As a business owner looking into health reimbursement arrangement (HRA) options, you may have been wondering whether the qualified small employer HRA (QSEHRA) or the individual coverage HRA (ICHRA) is the best choice for your company.
The QSEHRA was created in December 2016 and has been a great option for small businesses looking for an alternative to group insurance ever since. In June 2019, the federal government announced the ICHRA as an additional HRA option for businesses of all sizes, available on January 1st, 2020.
While the company eligibility requirements are different for each HRA, you might find yourself in a situation where your business would qualify for either plan.
In this post we’ll discuss the differences between the options and how they can affect the way you offer the benefit to your employees. You can use this information, along with your business’s individual goals for health benefits, to help decide which plan is the best fit for your company and employees.
The primary differences between the QSEHRA and the ICHRA are in how it works and who is eligible. We’ll examine both now.
- How it works. With the QSEHRA, a business can offer employees a set monthly allowance of tax-free funds and employees can use the allowance to be reimbursed for their insurance premiums and certain eligible out-of-pocket medical expenses. There is an annual contribution limit set by the federal government. For 2019, that limit is $5,150 annually ($429.17 per month) for single individuals and $10,450 annually ($870.83 per month) for families. Information regarding the limits for 2020 will be made available soon. Allowances can roll over year to year, however, the total annual allowance can never exceed the annual contribution limit.
- Eligibility requirements. The QSEHRA can be offered by qualified small employers with fewer than 50 employees. The business decides whether to include part-time employees, or limit the offer to only full-time employees, who are automatically eligible. If the company includes part-time employees, they must offer the benefit the same way to both employment statuses (same allowances varying only by family status, waiting periods, and eligible expenses).1099 employees aren’t eligible for the QSEHRA. Businesses can’t offer a QSEHRA and a group plan at the same time. Employees that qualify for a premium tax credit can participate in the QSEHRA, but the tax credit must be reduced by the amount of their QSEHRA allowance.
The QSEHRA might be best suited for companies:
- That have employees who are on their spouse’s insurance and want to include them
- That have employees on a health care sharing ministry plan or who don’t have health insurance
- That don’t have a high number of employees on premium tax credits
- That don’t offer group health insurance and have no plans to
- How it works. Like the QSEHRA, the ICHRA allows businesses to set an allowance of tax-free money for employees. Employees make health care purchases, like individual insurance policies, and the business reimburses them up to the set allowance amount. There are no annual contribution limits, therefore allowances can roll over from year to year. Businesses can also limit the benefit to specific classes of employees, as well as offer different allowance amounts based on family size and certain employee classes.
The 11 employee classes allowed under the ICHRA are:
- Full-time employees
- Part-time employees
- Salaried employees
- Seasonal employees
- Temporary employees that work for a staffing firm
- Hourly employees
- Employees covered under a collective bargaining agreement (unionized employees)
- 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
For more information about how employee classes work see: The individual coverage HRA (ICHRA)'s employee classes: how do they work?
- Eligibility requirements. The ICHRA can be offered by businesses of any size. If a company decides to offer the ICHRA, they can't offer the QSEHRA or any other HRA. They can offer a group health insurance policy, but they can’t offer the same employee class a choice between the ICHRA and the group policy. For an employee to be eligible to participate in the ICHRA, they must have individual insurance
coverage. Employees can’t use a premium tax credit and participate in 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.
The ICHRA might be best suited for companies:
- That want to limit eligibility or vary allowances by one of the 11 class options
- That choose to offer an allowance higher than the annual contribution limits for the QSEHRA
- That have employees with premium tax credits who would like the choice to either participate in the ICHRA or opt out
- That have a group health insurance plan they would like to continue offering
- That have few or new employees on a spouse’s group health insurance plan or who have other non-individual health insurance coverage
As you can see, there are a lot of differences between the two plans. The best option for your company will depend on what's most important for your company when providing a benefit and what your current and prospective employees will value the most.
For example, is your company offering an HRA to benefit all employees or are you targeting one or two specific individuals? Do you want your HRA to cover the full cost of your employees’ premiums, and if so, will that cost be within the QSEHRA’s annual limit? Are you open to subsidizing health care costs for employees regardless of where they get their insurance, or would you like to target employees who need individual coverage only?
The answer to these questions will help you decide between the QSEHRA and the ICHRA.
To see how these decisions play out in the context of an individual business, let’s look at some examples of when companies might choose either the ICHRA or the QSEHRA.
Doug’s Carpet Cleaning has 35 employees and currently offers a group health insurance plan. They have several high-value salaried employees that would prefer to stay on the group insurance plan. They also have a few hourly employees that they’d like to offer a benefit to, but it’s too expensive to include them all on the group insurance.
In this situation, the ICHRA would be the best fit. The ICHRA will allow the business to continue to offer a group insurance plan to their salaried employees while also offering the ICHRA to their hourly employees.
Fadel Family Law Practice has eight employees. Four of the employees are on a spouse’s group insurance plan that’s being provided through the spouse’s employer. Two of the employees have individual coverage through the marketplace, and the last two employees don’t currently have insurance because it’s too expensive. The practice wants to offer a benefit that helps them be competitive in the industry and retain their current employees. They want to make sure they provide a benefit that all of the employees are able to participate in.
They decide to offer the QSEHRA because all of their employees will be eligible to participate and can find personalized value from the benefit. Employees on their spouse’s plans can receive tax-free reimbursements for eligible medical expenses, employees with current individual coverage can be reimbursed for their premiums and medical expenses, and the employees that don’t have coverage yet can use their allowance to make coverage more affordable.
Stillwater Dental has seven employees. Their employees are all insured with individual coverage plans from the marketplace for themselves and their families. Most of the employees don’t use a premium tax credit, or the premium tax credit is low enough that they’d be willing to go without it if there was a different option. The business knows they want to offer an HRA. After looking into the options, they determine they want to offer more than the $870.83 a month allowed for employees with spouses and/or children and the $429.17 allowed for single employees under the QSEHRA.
Jn their case, offering the ICHRA is the right choice because it gives them the freedom to determine what allowances work for their employees without an annual maximum and the employees can be reimbursed for their current coverage or choose a different plan based on the allowance they’ll receive.
Tori’s Tasty Treats has 17 employees. The employees are in a variety of insurance situations, including being on a spouse’s group plan and having individual coverage. The business owner is looking to provide a benefit for the first time that will be helpful to the employees, but doesn’t want to allow annual rollover of unused funds. They also want to offer the benefit to all employees regardless of employment class.
The employer’s best option would be the QSEHRA because the business doesn’t have a need for an annual rollover and they’ll be able to include all of their employees.
Stockton Construction has 40 employees. At some point in the future, they might consider offering a group insurance plan, but for now they’re looking for a less expensive option they can easily manage in-house. The company wants to limit their financial exposure by setting allowances based on specific classes of employees, while still providing a useful benefit. They’d like to provide more to their salaried and hourly employees than to their seasonal and part-time employees.
The ICHRA will allow them to provide a benefit that they could pair with a group plan in the future and will help them stay in their budget by allowing them to set allowances differently for different groups of employees.
Calypso Island Grill has 10 full-time employees. They’re looking to hire more employees but are having trouble finding quality candidates because they don’t offer a benefit. They’re looking into HRA options to help them become more competitive. The business manager knows that a few of their current employees rely on a significant premium tax credit and doesn’t want to pay for tax-free money the government is already providing if employees don’t want it
For their business, the ICHRA is a good fit. It will allow them to offer an affordable benefit while employees with premium tax credits can choose whether to collect those credits or participate in the company benefit.
Every business is unique and has different needs when it comes to offering a benefit. The ICHRA and QSEHRA can help your company to personalize a benefit that’s affordable, easy to administer, and that’s valuable to current and prospective employees. With the two options, business owners and managers are empowered to make a choice that’s right for them.