Qualified Small Employer HRA 

Contributions to an HRA cannot be paid through an employee salary reduction. Contributions by an employer can be excluded from the employee’s gross income, resulting in tax savings for the employer.

Often, the employer creates an unfunded HRA account for each employee and reimburses the employees for substantiated medical expenses up to their account balance. An HRA must be paid for solely by the employer as specified by the IRS in Code §125 for a Cafeteria Plan. There is no specific Code section governing HRAs, but the IRS has confirmed their tax-favored treatment under the general principles of Code §105 and §106



  • Small employers that do not offer group health plans may offer a stand-alone HRA, referred to as a Qualified Small Employer HRA (QSEHRA)

  • Employees may use this QSEHRA to pay for health insurance or other medical expenses

  • Specific requirements are applicable including maximum benefit limits as well as a notice requirement


Health Reimbursement Accounts (HRAs) are employer-funded plans that reimburse employees for medical expenses on a tax-free basis. However, the Affordable Care Act limits HRA eligibility to employers that offer health insurance to employees, prohibiting stand-alone HRAs. A stand-alone HRA referenced here is an HRA that is offered which is not in conjunction with a group health insurance plan offered by an employer. 


On December 13, 2016, the 21st Century Cures Act was officially signed into law. This act allows for small employers who do not offer group health plans to offer a stand-alone HRA. This law is effective January 1, 2017, and is referred to as a Qualified Small Employer HRA (QSEHRA).

The Affordable Care Act (ACA) has historically prohibited stand-alone HRAs; however, the 21st Century Cures Act creates an exception from this and allows qualifying small businesses to offer QSEHRAs to their employees. This will allow small businesses to reimburse employees for any out-of-pocket medical expenses, including health insurance premiums, on a tax-free basis. ​

Who Is Eligible?

 There are two basic requirements to qualify for a small employer HRA:​             

  1. By definition, under the Affordable Care Act (ACA) the employer is not classified as an Applicable Large Employer (ALE), which are subject to ACA's employer shared responsibility rules. Essentially to not be included as an ALE, the employer must have fewer than 50 employees, including full-time equivalents.

  2. The employer does not offer and maintain a group health insurance plan for any of its employees.

Plan Design Requirements

Being an HRA, employees are not permitted to make contributions into their own plans. In addition, the following plan design requirements apply to Qualified Small Employer HRAs:

Maximum Benefit

  • Maximum benefit available to participants under a QSEHRA is $4,950 for individuals, or $10,000 for plans that also reimburse costs for participant's family members.

  • These amounts are subject to inflation for years beginning after 2016.

  • If participants are not covered by a QSEHRA for the entire year, the maximum benefit must be prorated for the time that the participant is covered.

Eligibility and Benefit Rules

The QSEHRA must be provided to all eligible employees on the same terms with the following exceptions:​

  • maximum benefit amounts may vary based on age and family-size variations in the price of an individual policy in the relevant individual health insurance market; and 

  • the QSEHRA may exclude certain categories of employees. These exclusions include

    • collectively bargained employees; ​

    • employees who are part-time or seasonal;

    • employees who have not completed 90 days of service;

    • employees who are under the age of 25; and

    • non-resident aliens who earned income from sources within the United States.


  • QSEHRA reimbursements and payments must be for medical care expenses (as defined in Tax Code Section 213(d)) incurred by either the employee or the family members of the employee, after the employee provides proof of coverage.

These reimbursements include premiums for health insurance coverage and/or out-of-pocket medical expenses.

Providing Notice

An employer who chooses to fund a QSEHRA for any given year is required to provide written notice to all eligible employees. This notice must be given within 90 days of the beginning of the year. For employees who become eligible to participate at some point during the year, written notice must be given by the date at which the employee becomes eligible. Information provided in the written notice must include:

  • The employee's annual maximum benefit under the QSEHRA; 

  • A statement that, if the employee is applying for advance payment of the premium assistance tax credit, the employee should provide the Exchange with information about the QSEHRA's maximum benefit; and

  • A statement that, if the employee is not covered under minimum essential coverage for any month, the employee may be subject to a penalty under the ACA's individual mandate and any reimbursements under the QSEHRA may be included in gross income.


If an employer fails to provide this written notice, they may be subject to a penalty of $50 per employee, for an annual maximum of $2,500. 

Transition Relief Extension 

The Act also extends the transition relief under IRS Notice 2015-17 so that it applies with respect to plan years beginning on or before Dec. 31, 2016. Notice 2015-17 provides that the excise tax for failing to satisfy the ACA’s market reforms does not apply to employer payment plans sponsored by non-ALEs that pay, or reimburse employees for, individual health policy premiums or Medicare Part B or Part D premiums. That relief was limited to periods before July 1, 2015, and it did not apply to stand-alone HRAs that reimbursed employees for medical expenses other than insurance premiums.

On Dec. 20, 2016, the Departments of Labor, Health and Human Services and the Treasury (Departments) issued a set of FAQs addressing ACA implementation issues, including the Act’s extension of this transition relief. According to these FAQs, for plan years beginning on or before Dec. 31, 2016, the ACA’s excise tax does not apply to employer payment plans that are sponsored by non-ALEs and that pay, or reimburse employees for, individual health policy premiums or Medicare Part B or Part D premiums. However, consistent with Notice 2015-17, this transition relief does not apply to stand-alone HRAs that reimburse employees for medical expenses other than insurance premiums.

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