ICHRA vs. QSEHRA

Key takeaways 

• Individual Coverage Health Reimbursement Arrangements (ICHRA) and Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) offer employees health benefits without traditional group plans. 
• ICHRA allows employers to set their own reimbursement amounts, while QSEHRA follows IRS set limit annually  
• Both options can be budget friendly for employees and employers by offering tax-free reimbursements. 

With the steady rise of healthcare costs, businesses — big and small — may be looking for better ways for their employees to receive benefits without completely draining the bank. The solution? Health Reimbursement Arrangements (HRAs). These employer-funded plans reimburse employees for health insurance and qualified medical expenses. 

Two of the most popular HRA options are Individual Coverage Health Reimbursement Arrangements (ICHRA) and Qualified Small Employer Health Reimbursement Arrangements (QSEHRA). Both options help employers control costs and give employees more flexibility with their healthcare options. But what’s the difference, and which would be the best fit for you and your employees? 

Understanding HRAs 

Employers and businesses have to figure out ways to offer insurance to their employees while staying within their budget. That’s where HRAs come in. 

What is an HRA? 

A Health Reimbursement Arrangement (HRA) is a tax-advantaged employer-funded arrangement that reimburses employees for medical expenses and health insurance premiums. It’s kind of like a tax-free perk for health insurance. It makes things easier for employers when it comes to healthcare benefits, while still giving employees some flexibility — definitely a win-win! 

With an HRA, employers can provide healthcare with more flexibility and save big time, making it a widely popular alternative to traditional group health plans. 

Benefits of HRAs 

Traditional group health plans can be pricey and a bit confusing, plus they usually have limited options. HRAs not only help employees, but they’re also great for employers: 

Benefits for employers:  

• You set your budget — you won’t be faced with any surprise rate increases from insurance companies. 
• HRAs offer easier administration as opposed to having to manage a more complex group plan for all of your employees. 

Benefits for employees:  

• You get to pick a plan that works best for you and is flexible when choosing health insurance plans or medical expenses.
• You don’t have to worry about being stuck in a plan that doesn’t cover what you need. 
• The reimbursements your employer gives you for your healthcare are completely tax-free for qualified medical expenses. 

Sounds great, right? Whether you’re a small or large business, there is an HRA option for you. Now let’s see how ICHRA and QSEHRA compare to each other. 

Deep dive: ICHRA vs. QSEHRA 

What is an ICHRA? 

An Individual Coverage Health Reimbursement Arrangement is a type of HRA that allows employers of any size to reimburse employees for some or all of the cost of health insurance premiums that they purchase on their own. They help to cover premiums for an employee’s health insurance plan and other qualified medical expenses, like prescription drugs, hospital stays, and doctor visits. 

Key features:  

• No contribution limits.  
• Employers can define different benefit levels for different employee classes.  
• Compatible with both ACA-compliant health plans and Medicare.  

To qualify for an Individual Coverage Health Reimbursement Arrangement, employees need to have their own individual health insurance. Any business, no matter how big or small, can be eligible as long as they don’t provide traditional group health insurance plans. 

What is a QSEHRA? 

A Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, is an HRA that allows small employers (50 full-time employees or less) who don’t offer group health coverage to help their employees pay for medical expenses. These reimbursements are tax free and can help pay for certain health care costs — like an employee’s monthly premium or coinsurances. 

Key features:  

• The contribution limits are IRS-set.  
• With limited exceptions, QSEHRA must be offered to all full-time employees. 
• These plans work with both individual health plans and Medicare. 

Comparing ICHRA and QSEHRA 

You might be wondering if these types of plans have in common — and there are definitely some similarities! Keep reading to learn about their shared traits and see how their main features stack up against each other. 

What they have in common 

These two HRAs allow employers to provide more affordable healthcare for their employees. Here are a few more ways ICHRA and QSEHRA level the playing field. 

• Both are employer-funded and have tax-free benefits. A win for you and your employees! 
• ICHRA and QSEHRA cover insurance premiums and medical expenses. HRAs are great for offering more flexibility for employees. 
• Both options provide cost savings for employers and employees, serving as more economical alternatives to the typically higher-priced group health insurance. 

Key features of ICHRA and QSEHRA 

Feature	ICHRA	QSEHRA
Who can offer it?	Any size business	Only small businesses (<50 employees)
Employee eligibility	Employers set eligibility rules	Must include all full-time employees
Contribution limits	No cap—completely flexible	IRS-set annual limits
Group plan integration	Can work alongside group plans	Cannot be used with a group plan
Premium tax credits	May impact eligibility	Employees forfeit tax credits if they accept QSEHRA funds

Advantages and disadvantages 

Benefits of ICHRA  

If you want to have more control over your benefits, ICHRA gives you the flexibility to offer different levels of reimbursement based on whether your employees are full-time, part-time, or remote. There are no restrictions on how much you can contribute, which is great if you’re looking to be a competitive employer.  

Plus, employees can use ICHRA funds toward their health plan’s medical expenses, which gives them the freedom to choose coverage that actually works best for them. 

Limitations of ICHRA 

ICHRA is harder to administer and manage compared to QSEHRA. Some employees might lose out on premium tax credits if they choose to accept ICHRA. Because it is made to be customizable, there are plenty of bells and whistles that go into it, making it more challenging to navigate and stay ACA-compliant. 

Though it can be a bit of a puzzle to manage, eHealth has Iris — an ICHRA service that makes choosing health benefits more affordable and easier to manage. Iris helps businesses save time, effort, and money. And you can start with a free quote here! 

Benefits of QSEHRA  

QSEHRA may not be fully customizable, but it offers a simpler, more budget-friendly solution for employers with less than 50 full-time employees. These clear limits and restrictions help employers stay within budget and can be ideal for startups. 

Limitations of QSEHRA  

These plans cannot be paired with group health plans and are restricted to small employers that are supporting less than 50 full-time employees. This can be restricting if you’re looking to give your employees access to a broader range of coverage options. 

Can business owners participate? 

Sole proprietors and partners often cannot participate in ICHRA plans, but business owners with a W-2 status may be eligible. As for QSEHRA, owners usually cannot participate unless they’re considered employees of the business as well. If you desire to be covered, make sure your business structure allows you to participate. 

Compliance with employer mandates 

When offering health benefits, it’s important to follow IRS rules to avoid penalties. For ICHRA, this means making sure the reimbursement amount meets affordability guidelines set by the government. If the amount is too low, employers could face penalties, and employees must enroll in a qualified health plan under the Affordable Care Act (ACA) to use ICHRA funds. 
 Small businesses have fewer restrictions since they aren’t required to meet ACA funding rules. However, ICHRA still provides a tax-free way to help employees cover their healthcare costs while keeping the business in line with regulations. 

Ways to save on HRAs 

Compared to traditional healthcare, HRAs are already meant to help you save on your medical expenses. There are ways you can continue to stretch your dollars and maximize your savings. 

How employers can maximize savings 

ICHRA helps you control costs while staying flexible.  

ICHRA lets you set different reimbursement amounts for employee groups, such as full-time, part-time, or remote workers. This approach ensures you’re optimizing benefits without overspending on healthcare costs. 

Tax benefits for you and your employees 

Employer contributions to ICHRA are tax-deductible for your business and tax-free for employees. This helps lower overall costs while giving your team more value from their healthcare budget. 

Pro tip: Maximizing employee health plan choices 
Even though employees select their own health plans, you can help them make informed decisions. Partnering with insurance brokers or providing trusted resources ensures employees understand their options and fully use their benefits. 

Choosing the right HRA for your business 

When picking between ICHRA and QSEHRA, the better choice really depends on how big your business is, your budget, and how much flexibility you’re after. 

ICHRA might be right for you if: 

• You have a mix of full-time, part-time, and remote employees. 
• You want unlimited contribution flexibility. 
• You may want to offer a group plan alongside ICHRA. 

QSEHRA might be a better fit if: 

• You run a small business with fewer than 50 employees. 
• You prefer simple administration with clear contribution caps. 
• You don’t offer a group health plan. 

At the end of the day, both ICHRA and QSEHRA offer tax-free reimbursements and help employers provide affordable health benefits. Your decision should reflect your business structure, budget, and employee needs—ensuring a plan that’s a win for everyone! Consultant a tax professional for more information. 

FAQs 

1. Are there contribution limits for ICHRA or QSEHRA? 
   While ICHRA does not have any tax limits, QSEHRA has IRS-set annual limits. 

2. Can HRAs help businesses stay ACA-compliant? 
   For ICHRAs, yes! Larger businesses will meet ACA compliance if the reimbursements are considered affordable. Smaller businesses under QSEHRA don’t have to abide by ACA compliance rules. 

3. Can employees still get premium tax credits with an HRA? 
   ICHRA allows employees to keep their tax credits if the policy is considered unaffordable. QSEHRA employees forfeit tax credits if they accept QSEHRA funds. 
   
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