Small employers (fewer than 50 full-time equivalent employees) who do not offer a group health insurance plan have a powerful, underused option: the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA), authorized under IRC 9831(d). The QSEHRA allows the employer to reimburse employees for individual health insurance premiums and qualified medical expenses up to annual limits ($6,350 self-only, $12,800 family for 2025), and those reimbursements are tax-free to the employee and deductible by the employer. Unlike group health insurance where the employer chooses the plan and the premium varies with enrollment, the QSEHRA gives the employer a fixed, predictable budget while letting each employee choose the health plan that fits their situation. The employer sets the reimbursement amount (up to the annual cap), employees purchase their own individual health insurance on the marketplace or elsewhere, and the employer reimburses documented costs up to the budgeted amount.
✓Key takeaway
QSEHRA requirements and limits:
Requirement
Details
Employer size
Fewer than 50 full-time equivalent employees
Group health plan
Employer must NOT offer a group health plan (can’t have both QSEHRA and group plan)
Eligible employees
All full-time employees who have been employed for 90+ days (same terms for all)
Minimum essential coverage
Employees must have MEC to receive tax-free reimbursements
Funded by
Employer only (no employee salary reductions or contributions)
2025 annual reimbursement limits:
Coverage Type
Maximum Annual Reimbursement
Self-only
$6,350
Family
$12,800
Tax treatment:
Party
Tax Consequence
Employee
Reimbursements are excluded from income (tax-free) if employee has MEC
Employee without MEC
Reimbursements are taxable income
Employer
Reimbursements are deductible as a business expense
FICA
Reimbursements are exempt from FICA (both employer and employee)
State tax
Generally follows federal treatment (most states)
How does a QSEHRA compare to group insurance?
What insurance premiums are tax-deductible for self-employed individuals?
Self-employed individuals can deduct health insurance premiums for themselves, their spouse, and dependents as an above-the-line deduction on Form 1040, which reduces AGI directly. This deduction under IRC 162(l) is limited to your net self-employment income from the business that established the plan, and you can’t claim it for months you were eligible for employer-subsidized coverage through a spouse’s job. Business insurance premiums including general liability, professional liability (E&O), property insurance, and business interruption insurance are fully deductible as ordinary business expenses on Schedule C. Workers’ compensation premiums are deductible as a business expense, and key person life insurance premiums are deductible only if the business isn’t a beneficiary of the policy.
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Cite this page
Yarik Yarosh, CPA. "QSEHRA: How Small Employers Can Reimburse Health Insurance Tax-Free." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-qsehra-qualified-small-employer-hra-rules