A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) offers small businesses a flexible, cost-effective alternative to traditional group health insurance. Understanding how to set up a QSEHRA is essential for employers seeking to provide health benefits while maintaining budget control. This comprehensive guide outlines the setup process, requirements, and key considerations for implementing a QSEHRA in your organization.
How to set up a QSEHRA
If your business is qualified to participate in a QSEHRA, the setup is pretty simple. Most businesses take advantage of using QSEHRA administration software to help free up time, but it is possible to do so in-house with a QSEHRA administrator. With QSEHRAs rapidly increasing in popularity, you definitely don’t want to miss out!
How to set up a QSEHRA: 7 essential steps
When learning how to set up a QSEHRA, following a structured approach ensures compliance and smooth implementation. Below are the seven critical steps for establishing your QSEHRA.
- Choose your start date. Select an appropriate start date for your QSEHRA implementation. If you do not currently offer a group health plan, your QSEHRA can begin immediately. However, if you are transitioning from an existing group plan, you must choose a start date that begins after your current plan has been terminated.
- Cancel your group plan (if you have one). Small employers cannot maintain both a group health plan and a QSEHRA simultaneously.¹ If you currently offer group health insurance, you must cancel it before implementing your QSEHRA. To prevent coverage gaps for your employees, schedule the cancellation date to occur no more than one day before your QSEHRA begins.
- Confirm employee eligibility. QSEHRAs must be offered equitably to all eligible employees.² Federal regulations require that you extend the benefit to all full-time employees. You may choose to include part-time employees as well, though this is not mandatory. Review the complete list of employee requirements to ensure proper classification and eligibility determination.
- Determine your reimbursement budget. Establish your reimbursement structure by determining how much you will allocate toward employee healthcare expenses. You may vary reimbursement amounts based on employee classification, age, and family size, provided that employees within the same class receive equal allowances.³ While there is no minimum contribution requirement, you must adhere to annual IRS contribution limits.
- Establish QSEHRA plan documents. The IRS requires specific legal documentation before you can officially implement a QSEHRA.⁴ Your plan documents must clearly outline your HRA policies, including monthly reimbursement amounts, employee eligibility criteria, and administrative procedures. These documents serve as the foundation of your QSEHRA and must be maintained in compliance with federal regulations.
- Provide employee notification. Federal law requires that employees receive written notice of their QSEHRA benefit at least 90 days before the plan year begins.⁵ During this notification process, communicate essential information including start dates, annual HRA allowances, and instructions for obtaining individual health coverage. Clear communication ensures employees understand how to utilize their benefits effectively.
- Provide healthcare selection resources to employees. Once enrolled in your QSEHRA, employees will need to select individual health insurance plans that meet their needs. While you cannot directly participate in their decision-making process or recommend specific carriers, you may provide educational resources to help them make informed choices about their coverage options.
→ Check out this post on how to communicate a QSEHRA benefit to your employees
To save you time, energy, and confusion during the setup stage of your QSEHRA, experts at Take Command are available to help you from beginning to end.
QSEHRA setup timeline
Most small businesses complete the QSEHRA setup process within 2-4 weeks, depending on whether they need to terminate an existing group health plan.⁶ Organizations without current group coverage can often implement a QSEHRA more rapidly, potentially within days of completing the necessary documentation.
Self-administration vs. third-party administration
One frequently asked question is whether employers can self-administer a QSEHRA. While technically possible, self-administration presents significant challenges that most small businesses are not equipped to handle effectively.
Privacy concerns
QSEHRA administration requires regular review of protected health information for employees and their family members. Federal law prohibits employers from directly accessing certain employee medical information.⁷ To maintain compliance with privacy regulations, you would need to designate a separate account administrator to handle employee accounts, reimbursement requests, and protected information.
Documentation requirements
Maintaining a compliant QSEHRA demands meticulous record-keeping. The IRS requires secure storage of all QSEHRA records for up to seven years,⁸ including receipts, reimbursement requests, approvals, payments, and protected health information. Managing this documentation burden alongside regular business operations can be overwhelming for small employers.
HIPAA compliance
Employers who self-administer QSEHRAs must ensure full compliance with the Health Insurance Portability and Accountability Act (HIPAA) of 1996, which protects all patient medical information.⁹ Violations of HIPAA regulations carry substantial penalties ranging from $100 to $250,000 per violation, with potential criminal penalties including up to ten years of imprisonment.¹⁰
QSEHRA administration software significantly reduces the administrative burden and compliance risks associated with self-administration.
2026 QSEHRA contribution limits
The IRS adjusts QSEHRA contribution limits annually to account for inflation.¹¹ For 2026, small employers with fewer than 50 employees may contribute:
- Individual employees: Up to $6,450 annually ($537.50 per month)
- Employees with families: Up to $13,100 annually ($1,091.66 per month)
These limits represent an increase from 2025, when the maximum contributions were $6,350 for individual coverage and $12,800 for family coverage. The 2026 increases reflect cost-of-living adjustments as outlined in IRS Revenue Procedure 2025-32.
There are no minimum contribution requirements for QSEHRA participation. Employers have the flexibility to set reimbursement amounts anywhere from $0 to the annual maximum limits.
Read more about 2026 QSEHRA contribution maximums.
Ready to see how QSEHRA administration software can help alleviate some stress?
QSEHRA employer eligibility requirements
To offer a QSEHRA, your business must meet specific criteria:¹,²
- Employ fewer than 50 full-time equivalent employees
- Not sponsor or contribute to a group health insurance plan
- Not endorse specific health insurance policies or carriers
- Offer the benefit equitably to all eligible full-time employees
These requirements ensure that QSEHRAs serve their intended purpose of providing health benefits to small businesses that cannot feasibly offer traditional group health insurance.
QSEHRA employee eligibility requirements
While QSEHRAs must generally be offered to all full-time employees, the IRS permits employers to exclude certain categories of workers:⁵
- Part-time employees
- Seasonal employees
- Employees under 25 years of age
- Employees with less than 90 days of service
- Union members (unless the collective bargaining agreement provides for QSEHRA eligibility)
- Non-resident aliens without U.S.-source income
Understanding these eligibility distinctions is essential when setting up your QSEHRA to ensure proper implementation and compliance.
QSEHRA-eligible expenses
Employees can use their QSEHRA reimbursements for a wide range of qualified medical expenses as defined by the IRS.¹² Eligible expenses include:
- Medical diagnoses, treatments, and preventive care
- Health insurance premiums for individual or family coverage
- Prescription medications
- Dental and vision care
- Medical equipment and supplies
- Qualified long-term care services
- Many additional IRS-approved medical expenses
The IRS publishes an updated list of eligible expenses annually. Providing your employees with comprehensive information about eligible expenses helps them maximize the value of their QSEHRA benefit.
Ongoing QSEHRA compliance requirements
After completing your QSEHRA setup, you must maintain compliance with several ongoing requirements:⁵,¹³
Contribution limits
Adhere to annual IRS maximum reimbursement amounts and adjust contributions when limits change each year.
Equitable participation
Ensure that employees within the same classification receive equal reimbursement amounts, though amounts may vary between different employee classes based on age, family size, or other permissible factors.³
Annual employee notices
Provide written notice to employees at least 90 days before each plan year begins, informing them of their QSEHRA benefit availability.
Minimum Essential Coverage (MEC) verification
Require employees to provide documentation that their individual health insurance meets Minimum Essential Coverage (MEC) standards before processing reimbursements.
Expense substantiation
Require proof of medical expenses for all reimbursement requests to ensure compliance with IRS regulations.
Tax reporting
Report QSEHRA reimbursement amounts on employees' W-2 forms as required by the IRS.
Common QSEHRA setup mistakes to avoid
Understanding how to set up a QSEHRA correctly means avoiding these common implementation errors:
Failing to cancel group coverage completely: You cannot maintain any group health plan while offering a QSEHRA. Ensure all group coverage is terminated before your QSEHRA start date.
Inadequate employee notification: Federal law requires 90-day advance notice. Insufficient notice can result in compliance violations and penalties.
Incomplete plan documentation: Missing or inadequate plan documents can jeopardize your QSEHRA's tax-advantaged status. Ensure all required documentation is thorough and compliant.
Inequitable benefit offerings: Failing to offer benefits equitably to all eligible employees within a class violates QSEHRA regulations and can result in plan disqualification.
Poor record-keeping: Inadequate documentation of reimbursements and expenses can create compliance issues during IRS audits.
Getting started with your QSEHRA setup
Learning how to set up a QSEHRA is an important step toward providing valuable health benefits to your employees while maintaining cost control for your business. By following the seven-step implementation process and understanding the eligibility requirements, contribution limits, and compliance obligations, you can successfully establish a QSEHRA that benefits both your organization and your workforce.
Professional QSEHRA administration services can simplify the setup process, ensure ongoing compliance, and handle all documentation requirements, allowing you to focus on running your business while providing meaningful health benefits to your employees.
Are you ready to get a better understanding of the QSEHRA employee requirements and begin setting up your QSEHRA plan?
Ready to explore if QSEHRA is right for your business? Reach out to Take Command QSEHRA experts who can guide you through the complete setup process, from initial implementation to ongoing compliance and employee support.
FAQ
How long does it take to set up a QSEHRA?
Most small businesses complete the QSEHRA setup process within 2-4 weeks.⁶ If you do not have an existing group health plan to cancel, you can often implement your QSEHRA more quickly, potentially within days of completing the necessary documentation.
Can I offer a QSEHRA if I have 50 employees?
No. QSEHRAs are only available to employers with fewer than 50 full-time equivalent employees.¹ If your business reaches 50 or more employees, you will no longer qualify as an eligible employer under IRS regulations.
Do I need to offer the same amount to all employees?
You must offer the QSEHRA on the same terms to all eligible employees, but you may vary reimbursement amounts based on age and family size.³ However, employees within the same class (same age and family status) must receive equal reimbursement amounts.
What happens if an employee doesn't use their full QSEHRA allowance?
If employees do not submit claims for their full reimbursement amount, the employer retains the unused funds.¹⁴ Employers may choose to roll over unused amounts to the following year while the employee remains employed, though this is not required.
Can business owners participate in a QSEHRA?
It depends on your business structure. S-corporation owners and their family members cannot participate in a QSEHRA because they are considered self-employed rather than employees.¹⁵ Similarly, partners in a partnership are not eligible. However, C-corporation owners who are W-2 employees may participate.
Is a QSEHRA the same as an HSA or FSA?
No. A QSEHRA is an employer-funded health reimbursement arrangement, while Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) allow employee contributions.¹⁶ QSEHRAs also have different contribution limits and usage requirements than HSAs or FSAs.
What documentation do I need to maintain for QSEHRA compliance?
The IRS requires that all QSEHRA records be stored securely for up to seven years.⁸ This includes receipts, reimbursement requests, approvals, payments, proof of minimum essential coverage, and employee notices.
Can I offer both a QSEHRA and a group health plan?
No. Federal regulations prohibit employers from offering both a QSEHRA and a group health plan simultaneously¹. You must cancel any existing group health coverage before implementing a QSEHRA.
What medical expenses are eligible for QSEHRA reimbursement?
Employees can be reimbursed for qualified medical expenses as defined in Internal Revenue Code Section 213(d).¹² This includes health insurance premiums, medical diagnoses and treatments, prescription medications, dental and vision care, and many other IRS-approved medical expenses.
Do QSEHRA reimbursements need to be reported to the IRS?
Yes. Employers must report the annual QSEHRA permitted benefit amount on each eligible employee's Form W-2 in box 12 using code FF.¹³ This is required regardless of whether the employee actually received reimbursements.
References
- 21st Century Cures Act, Pub. L. No. 114-255, § 18001, 130 Stat. 1033 (2016). Internal Revenue Code § 9831(d).
- Internal Revenue Service. (2017). Notice 2017-67: Qualified Small Employer Health Reimbursement Arrangements. Retrieved from https://www.irs.gov/pub/irs-drop/n-17-67.pdf
- Internal Revenue Service. (2017). Notice 2017-67, Question 12. https://www.irs.gov/pub/irs-drop/n-17-67.pdf
- Internal Revenue Service. (2017). Notice 2017-67: Plan Document Requirements. https://www.irs.gov/pub/irs-drop/n-17-67.pdf
- Internal Revenue Service. (2017). Notice 2017-67, Questions 9 & 25. https://www.irs.gov/pub/irs-drop/n-17-67.pdf
- HealthCare.gov. (n.d.). Health Reimbursement Arrangements (HRAs) for small employers. Retrieved from https://www.healthcare.gov/small-businesses/learn-more/qsehra/
- U.S. Department of Health and Human Services, Office for Civil Rights. Health Insurance Portability and Accountability Act of 1996 (HIPAA). 45 CFR Parts 160 and 164.
- Internal Revenue Service. Recordkeeping Requirements for Health Reimbursement Arrangements. Retrieved from https://www.irs.gov/publications/p15b
- Health Insurance Portability and Accountability Act of 1996, Pub. L. No. 104-191, 110 Stat. 1936 (1996).
- U.S. Department of Health and Human Services, Office for Civil Rights. (2026). HIPAA Enforcement. Civil monetary penalties range from $141 to $2,134,831 per violation; criminal penalties up to $250,000 and 10 years imprisonment for violations involving intent to sell, transfer, or use protected health information for commercial advantage, personal gain, or malicious harm.
- Internal Revenue Service. (2025). Revenue Procedure 2025-32: 2026 QSEHRA Contribution Limits. October 9, 2025.
- Internal Revenue Code § 213(d); IRS Notice 2017-67.
- Internal Revenue Service. (2025). Publication 15-B, Employer's Tax Guide to Fringe Benefits, QSEHRA Reporting Requirements. https://www.irs.gov/publications/p15b
- Internal Revenue Service. (2017). Notice 2017-67, Question 31: Unused QSEHRA Benefits. https://www.irs.gov/pub/irs-drop/n-17-67.pdf
- Internal Revenue Service. (2017). Notice 2017-67, Question 9. https://www.irs.gov/pub/irs-drop/n-17-67.pdf; Internal Revenue Code § 1372.
- Internal Revenue Service. (2025). Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. Retrieved from https://www.irs.gov/publications/p969
