QSEHRA and Medicare: Avoiding MSP and Section 111 Pitfalls

Key Takeaways

• For employers with 20+ employees and Medicare-covered workers, a QSEHRA may be treated as group health plan coverage under MSP/COB rules and may be expected to pay primary.
• Even if Medicare pays after the QSEHRA is exhausted, Medicare may later seek reimbursement from the employer, even if the QSEHRA funds have already been disbursed to the employee.
• Unrecovered Medicare reimbursement liability can be significant and may surface unexpectedly through an offset against the employer’s tax refund.
• Section 111 reporting is a separate, commonly missed compliance obligation, and CMS can impose penalties of up to $1,000 per day per uncorrected reporting incident.

QSEHRA Basics and the Potential Medicare Trap

Many small employers, those with fewer than 50 employees, often use a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) to help their employees purchase individual health coverage and to reimburse other health-related expenses on a tax-free basis.

The QSEHRA provides employers with a predictable cost while giving employees greater flexibility in benefits compared to group insurance coverage. Employers can view the QSEHRA option as a win-win for employers and employees. However, if the employer has more than 20 employees, some employees are on Medicare, and the QSEHRA benefits exceed $5,000 annually, the Medicare Secondary Payer (MSP) rules can spring a trap.

How the MSP Rules Treat QSEHRAs

The MSP rules determine whether Medicare or another insurer pays first. If an employee on Medicare has another group health plan and the employer has 20 or more employees, Medicare pays secondary, and the group health plan pays first. Under the MSP rules, a QSEHRA is considered group health plan coverage. Next, the MSP Coordination of Benefits (COB) requires the QSEHRA to pay first when the employer has 20 or more employees.

The Reimbursement Trap for Employers

What can happen is that, when a Medicare-covered employee receives services and Medicare pays for them before exhausting the QSEHRA, Medicare will seek reimbursement from the employer sponsoring the QSEHRA. Typically, the QSEHRA funds will have already been disbursed to the employee by the time Medicare seeks reimbursement. While most plan documents will allow the employer to claim reimbursement from the employee, most employees will have already spent the funds on unreimbursed medical expenses. This situation will leave the employer with no recourse other than to pay Medicare. In some cases, this can be $20,000 or more, and the employer will not learn about the payment until they do not receive their anticipated tax refund because the Department of the Treasury has offset the Medicare liability against the refund.

Section 111 Reporting

Another step often missed by the above QSEHRA is Section 111 reporting. The purpose of Section 111 reporting is to enable Medicare to correctly pay for the health insurance benefits of Medicare beneficiaries by determining primary versus secondary payer responsibility. As of October 11, 2025, the Centers for Medicare and Medicaid Services (CMS) can penalize an employer up to $1,000 per day, per uncorrected reporting incident.

Why This Happens and How to Reduce Exposure

What leads to this outcome? A small employer's lack of health plan literacy is like that of the general U.S. population’s lack of health insurance literacy. Studies show 88% of the U.S. population is health insurance illiterate. For the individual, this impacts their ability to navigate the health system, adherence to treatment instructions, self-care decisions regarding prevention and interventions, insurance needs, and overall confidence in managing health-related circumstances.

Likewise, for the small employer, seven varieties of HRAs, Internal Revenue Code complications, ERISA considerations, and now CMS interaction. Because choosing an HRA is complex and constantly evolving, the professionals at EisnerAmper can help you understand how your HRA operates and help you maintain compliance. Connect with our team using the form below.