QSEHRA explained: the small employer HRA, 2026 limits and rules

A qualified small employer health reimbursement arrangement (QSEHRA) lets an employer with fewer than 50 full-time-equivalent employees reimburse workers tax-free for individual health insurance premiums and medical expenses, up to a yearly cap. For 2026 the cap is $6,450 for self-only coverage and $13,100 for family coverage (IRS Rev. Proc. 2025-32). It is the simplest way for a very small employer to help with health costs without sponsoring a group plan.

Who can offer a QSEHRA

The employer must:

• Not be an applicable large employer. In practice that means fewer than 50 full-time employees, counting full-time equivalent hours, in the prior year. If you grow into ALE status, the QSEHRA can no longer be offered, and the employer moves to a group plan or an ICHRA (see ICHRA explained: individual coverage HRAs for employers and The ACA employer mandate: who must offer coverage and the 2026 penalties).
• Not offer a group health plan of any kind to any of its employees. A QSEHRA and a group plan cannot coexist, even for different employee groups, and that is the largest difference from an ICHRA, which can sit alongside a group plan for a different class.
• Fund the arrangement itself. Employees cannot contribute through salary reduction, which keeps a QSEHRA out of a Section 125 cafeteria plan salary-reduction election.

C corporations, S corporations, partnerships and sole proprietors can all use a QSEHRA, but owners have their own tax rules: for instance, more-than-2% S corporation shareholders and partners are not treated as employees for this purpose in the same way, so a tax adviser should review the structure.

The 2026 numbers

The limit is a per-year cap on the benefit the employer makes available. If an employee is covered for only part of the year, the cap is prorated by month. Family coverage means the employee has dependents on the individual policy, and the family cap applies to that employee's whole arrangement, not per dependent.

How the arrangement runs

1. The employer adopts a written plan with the allowance amounts and eligible expenses.
2. It gives each eligible employee a written notice at least 90 days before the plan year starts (or by the date they become eligible, if later). The notice states the allowance, that the employee must report it on a Marketplace application and that taxable consequences can follow.
3. The employee buys individual coverage that is minimum essential coverage. Many QSEHRAs require proof of coverage with each reimbursement request.
4. The employee submits proof of the premium or expense, and the employer reimburses up to the monthly or annual limit. Reimbursements only for substantiated expenses; the employer cannot hand over cash in advance without substantiation.
5. The employer reports the allowance (the amount made available, not what was reimbursed) in Box 12 of Form W-2 with code FF. That amount is not taxed as wages if the employee has qualifying coverage, but it is reportable.

Employers may impose some conditions: they can exclude employees who have not completed 90 days, are under age 25, are part-time or seasonal, or are covered by a collective bargaining agreement that included health benefits. Beyond that, a QSEHRA must be offered on the same terms to all eligible employees. The only variation allowed is in the amount: it may differ by age (as the premium for the individual market does) and by the number of family members covered, as long as it follows a consistent rule. The employer cannot offer one worker $200 per month because the owner likes them better.

What it does to the employee's tax credit

A QSEHRA does not affect an employee who is not eligible for premium tax credits. For those who are, it interacts in two ways.

• If the QSEHRA is affordable, the employee is considered to have an offer of employer coverage and is not eligible for the credit.
• If it is not affordable, the employee can still claim the credit, but the credit is reduced dollar-for-dollar by the monthly QSEHRA allowance.

Affordability for a QSEHRA is measured like the ICHRA: the lowest-cost silver plan self-only premium in the employee's rating area, minus the monthly QSEHRA self-only allowance, compared with 9.96% of household income for 2026. Employers do not do this test, since a QSEHRA employer is not subject to the mandate, but employees file Form 8962 with their returns, so your notice should explain the effect and you should keep the plan paperwork available.

A worked example (hypothetical)

Say a 12-employee dental practice in Texas decides to give each full-time employee $400 a month toward individual coverage, and $800 a month if the employee has a spouse and child on the policy.

• Annual allowance: $4,800 self-only, $9,600 family. Both fall under the 2026 caps of $6,450 and $13,100.
• Cost to the practice: if 8 employees take the benefit (5 self-only, 3 family): 5 x $4,800 + 3 x $9,600 = $52,800 a year, and the practice pays nothing for employees who do not claim.
• Reporting: the allowance amounts are reported in Box 12, code FF, of each W-2 ($4,800 or $9,600).
• If an employee's premium is $350 a month, the practice reimburses $350, not $400, because reimbursement is limited to the substantiated expense.

Compare that with a group plan using the group health insurance cost and affordability calculator, and test what allowances stay under the caps with the QSEHRA and ICHRA allowance calculator.

QSEHRA, group plan or tax credit

A QSEHRA suits an employer who wants predictable monthly cost, does not meet carrier participation requirements for a group plan, or has employees spread over different states. An employer with a stable workforce who wants a deductible-based group plan may prefer the group plan route (group health insurance for small businesses: how it works and what it costs). A small employer with low wages might get more from the federal credit under The small business health care tax credit (Form 8941): rules and 2026 figures, which is available for coverage bought through the SHOP (The SHOP Marketplace for small employers: how it works in 2026), and a QSEHRA employer cannot claim it on those reimbursements.

An employee who is enrolled in a high-deductible individual plan reimbursed by a QSEHRA may be unable to make HSA contributions, because a QSEHRA that reimburses medical expenses generally counts as disqualifying other coverage. See HDHPs and HSAs: an employer guide with 2026 limits for the rules.

Common mistakes

• Offering a QSEHRA and a group plan to different groups of employees.
• Missing the 90-day written notice, which exposes the arrangement to penalty under the rules (IRS Publication 15-B describes an excise tax of $50 per employee per day of failure, up to $2,500 per employee per year; confirm with a tax adviser).
• Letting employees pay by salary reduction or cash out the unused balance.
• Leaving off the W-2 reporting on Box 12, code FF.
• Not noting the state: some states treat employer reimbursements differently for state income tax or have mini-COBRA and reporting rules; see workers' comp and benefits requirements by state.

Key takeaways

• A QSEHRA is for employers with fewer than 50 full-time-equivalent employees that offer no group health plan; 2026 caps are $6,450 (self-only) and $13,100 (family).
• It is funded only by the employer, requires a written plan and a 90-day notice, and is reported in W-2 Box 12 with code FF.
• Allowances may vary only by age and family size, so employees must be treated the same otherwise.
• Unaffordable allowances reduce the employee's premium tax credit dollar for dollar; affordable ones can remove eligibility.
• Source: IRS Rev. Proc. 2025-32 and IRS Publication 15-B.