Qualified Small Employer HRA



Effective for plan years beginning after December 31, 2016, there is an exception to HRA integration rules that applies to Qualified Small Employer HRAs. This exception would allow Qualified Small Employers to reimburse the cost of medical expenses (including individual health insurance coverage purchased by employees, Medicare premiums and Medigap policies) through an HRA without causing the HRA to become a group health plan subject to the ACA. Generally, payments from a QSEHRA to reimburse an eligible employee’s medical expenses are not included in the employee’s gross income if the employee has coverage that provides minimum essential coverage (MEC).

Small Employers Only

The exception for QSE HRAs is only available to small employers. ALEs must still treat HRAs as group health plans. In addition, the exception does not apply to any arrangement (such as a cafeteria plan) which is funded by employee contributions or salary reductions.

A Qualified Small Employer (“QSE”) is an employer that is not an Applicable Large Employer and does not offer a group health plan (including a health FSA or a plan that only provides excepted benefits) to any of its employees.

Like all HRAs, a QSE HRA may not include any employee contributions. The HRA must be provided to all eligible employees on the same terms.

Eligible Employee

For purposes of the arrangement, an “eligible employee” is any employee of the employer except:

Maximum Benefit

The amount of the reimbursement cannot exceed $4,950 for a single employee or $10,000 for an employee and his or her family (for 2017). These amounts must be prorated for persons not covered for an entire calendar year; they are also subject to inflation-related increases.

While a QSE HRA can provide for a carry-over of unused benefits from a prior year, the amount of the carry-over plus the employer contribution for the following year cannot exceed the applicable limit.

Same Terms

The arrangement must be provided on the same terms to all eligible employees. This means that an eligible employee cannot waive coverage under the HRA.

Standard aggregation rules for employers in a controlled group apply. If one employer in a controlled group offers its employees a group health plan, no other employer in the group can offer a QSE HRA. Conversely, if an employer in a controlled group offers a QSE HRA to its eligible employees, all employers in the group must offer the HRA on the same terms and conditions. However, an employer does not fail to be a QSE simply because it permits employees to make pre-tax contributions to an HSA.

IRS guidance on the “same terms” requirement indicates that:

In order to obtain benefits under the HRA, the employee would have to present proof of coverage under the individual policies.


Employers that fund a QSE HRA must provide a written notice to employees no later than 90 days before the start of the plan year. The notice must include:

An eligible employer that provides a QSE HRA during 2017 or 2018 must furnish the initial written notice to its eligible employees by the later of (a) February 19, 2018, or (b) 90 days before the first day of the plan year of the QSE HRA. Except as provided in the previous sentence, in the case of a newly eligible employee, the initial written notice must be furnished on or before the first day the employee becomes eligible to participate in the QSE HRA.

Failure to provide the notice as required can result in a fine of up to $50 per employee per failure, not to exceed $2,500 per calendar year.


Coverage under a QSE HRA affects the amount of any premium tax credit that may be available to an individual depending on whether the coverage is deemed affordable. If it is affordable (determined on a monthly basis), then no tax credit is available for that month. If it is not affordable, the available tax credit is reduced by the one-twelfth of the annual benefit. Affordability is determined by taking the employee’s monthly premium self-only coverage under the second lowest cost silver plan in the individual’s insurance market and subtracting one-twelfth of the annual available benefit under the HRA. If the result is not more than one-twelfth of 9.5% of the employee’s annual household income, it is considered affordable.

In addition, coverage under a QSE HRA will be considered taxable income to an employee for any month in which the employee does not have minimum essential coverage. For example, an employee that uses a QSE HRA to purchase excepted benefits such as dental, vision, dread disease or daily indemnity policies will realize taxable income.

Minimum Essential Coverage

Payments or reimbursements from a QSE HRA will be included in an individual’s gross income if, for the month in which the medical care is provided, the individual does not have MEC.

Before a QSE HRA can reimburse an expense for any plan year, the eligible employee must first provide proof that the eligible employee and (if different) the individual whose expense will be reimbursed has MEC for the month during which the expense was incurred. This proof must consist of either (a) a document from a third party (for example, the insurer) showing that the employee and the individual have coverage (for example, an insurance card or an explanation of benefits) and an attestation by the employee that the coverage is MEC; or (b) an attestation by the employee stating that the employee and the individual have MEC, the date coverage began, and the name of the provider of the coverage. An employer may rely on the employee’s attestation unless the employer has actual knowledge that the individual whose expense is submitted does not have MEC. Proof of MEC must be provided at least annually.

A QSEHRA may not reimburse an eligible employee on a taxable basis if the employee fails to provide proof of MEC.


An employee must provide substantiation of medical expenses as condition of receiving QSE HRA benefits. The same rules as those for health FSAs apply.

Medical Expenses

Distributions from an HRA must be paid to reimburse an employee for qualified medical expenses incurred on or after the date the employee enrolled in the HRA. Reimbursements from an HRA used to pay qualified medical expenses, pursuant to Section 213 of the IRC, are not taxed.

Check out our Geek Out! page for lists of medical and dental expenses that can and cannot be itemized deductions claimed on Schedule A of Form 1040 (Individual Income Tax Return).



The eligible employer must report the amount of payments and reimbursements that the eligible employee is entitled to receive from the QSEHRA for the calendar year in box 12 of the Form W-2 using code FF, without regard to the amount of payments or reimbursements actually received. This only includes newly available amounts; carry-overs are not reported.

Note that a QSE HSA is subject to PCORI fees and the associated reporting requirements.

Consequences of Failure to Meet QSE HRA Requirements

An arrangement will be a group health plan that is not a QSE HRA if it does not comply with the if (a) it is not provided by an eligible employer (such as an employer that offers another group health plan to its employees), (b) it is not provided on the same terms to all eligible employees, (c) it reimburses medical expenses without first requiring proof of MEC, or (d) it provides a permitted benefit in excess of the statutory dollar limits. An arrangement’s failure to be a QSEHRA will not cause any reimbursement of a properly substantiated medical expense that is otherwise excludable from income to be included in the employee’s income or wages.

If an arrangement operationally or by its terms reimburses eligible employees for expenses (a) that have not been substantiated, (b) that are reimbursed in advance of substantiation, or (c) that are not medical expenses, then the arrangement is neither a QSE HRA nor a group health plan, and all amounts paid under the arrangement are included in every employee’s gross income and wages.

An employer’s failure to timely provide a compliant written notice does not cause an arrangement to fail to be a QSE HRA, but instead results in a penalty of $50 per employee per incident subject to a maximum of $2,500 per calendar year.


Individual eligibility for HSA purposes can be affected by coverage under a QSE HRA,

In general, if the QSA HRA reimburses any medical expense, the covered individual is not eligible to contribute to an HSA. However, if reimbursements are limited to reimbursement of premiums for health insurance policies, or permitted insurance or disregarded coverage (as defined under the HSA rules), HSA eligibility is not affected.

Note that a QSE HRA is not considered a group health plan for purposes of ERISA or COBRA. However, it will still be a “welfare benefit plan” and subject to those provisions of ERISA and HIPAA that apply to such plans (even if they are not group health plans.) This includes plan document and SPD requirements; and HIPAA privacy and security rules unless the exception for small, self-administered plans applies.