Home / Blog / QSE-HRA Guidance: Coverage, Reimbursement, Reporting, and Marketplace Coordination (Part 2 of 3)

QSE-HRA Guidance: Coverage, Reimbursement, Reporting, and Marketplace Coordination (Part 2 of 3)

In late 2017, the IRS delivered guidance on the Qualified Small Employer Health Reimbursement Arrangement (QSE-HRA). The QSE-HRA is a new HRA plan design allowable only since December 2016. In early 2017, the IRS suspended the written notice requirement for 2017 plan years until further guidance could be issued (which we covered here).

When the guidance arrived, it delivered much more than the awaited information on the notice requirement along with a statement anticipating further guidance in response to Executive Order 13813.

In the weeks since Notice 2017-67 was issued, we have worked through its content to determine the information most useful to our clients as well as to those employers considering installing a QSE-HRA for the first time. Since it is a somewhat larger volume of text, we present the guidance in three parts:

  1. Eligibility, Terms, Limits and Notice Requirement
  2. Coverage, Reimbursement, and Marketplace Coordination (below)
  3. Failure to satisfy, HSA interaction, and Effective date

Part II: Coverage, Reimbursement, and Marketplace Coordination

F. MEC Requirement

Minimum essential coverage is assured when a health plan is purchased on the Marketplace. When health insurance is purchased outside the Marketplace, MEC is assured when the plan has a Marketplace certification.

A QSE-HRA reimbursement to the employee for eligible medical expenses incurred during a month when the employee did not have MEC becomes gross taxable income for the employee.

G. Proof of MEC requirement

A QSE-HRA may only reimburse eligible medical expenses to an employee after the employee has provided proof of MEC for the employee and, if for an eligible individual other than the employee (spouse, child, etc.), proof of MEC for the person for whom the expense was incurred.

Proof of MEC must be either (a) documentation from a third party, for example, the insurer in the form of an insurance card or explanation of benefits, with attestation from the employee that the coverage is MEC, or (b) attestation from the employee that the employee (or other eligible individual) has MEC, the effective date of MEC, and the provider of the coverage.

Employers may rely upon the employee’s attestation unless the employer has knowledge that the employee does not have MEC.


Proof of MEC must be presented prior to the first reimbursement for an individual’s medical expenses.

Upon each subsequent request for reimbursement for an individual, the employer must, at a minimum, receive attestation that the individual and employee have MEC for the period in which the expense occurred. This attestation can be a part of the request for reimbursement form provided by the employer.

If an employee fails to provide proof of MEC prior to the first reimbursement, the employer may not provide reimbursement for medical expenses on a taxable basis.

H. Substantiation Requirement

Before a QSE-HRA can reimburse an employee for medical expenses, including health insurance premiums, the employee must submit proof of the medical expense from a third party, such as the insurer or the medical provider.

Documentation must contain information sufficient for the QSE-HRA administrator to determine that the product or service is an eligible medical expense.

The employee must attest that the expense has not been reimbursed and will not be reimbursed from another health plan. This may be included as part of the reimbursement request form provided by the employer.


If a QSE-HRA mistakenly reimburses an expense that has not been properly substantiated or any expense that turns out to not be an eligible medical expense, the arrangement fails to satisfy the requirement for pre-tax payments. All payments to all employees, substantiated or not, made after the date of the non-substantiated reimbursement, become taxable income.

If the employee receiving non-substantiated payment provides substantiation or repays the unsubstantiated amount timely with after-tax funds, the arrangement will not be considered as failing.

Timely repayment is defined as no later than March 15 of the following plan year.

 I. Reimbursement of Medical Expenses

A QSE-HRA may offer a run-out period on or after the last day of the plan year allowing participating employees to use up funds so long as the period is provided to all employees on the same terms.

There is no pre-tax cash out provision for a QSE-HRA. If an employer elects to give employees their fund balance at the end of the year, that distribution will be included in the employee’s gross taxable income.

A newly eligible employee may receive reimbursement for medical expenses beginning on the first day of eligibility, so long as substantiation and other requirements are met.

A QSE-HRA may make reimbursements available on a month-to-month basis. For example, a $4,800 annual allowance may be pro-rated with a $400 per month limit. Under this scenario, an employee may submit substantiated expenses on January 1, the first day of the plan year. The employee would receive $400 in January, $400 in February, and so on, until the full reimbursement is met.

A QSE-HRA may, but is not required to, reimburse over-the-counter drugs; however, these reimbursements will be taxable income to the employee.


A QSE-HRA may reimburse an eligible employee for a family member’s separate health plan premium purchased individually on the Marketplace.

Reimbursement can also be made for premiums paid for a health plan offered through the spouse’s employer-sponsored group health plan; however, if the premium paid by the spouse is made on a pre-tax basis, the QSE-HRA reimbursement to the employee is taxable income (see “Reporting Requirements”).

J. Reporting Requirement

The employer must report the QSE-HRA benefit the employee is eligible to receive in the calendar year. This amount is to be reported on Form W-2, in box 12, using code FF.

If an eligible employee does not provide proof of MEC and receives no reimbursement from the QSE-HRA in the calendar year, the amount the employee is eligible to have received must be reported on Form W-2, per above.

When a QSE-HRA is run on a non-calendar plan year, the amount reported on Form W-2 is pro-rated accordingly.

When a QSE-HRA has a carryover provision, the amount reported on Form W-2 for a calendar year includes only newly available funds.

When an employee receives reimbursement from the QSE-HRA for over-the-counter drugs, the amount is reported on Form W-2 as income in box 1 as well as box 3, Social Security wages, and box 5, Medicare wages.

An employer may not reimburse any funds from a QSE-HRA without receiving proof of MEC at least at the first reimbursement; however, having received initial substantiation, if an employer later discovers reimbursement was made for an eligible medical expense incurred by the employee during a month when the employee allowed MEC to lapse, the amount reimbursed through the QSE-HRA for expenses incurred during that period must be included in the employee’s gross income on Form W-2, box 1. However, the amount is not subject to FICA tax and should not be included in box 3, Social Security wages, or box 5, Medicare wages.


A QSE-HRA is an applicable self-insured health plan and, as such, sponsors (employers) are required to file Form 720, Quarterly Federal Excise Tax Report, on an annual basis, to pay the PCORI fee due every July 31 of the following year, for plan years ending before October 1, 2019.

Eligible employers providing a QSE-HRA to eligible employees are not subject to Form 1095-B reporting in regard to the QSE-HRA.

K. Coordination with PTC

When an employee applies for coverage on the Marketplace, the amount of QSE-HRA benefit for which the employee is eligible must be reported. This amount is included in the written notice provided to the employee by the employer at least 90 days prior to the start of the plan year.

An employee eligible for advance premium tax credits (APTC) on the Marketplace may have the APTC amount reduced as much as dollar-for-dollar by the amount of the QSE-HRA. This is also explained in the employer notice.

If an employee fails to report the QSE-HRA benefit for which he or she is eligible and takes the full APTC available, any excess APTC received by the employee must be repaid when the employee reconciles the APTC at tax time. This, too, is explained to the employee via the employer notice.

Additional sections in the QSE-HRA Guidance series:

Eligibility, Terms, Limits and Notice Requirement

Failure to satisfy, HSA interaction, and Effective date

For more information on the QSE-HRA plan document package, please see:

QSE-HRA: The Stand-Alone HRA Returns — Plan Documents Just $199

New brochure explains small employer HRA options

Expanded Health Care Choice Key Point of Presidential Executive Order

Read the full text of IRS Notices on QSE-HRA plans and Presidential EO 13813:

Qualified Small Employer Health Reimbursement Arrangements (Notice 2017-67)

Presidential Executive Order Promoting Healthcare Choice and Competition Across the United States (EO 13813, referenced in Notice 2017-67)


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