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For many small employers, providing health benefits does not have to mean purchasing a traditional group health insurance plan. A QSEHRA can allow an eligible business to reimburse employees for individual health insurance premiums and other qualified medical expenses while controlling the employer’s annual benefit costs. For 2026, employers evaluating this option should understand the eligibility rules, reimbursement requirements and IRS contribution limits before deciding whether it fits their workforce.
A Qualified Small Employer Health Reimbursement Arrangement is an employer-funded arrangement created under the 21st Century Cures Act, enacted December 13, 2016. It became available beginning in 2017. To qualify, an employer generally must have fewer than 50 full-time and full-time-equivalent employees and cannot offer a group health plan to its employees. The arrangement must be funded entirely by the employer, with no employee salary-reduction contributions. Benefits generally must be offered on the same terms to eligible employees, although permitted exclusions include certain part-time, seasonal, union and newly hired employees.
For businesses reviewing tax planning opportunities, the R&D Tax Credit is another area to consider alongside employee benefit arrangements like a QSEHRA.
A QSEHRA can generally reimburse eligible employees and their family members for qualifying medical expenses under Internal Revenue Code Section 213(d). That can include individual health insurance premiums, deductibles, copays and other eligible out-of-pocket medical expenses. Reimbursements can be tax-free when the employee has qualifying minimum essential coverage and properly substantiates the expense. The employer may also design the arrangement more narrowly, such as limiting reimbursements to insurance premiums. A QSEHRA cannot be funded through employee salary reductions, and an eligible employer cannot simultaneously offer employees a group health plan.
Understanding Facilitative Costs alongside employee benefit expenses can help businesses better organize their financial records and identify the appropriate tax treatment for different types of costs.
The QSEHRA contribution limits are indexed for inflation. For 2026, the IRS maximum is $6,450 for self-only coverage and $13,100 when the arrangement also reimburses family expenses. That equals maximum monthly amounts of $537.50 and approximately $1,091.67, respectively. The limits increased from $6,350 and $12,800 in 2025. Benefits are generally prorated when an employee participates for only part of the year.
One important distinction in QSEHRA vs ICHRA planning is that an ICHRA has no statutory employer contribution cap. A QSEHRA therefore provides more built-in cost boundaries, while an ICHRA offers greater funding flexibility.
Employees cannot simply submit a request and receive tax-free reimbursement. They must first provide evidence that they and any family members whose expenses will be reimbursed have minimum essential coverage. Employees must also substantiate reimbursable medical expenses with appropriate documentation. The employer generally provides written notice at least 90 days before the beginning of the plan year, and employees purchasing Marketplace coverage need to account for their QSEHRA benefit when determining premium tax credit eligibility. QSEHRA benefits are also reported on Form W-2 in Box 12 using Code FF, based on the permitted benefit rather than the amount actually reimbursed.
A small employer HRA can make sense for an employer with fewer than 50 full-time and full-time-equivalent employees that does not want to sponsor a group health plan. It can be particularly useful when employees are geographically dispersed, individual-market coverage is readily available, or the employer wants a defined annual benefits budget instead of absorbing changes in group-plan premiums. The 2026 limits also give employers a predictable ceiling on reimbursements. A QSEHRA may be less suitable when the employer wants to contribute above those limits, maintain a group plan for some employees or provide substantially different benefit levels among employee groups.
The practical question is not simply whether a QSEHRA is cheaper than group insurance. Employers should consider workforce size, employee coverage needs, expected growth, administrative requirements and how the arrangement interacts with Marketplace coverage before choosing a structure.
For more than four decades, Bennett Thrasher has provided businesses and individuals with strategic business guidance and solutions through professional tax, audit, advisory, and business process outsourcing services. Contact Bennett Thrasher’s Employee Benefit Plan Audit Team, or call us at 770.396.2200.
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