How to set up a QSEHRA

Step 1: Confirm you qualify

Before anything else, make sure a QSEHRA is open to you: you need fewer than 50 full-time-equivalent employees and no group health plan. If you offer group coverage or you’ve crossed 50 employees, look at an ICHRA instead. The full eligibility picture — including which employees you must cover — is in QSEHRA eligibility and rules.

Step 2: Choose the allowance

Decide how much to reimburse each month, up to the IRS cap — $6,450 a year for self-only and $13,100 for family coverage in 2026. There’s no minimum, so the number is yours to set against your budget, and many employers land well below the maximum. You can offer a flat amount or vary it by age and family size using the cost of a benchmark plan, as long as everyone is treated on the same terms. See contribution limits for how the caps and proration work.

Step 3: Set eligibility and terms

All full-time W-2 employees must be eligible on the same terms. Decide whether to include part-time and seasonal workers, which is optional, and which permitted categories, if any, to exclude. Settle the plan year, the allowance structure, and whether the QSEHRA will reimburse premiums only or premiums plus other qualified medical expenses.

Step 4: Adopt a plan document

A QSEHRA is a formal health plan, so put it in writing. A plan document sets out the allowance, who’s eligible, what’s reimbursable, and how the arrangement runs. This is the foundation that keeps the benefit compliant and gives you something to point to if an employee or the IRS asks how it works.

Step 5: Give the 90-day notice

This step is specific to the QSEHRA and easy to miss. You must give each eligible employee a written notice at least 90 days before the start of each plan year — or, for a new employee, by the date they first become eligible. The notice has to state the employee’s permitted benefit, remind them that they need minimum essential coverage to be reimbursed tax-free, and tell them to report the QSEHRA to the Marketplace if they apply for premium tax credits, because the benefit affects those credits. Missing the deadline carries penalties, so calendar it.

Step 6: Substantiate and reimburse

Before reimbursing, collect proof that the employee has minimum essential coverage, and documentation of each expense — a premium statement, an insurance card, receipts for qualified medical costs. Once verified, reimburse the employee up to their allowance, tax-free, with no income or payroll tax on the reimbursement. Unused allowance simply stays with the business; it doesn’t pay out as cash.

Step 7: W-2 reporting

Report each employee’s QSEHRA permitted benefit on their Form W-2, in box 12 using code FF. This is the amount you made available to them for the year, not necessarily what they used.

Using an administrator

Most small employers don’t run a QSEHRA by hand. An HRA administrator can generate the plan document and the required notice, collect and verify coverage and expense documentation, process reimbursements, and keep the W-2 reporting straight — for a per-employee monthly fee. It turns the benefit into something close to set-and-forget, which is the appeal of the QSEHRA in the first place. This is general information, not tax, legal, or benefits advice.