QSEHRA Rollover Rules: What Small Business Owners Need to Know About Unused Funds

In today's competitive landscape, attracting and retaining top talent is a major challenge for small businesses. A key differentiator is the quality and flexibility of the benefits you offer. Health benefits, in particular, are a powerful tool. However, traditional group health plans can be rigid and expensive, often placing a heavy burden on small employers. That’s where modern, flexible solutions like the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) come into play.

A QSEHRA allows small employers to provide their teams with a tax-free allowance for healthcare expenses, empowering employees to choose the insurance plans and services that best fit their individual needs. It’s a way to offer meaningful health benefits without the administrative complexity of a one-size-fits-all group plan. But to truly maximize the value of this benefit, both employers and employees need to understand a crucial component: what happens to the money if it isn't all used by the end of the year?

This guide dives deep into QSEHRA rollover rules, exploring how unused funds are managed, the tax implications, and best practices for small business owners. At Venteur, we believe that understanding these details is the first step toward building a benefits strategy that not only controls costs but also genuinely supports your team’s health and well-being.

What Happens to Unused QSEHRA Funds?

One of the most common questions employers have when setting up a QSEHRA is about the handling of unused funds. Unlike a Health Savings Account (HSA), where funds are owned by the employee and always roll over, the rules for a QSEHRA are different and hinge on the employer's decisions.

The core principle to understand is that the employer decides whether unused QSEHRA funds roll over to the next plan year. This flexibility allows you to design a plan that aligns with your company's financial goals and your employees' needs. During the plan year, any unused allowance typically rolls over from month to month for each employee. The key decision is what to do with the balance at year-end.

Here are the primary options available to small business owners:

• Forfeit Rule (Use-It-or-Lose-It): You can design your plan so that any funds remaining at the end of the plan year are forfeited. The funds are not paid out to the employee; they simply remain with the employer, as the money never leaves the company's account until a reimbursement is made.
• Rollover Option: Alternatively, you can allow employees to roll over their unused balance into the next year. This is often seen as a more employee-friendly option, as it gives your team more time and flexibility to use their health benefit for larger or unexpected medical costs. You can choose to allow a full or partial rollover of the remaining funds.

It's critical to note that even with a rollover policy, the total amount an employee can be reimbursed in a given year is still capped by the federal limits set by the IRS. For 2025, these limits are $6,350 for individual coverage and $12,800 for family coverage. Any rolled-over funds plus the new year's allowance cannot exceed these maximums for tax-free reimbursement.

Additionally, employers can offer a "run-out" or grace period—commonly 90 days—after the plan year ends. This gives employees extra time to submit claims for expenses they incurred during the plan year, which helps ensure they can take full advantage of their benefit.

Tax Implications of QSEHRA Rollover Rules

One of the greatest advantages of a QSEHRA is its tax-friendly nature. For employers, the allowances provided to employees are a tax-deductible business expense. For employees, reimbursements are 100% tax-free, as long as they maintain a health insurance plan that provides Minimum Essential Coverage (MEC). This dual tax benefit makes it a highly efficient way to fund healthcare.

The rollover rules operate within this tax-advantaged framework. When you allow funds to roll over, they retain their tax-free status for the employee in the following year. The key is that the total reimbursement—the new year's allowance plus the rolled-over amount—must stay within the annual IRS contribution limits.

For example, if an employee with individual coverage has a $6,000 annual allowance and uses only $5,000, they have $1,000 remaining. If the employer allows rollovers, that $1,000 can be carried into the next year. In 2025, if they are given a new allowance of $6,350, their total available reimbursement pool would be $7,350. However, they can only be reimbursed up to the federal maximum of $6,350 for that year. The rollover gives them a larger buffer for expenses but does not increase the annual tax-free limit.

This structure provides a significant advantage for employees who may have low healthcare costs one year but anticipate a major expense the next. It allows them to plan ahead while the employer maintains predictable, tax-deductible costs.

Conditions for Employers to Provide a QSEHRA

While a QSEHRA is an excellent tool, it's specifically designed for small employers. To be eligible to offer a QSEHRA, a business must meet two primary conditions:

1. Have fewer than 50 full-time equivalent employees.
2. Not offer a group health plan to any employees. This includes traditional group insurance, a flexible spending account (FSA), or coverage through the SHOP marketplace.

Furthermore, the QSEHRA must be offered on the same terms to all full-time employees. While the allowance amount can be varied based on an employee's age or family size (e.g., self-only vs. family coverage), you cannot discriminate or offer different terms to different classes of employees beyond these factors.

Ownership of QSEHRA Funds: Who Holds the Rights?

A common point of confusion is who actually owns the money in a QSEHRA. The answer is simple: QSEHRA funds are owned by the employer. This is a fundamental difference from an HSA, which is an employee-owned account.

A QSEHRA is a reimbursement arrangement, not a pre-funded bank account. The allowance you offer represents the maximum amount an employee can be reimbursed for. The money stays in your business account until an employee incurs an eligible medical expense, submits proof of that expense, and you reimburse them. Because the funds are never the employee's property, they cannot be cashed out or taken with them if they leave the company. Any unused balance, whether forfeited at year-end or left behind upon termination, remains with the employer.

This model provides financial protection for the business. You only pay for the healthcare employees actually use, making it a predictable and budget-friendly benefit.

Best Practices for Managing Unused QSEHRA Funds

To make your QSEHRA a success, clear management and communication are key. Here are some best practices for handling unused funds:

• Communicate Clearly and Often: Your rollover policy should be clearly documented in your plan documents and communicated to employees when they enroll and throughout the year. Make sure they understand whether funds roll over, what the limits are, and the deadlines for submitting claims.
• Consider Offering Rollovers: While not required, allowing funds to roll over can significantly increase the perceived value of the benefit. It shows that you are invested in your employees' long-term health and financial well-being, which can boost morale and retention.
• Implement a Run-Out Period: Providing a grace period (e.g., 90 days) after the plan year ends for employees to submit final claims is a simple way to help them maximize their benefit and reduce forfeited funds.
• Educate Employees on Eligible Expenses: Help your team understand the wide range of expenses that can be reimbursed under a QSEHRA, from insurance premiums to co-pays, dental visits, and prescription glasses. The more they know, the more effectively they can use their allowance.

Common Misconceptions About QSEHRA Rollover Rules

Misinformation can prevent both employers and employees from getting the most out of a QSEHRA. Let's clear up some common myths:

• Myth: Unused QSEHRA funds always roll over.
  
  • Fact: Rollover is an optional feature that the employer must choose to offer. Without an explicit rollover policy, funds are typically forfeited at the end of the year.
• Myth: Employees can get a cash payout for their unused allowance.
  
  • Fact: This is strictly prohibited. QSEHRA funds can only be used for reimbursing qualified medical expenses and have no cash value.
• Myth: The QSEHRA allowance is the employee's money, like an HSA.
  
  • Fact: The funds are owned by the employer. The arrangement is for reimbursement, and any unused money remains with the company.
• Myth: Rollovers let employees exceed the annual tax-free limits.
  
  • Fact: All reimbursements, including those from rolled-over funds, are subject to the annual IRS maximums. Rollovers provide a larger pool to draw from but do not increase the yearly cap.

Navigating the nuances of QSEHRA, from rollover rules to compliance, can feel overwhelming for a small business owner. This is where a dedicated partner can make all the difference. At Venteur, we provide an intuitive platform that simplifies the entire process of managing modern health benefits like QSEHRA and ICHRA. We handle the complexities of administration—from tracking allowances to ensuring compliance—so you can focus on what you do best: running your business. Our goal is to empower you to offer flexible, high-quality health benefits that attract and retain top talent, without the administrative burden. We believe that with the right tools and expert support, every small business can provide benefits that make their employees feel valued and secure.

Key Takeaways on QSEHRA Rollover Rules

For small business owners, understanding QSEHRA rollover rules is essential for designing a compliant and effective benefits plan. Here are the most important takeaways:

• Employer Discretion is Key: You decide whether unused funds roll over or are forfeited.
• Annual Limits Apply: All reimbursements are capped by annual IRS limits, even with rollovers.
• Funds Belong to the Employer: It's a reimbursement model, not a bank account, providing cost control for the business.
• Communication is Crucial: A successful QSEHRA program depends on clear communication about your specific plan rules.

While QSEHRA is a fantastic option for businesses under 50 employees, it's one of several modern HRA solutions. For companies seeking greater flexibility, higher contribution limits, or a plan that can scale as they grow, an Individual Coverage HRA (ICHRA) may be a better fit. An ICHRA has no contribution caps and is available to businesses of all sizes, offering a powerful way to empower employees with even more choice and control over their health coverage.

Resources for Small Business Owners on QSEHRA

Navigating the world of health benefits can be complex, but you don't have to do it alone. To ensure your QSEHRA is set up and managed correctly, consider leveraging expert resources:

• Benefits Administration Platforms: Modern platforms can automate QSEHRA administration, from verifying employee eligibility and tracking allowances to processing reimbursements and ensuring compliance. This simplifies the process for you and your employees.
• Benefits Brokers and Consultants: An experienced benefits professional can help you compare different HRA options (like QSEHRA vs. ICHRA), design a plan that meets your goals, and create the necessary legal plan documents.
• IRS Publications: For definitive guidance on what constitutes a qualified medical expense, refer to IRS Publication 502. This official document provides a comprehensive list that can help you and your employees understand what is reimbursable.

At Venteur, we are dedicated to helping businesses of all sizes find health and financial benefits that truly work. By making these plans more accessible and easier to understand, we empower you to build a healthier, more productive team ready to achieve its dreams.