
A Phoenix firm with 14 employees of mixed ages
Some employees have families, some are in their 20s, and two have ongoing health conditions. The owner compares a QSEHRA, an ICHRA with different employee classes, and a small group plan before deciding. For teams where guaranteed group coverage matters, a group plan can still be the better fit.
Frequently asked questions
What is a QSEHRA?
A Qualified Small Employer Health Reimbursement Arrangement lets employers with fewer than 50 full-time-equivalent employees that don’t offer a group health plan reimburse employees tax-free for individual health insurance premiums and other qualified medical expenses, up to an annual IRS limit.
How much can a QSEHRA reimburse in 2026?
For 2026, the IRS maximum is $6,450 a year for self-only coverage and $13,100 a year for family coverage. Employers can set any allowance up to those limits. The IRS publishes new limits each year, so confirm the 2027 figures before you finalize a 2027 budget.
Can I offer a QSEHRA and a group health plan at the same time?
No. An employer that offers a QSEHRA can’t offer a group health plan to any employees. If you want to offer a group plan to some workers and an HRA to others, an ICHRA may be a better fit.
Do employees need health insurance to use a QSEHRA?
Yes. Employees need minimum essential coverage for reimbursements to be tax-free. Without it, reimbursements become taxable income. Not every medically underwritten private plan counts as minimum essential coverage, so check before pairing one with a QSEHRA.
Can employees still get ACA subsidies with a QSEHRA?
Sometimes. If the QSEHRA doesn’t make Marketplace coverage affordable, an employee may still get a premium tax credit, but it’s reduced by the QSEHRA amount. Employees must report the QSEHRA when they apply. HealthCare.gov has a worksheet to help.
Can the business owner use the QSEHRA?
Generally, only employees can participate. Owners who aren’t employees, such as sole proprietors, partners, and more-than-2% S-corp shareholders, usually can’t use it for themselves on a tax-free basis. Ask your tax professional how this applies to your entity.
When do I have to notify employees about a QSEHRA?
You must give eligible employees a written notice at least 90 days before the start of the plan year, or by the date a new employee becomes eligible. Failing to provide the notice can trigger penalties.
Is a QSEHRA better than a small group health plan?
It depends on your team and budget. A QSEHRA gives you a fixed, predictable cost and lets each employee choose their own plan. A group plan gives everyone the same coverage and may be easier for employees with health conditions. Many owners compare QSEHRA, ICHRA, and group options side by side.
Want to see if a QSEHRA fits your business?
I’ll compare a QSEHRA, an ICHRA, and small group options for your team size and budget, and help your employees find individual plans that work with the allowance. Free review, no obligation.
Derek Greenlee, Greenlee Health Insurance
8687 East Vía de Ventura #210, Scottsdale, AZ 85258
Phone: 480-375-1652
Email: derek@greenleehealthinsurance.com
Website: greenleehealthinsurance.com
Related reading
- How High-Income Business Owners Should Structure Household Health Coverage in 2026
- 2027 Health Insurance Rate Increases by State: How Much Premiums Are Rising and What to Do
- Is Your Employer’s Family Coverage “Affordable” in 2027? The 10.22% Test
- What Is a Special Enrollment Period and Do You Qualify? Arizona Guide for 2027
Sources
- HealthCare.gov — Health Reimbursement Arrangements (HRAs) for small employers
- HealthCare.gov — QSEHRA worksheet
- IRS — Revenue Procedure 2025-32 (2026 QSEHRA limits)
- IRS — Notice 2017-67, Qualified Small Employer Health Reimbursement Arrangements
- HealthInsurance.org — Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)