There's one type of tax-favored health benefit plan that often flies under the radar. Although Health Savings Accounts (HSAs) get a good amount of attention, fewer people have heard about their close cousin, Health Reimbursement Arrangements (HRAs). But the qualified small employer health reimbursement arrangement (QSEHRA) — sometimes called the "small business HRA" — has been making some noise lately.
A QSEHRA is a health benefit plan fully funded by employers in place of a regular health insurance plan. By contrast, HSAs generally are funded by employees who also have high deductible health plans (HDHPs). HSA payments are deductible above-the-line on an employee's personal tax return.
With a QSEHRA, the employer reimburses a participating employee for individual health insurance premiums and qualified health care expenses. QSEHRA reimbursements are 100% tax-free to employees and 100% tax-deductible by employers, up to certain limits. The IRS adjusts these limits every year to reflect inflation. For 2025, the QSEHRA limit for a single individual is $6,350 (or $529.16 per month), up from $6,150 in 2024. The limit for family coverage is $12,800 in 2025 (1,066.66 per month), up from $12,550 in 2024.
Employers with fewer than 50 full-time and full-time equivalent (FTE) employees are allowed to offer a QSEHRA to workers. This includes employees who receive W-2 forms and work at least 30 hours week, as defined by the Affordable Care Act (ACA). However, employers may choose to cover part-time workers as well. In addition, employees must have obtained minimal essential coverage (MEC), also defined by the ACA, to participate in a QSEHRA. (Your benefits advisors can crunch the numbers for you.)
Caveat: To be eligible to use a QSEHRA, employers can't offer employees a group health plan, a dental or vision plan, an HSA, or a flexible spending arrangement (FSA). What employers can do is decide how much they'll contribute to their QSEHRA within the annual limit, what types of medical expenses qualify for reimbursement and whether account funds can be carried over from year to year.
The list of qualified expenses can vary slightly depending on the QSEHRA version chosen by an employer. But in general, the expenses are comparable to those that would qualify for a medical expense deduction on a personal income tax return. This includes the cost of health, vision and dental insurance premiums — including co-insurance, deductibles and co-payments — as well as dozens of out-of-pocket expenses. Depending on the plan, expenses incurred by family members may count.
Some common qualified expenses are:
The cost of nonprescription drugs and cosmetic surgery expenses typically don't qualify for tax-favored treatment, making reimbursement for such expenses taxable. Also, long-term care expenses outside of amounts covered by long-term care insurance premiums usually aren't allowed.
In general, there are four types of HRAs that may be available to employers, depending on their size and needs:
The QSEHRA is a potential alternative for employers searching for ways to offer tax-favored health care coverage to employees. Just keep in mind that QSEHRAs are limited to smaller employers. Your professional advisor can help you weigh this type of HRA with other types, as well as traditional health insurance options.
Get in touch today and find out how we can help you meet your objectives.
