When it becomes available in 2020, the individual coverage health reimbursement arrangement (ICHRA) will be the latest in IRS-approved health benefits.
With the ICHRA, businesses can reimburse employees for their health care expenses, including individual health insurance. The business offers employees a monthly allowance amount, employees buy the health care that fits their personal needs, and the business reimburses them tax-free up to their allowance amount.
If that sounds familiar, it may be because the ICHRA resembles another HRA: the qualified small employer HRA (QSEHRA).
Introduced in January 2017, the QSEHRA was the first HRA in many years to allow small businesses to offer formal, tax-advantaged health reimbursement to all of its employees. Since its creation, the QSEHRA has helped thousands of businesses offer health benefits when they were otherwise unable to.
Now, businesses can choose between the two. Which is the right choice: the QSEHRA or the new ICHRA?
In this post, we’ll help you decide by walking you through the main differences between the two HRAs. We’ll also provide you with a chart to digest the information more quickly.
Let’s get started.
How the QSEHRA and the ICHRA work
To compare how the QSEHRA and the ICHRA differ, we should start with their similarities. These lie primarily in how the two HRAs work.
Like other HRAs, the QSEHRA and ICHRA both involve the business reimbursing employees for health care. Here’s a quick step-by-step look at the model:
The business sets an allowance amount. The business chooses a monthly allowance amount. This figure represents the maximum amount the business will pay out through the HRA.
- Employees purchase health care. Employees buy the health care products and services they want, potentially including individual health insurance. Both the QSEHRA and the ICHRA can reimburse any expense listed in IRS Publication 502.
- Employees submit reimbursement requests. Employees submit documentation that shows they incurred an expense, including the amount, the date it was incurred, and a description of the product or service.
- Businesses review and approve the requests. The business reviews employee documentation to ensure the expense is eligible.
- The business reimburses employees tax-free. If the request is approved, the business reimburses the employee. Reimbursements are always free of payroll tax, and may be free of income tax to the participant (see “Employee Eligibility” below for more details).
Now, we’ll examine the primary differences between the QSEHRA and the ICHRA.
Employer eligibility is stricter with the QSEHRA. To offer a QSEHRA, a business must have fewer than 50 full-time employees, and it cannot offer a group insurance policy (including group health, dental, or vision insurance).
The ICHRA comes with no such requirements. Businesses of all sizes can offer the ICHRA. They can also offer group health insurance, though they cannot offer employees a choice between group health insurance and the ICHRA (see “Group health insurance integration” for more).
With the QSEHRA, all full-time employees and their families are automatically eligible for the benefit. The business can choose to extend eligibility to part-time employees as well, provided they offer the same allowance amounts to both full- and part-time employees.
The employee’s insurance status doesn’t affect their eligibility for the QSEHRA. Employees can participate whether they have an individual health insurance policy, a group policy from their spouse’s employer, an alternative health care solution like Medi-Share, or no insurance at all. However, only employees with minimum essential coverage (MEC) can receive QSEHRA reimbursements free of income tax. Employees without MEC must report all QSEHRA reimbursements as taxable income when they file their taxes.
With the ICHRA, businesses can structure their eligibility requirements based on a given set of employee classes. That means they can choose to offer the ICHRA to all their employees, or they can choose to offer it only to one or more of the following classes:
- Full-time employees
- Part-time employees
- Salaried employees
- Hourly employees
- Seasonal employees
- Temporary employees who work for a staffing firm
- Employees covered under a collective bargaining agreement
- Employees in a waiting period
- Foreign employees who work abroad
- Employees in different locations, based on rating areas
- A combination of two or more of the above
If businesses choose to offer both an ICHRA and group health insurance coverage, and they choose to make decisions on eligibility based on full-time or part-time status, salaried or hourly pay structures, or geographic location, their employee classes must meet a minimum size.
Those minimum employee class sizes vary by employer size. They are:
- 10 employees for employers with fewer than 100 employees
- 10 percent of the total number of employees for employers with between 100 and 200 employees
- 20 employees for employers with more than 200 employees
To participate in the ICHRA, all employees must be covered by individual health insurance or Medicare Parts A and B, or Part C. Uninsured employees, employees with Medi-Share or another health care sharing ministry plan, and employees covered under a spouse’s group health insurance policy cannot participate in the ICHRA.
Because all ICHRA employees have coverage under individual health insurance, all ICHRA reimbursements are free of payroll and income tax.
Group health insurance integration
Businesses cannot offer both group insurance and the QSEHRA.
However, businesses can offer both group insurance and the ICHRA as long as both options aren’t offered to the same employee class. For example, a business can offer group health insurance to one employee class (such as full-time employees) and the ICHRA to another, separate employee class (part-time employees).
A good rule of thumb is that employees should never have a direct choice between group health insurance and the ICHRA.
Remember, if employee eligibility for either group health insurance or the ICHRA is based on full- or part-time status, salaried or hourly pay structure, or geographic location, employee class sizes must meet minimum standards.
Allowance caps, rollover, and budgetary guidelines
The QSEHRA comes with greater restrictions on allowance amounts and benefits budgets than the ICHRA.
With the QSEHRA, businesses cannot offer allowance amounts that exceed annual caps set by the IRS. In 2019, those caps are $5,150 ($429.17 a month) for single employees and $10,450 ($870.83 a month) for employees with a family.
QSEHRA allowances can roll over month to month as well as year to year, but the total amount of reimbursements made to employees in a year can never exceed the annual cap.
Businesses can offer different allowance amounts to different employees based on age and family size.
With the ICHRA, there are no annual contribution caps. Businesses can offer different allowance amounts to different employees based on any of the employee classes listed above, as well as age and family size.
ICHRA allowance amounts can roll over month to month and year to year without restriction.
Premium tax credit guidelines
Both the QSEHRA and the ICHRA are subject to special rules regarding premium tax credits. That means that employees who qualify for premium tax credits deal with additional requirements before they can access their benefit.
With the ICHRA, employees cannot have both the ICHRA and premium tax credits. Instead, employees face a choice: waive their premium tax credits and participate in the ICHRA, or opt out of the ICHRA and use their premium tax credits (as long as the HRA contribution is considered "unaffordable").
Employees with premium tax credits can still participate in the QSEHRA, but the amount of their premium tax credits must be reduced by the amount of their monthly QSEHRA allowance. For example, an employee eligible for a $500 premium tax credit and a $200 QSEHRA allowance could only collect $300 of their premium tax credit.
There is no option to opt out of the QSEHRA.
In 2019, the QSEHRA is the only benefit available to businesses wishing to offer an HRA to all their employees. Businesses must wait until January 1, 2020, to offer the ICHRA.
However, businesses with fewer than 50 employees interested in the ICHRA can begin by offering the QSEHRA and then switch to the ICHRA in 2020.
ICHRA vs. QSEHRA: a chart
Looking for a quick way to consider all this information?
Here’s a chart distilling the major differences between the ICHRA and the QSEHRA.
|Employer eligibility requirements||Available to any business that doesn’t offer employees a choice between the ICHRA and group health insurance.||Available to businesses with fewer than 50 full-time employees that don’t offer group health insurance.|
|Employee eligibility||The business can structure eligibility guidelines based on 11 specified employee classes, and employees must have individual health insurance to participate.||All full-time employees are automatically eligible. Businesses can choose to extend eligibility to part-time employees.|
|Group health insurance integration||Businesses can offer group health insurance, but not to the same class of employees to whom they offer the ICHRA.||Businesses can’t offer group health, dental, or vision insurance.|
|Annual allowance caps||None.||$5,150 for single employees and $10,450 for employees with a family in 2019.|
|Rollover guidelines||Month to month and year to year permitted.||Month to month and year to year permitted, but total reimbursements in one year can’t exceed the annual allowance cap.|
|Budgetary guidelines||Businesses can offer different allowance amounts to different employees based on 11 specified classes, as well as age and family size.||Businesses can offer different allowance amounts to different employees based on age and family size.|
|Premium tax credit guidelines||Employees cannot have both the premium tax credit and the ICHRA. They may waive premium tax credits and participate in the ICHRA, or opt out of the ICHRA and collect premium tax credits if the HRA allowance amount is considered unaffordable.||Employees with premium tax credits can participate in the QSEHRA, but their premium tax credit will be reduced by the amount of their QSEHRA allowance. Employees cannot opt out of the QSEHRA.|
|Current availability||Available beginning January 1, 2020.||Available now.|
Which is right for your business: the QSEHRA or the ICHRA?
Businesses evaluating both the QSEHRA and the ICHRA should consider several things.
First, think about the needs of your employees. Most businesses choose to offer benefits to retain good employees and hire new ones, so the benefit should be as tailored as possible to the people on your team.
If your business has employees who are largely either uninsured or paying for their own individual health insurance, the ICHRA is a good choice. However, if you have employees in multiple situations -- covered by a spouse’s group policy or belonging to a health care sharing ministry, for example -- the QSEHRA may be a better fit as it delivers value to all employees regardless of their situation.
Additionally, make sure to consider how many of your employees qualify for premium tax credits. If you have a large number of employees with premium tax credits, the ICHRA is a stronger choice as it allows employees to choose between their credit and the benefit. Employees don’t get this choice with the QSEHRA, and businesses foot the bill for money the federal government would have otherwise supplied.
Some businesses may also want to offer more money to certain employees. If these high-value employees can be grouped together based on the 11 classifications allowed with the ICHRA, that benefit is the better choice.
Finally, consider your business’s growth trajectory. If your business anticipates employing more than 50 full-time workers in the near future, offer the ICHRA.
However, small businesses that prefer the ICHRA shouldn’t wait until 2020 to start offering benefits. By getting started with the QSEHRA now, your business can deliver value to employees immediately while expanding to a different benefit later.
Both the ICHRA and the QSEHRA are valuable benefits that can help businesses hire and keep talented employees. However, they are unique benefits with different strengths and weaknesses.
In considering the right benefit for your business, evaluate the differences between the ICHRA and the QSEHRA closely.
Have questions or other thoughts? Let us know in the comments below!
You can also check out our HRA Comparison Chart, which looks at the ICHRA, the QSEHRA, and four other kinds of HRAs.
Editor's Note: This blog has been updated to reflect new ICHRA details provided in the federal government's final HRA rule, which was released in June 2019.