The qualified small employer health reimbursement arrangement (QSEHRA) and the individual coverage health reimbursement arrangement (ICHRA) are two health benefits plans uniquely suited for for employers looking for an affordable and personalized benefits option. Both of them allow organizations to set allowances for their employees to use on health insurance policies and other medical expenses.
However, while they perform similar functions, they operate differently. In this article, we’ll help you decide which one might be best for you by walking you through the main similarities and differences between the two HRAs. We’ll also provide you with a chart to digest the information more quickly.
Similarities between a QSEHRA and an ICHRA
To compare how a QSEHRA and an ICHRA differ, we should start with their similarities. These lie primarily in how the two HRAs work.
Like other HRAs, a QSEHRA and an ICHRA both involve the organization reimbursing employees for healthcare.
Here’s a quick step-by-step look at the model:
- The employer sets an allowance. This monthly allowance amount represents the maximum amount the organization will pay out through the HRA.
- Employees purchase healthcare. Employees buy the healthcare products and services they want, potentially including individual health insurance. Both a QSEHRA and an 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.
- Employers review and approve the requests. The employer reviews employee documentation to ensure the expense is eligible.
- The employer reimburses employees tax-free. If the request is approved, the employer reimburses the employee. Reimbursements are always free of payroll tax, and may be free of income tax to the participant.
Differences between a QSEHRA and an ICHRA
While both a QSEHRA and an ICHRA follow the same basic reimbursement model for reimbursing employees for healthcare, they also have several differences that make them unique.
Employer eligibility is stricter with a QSEHRA. To offer a QSEHRA, an organization must have fewer than 50 full-time employees, and it can't offer a group insurance policy (including group health, dental, or vision insurance).
An ICHRA comes with no such requirements. Employers of all sizes can offer an ICHRA. You can also offer a group health insurance policy to one class of employees and an ICHRA to another class of employees, provided they meet minimum class size standards. (Minimum class sizes only apply to employers offering group coverage alongside an ICHRA).
With a QSEHRA, all full-time employees and their families are automatically eligible for the benefit. The employer 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 a QSEHRA. Employees can participate whether they have an individual health insurance policy, a group policy from their spouse’s employer, an alternative healthcare 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 an ICHRA, employers 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 employers 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 such as:
- 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
(Minimum class sizes only apply to employers offering group coverage alongside an ICHRA.)
To participate in an 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 healthcare sharing ministry plan, and employees covered under a spouse’s group health insurance policy can't participate in an 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
Employers can't offer both group insurance and a QSEHRA to their employees.However, employers can offer both group insurance and an ICHRA as long as both options aren’t offered to the same employee class.
For example, an employer can offer group health insurance to one employee class (such as full-time employees) and an 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 an ICHRA.
Remember, if employee eligibility for either group health insurance or an 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
A QSEHRA comes with greater restrictions on allowance amounts and benefits budgets than an ICHRA.
With a QSEHRA, employers can't offer allowance amounts that exceed annual caps set by the IRS—these allowance caps are updated annually.
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.
Employers can offer different allowance amounts to different employees based on age and family size.
With an ICHRA, there are no annual contribution caps. Employers 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 a QSEHRA and an 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 an ICHRA, employees can't have both an 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 a QSEHRA, but the amount of their premium tax credits must be reduced, dollar-for-dollar, 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.
ICHRA vs. QSEHRA: a chart
Looking for a quick way to consider all this information?
Which is right for your organization: a QSEHRA or an ICHRA?
Employers evaluating both a QSEHRA and an ICHRA should consider several things.
First, think about the needs of your employees. Most employers 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 organization has employees who are largely paying for their individual health insurance, an 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—a 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, an ICHRA is a stronger choice as it allows employees to choose between their credit and the benefit. Employees don’t get this choice with a QSEHRA, and employers foot the bill for money the federal government would have otherwise supplied.
Some employers may also want to offer more money to certain employees. If these high-value employees can be grouped based on the 11 classifications allowed with an ICHRA, that benefit is the better choice.
Finally, consider your organization’s growth trajectory. If you anticipate employing more than 50 full-time workers in the near future, you'll want to offer an ICHRA.
Both a QSEHRA and an ICHRA are valuable benefits that can help employers hire and keep talented employees. However, they are unique benefits with different strengths and weaknesses.
In considering the right benefit for your organization, evaluate the differences between a QSEHRA and an ICHRA closely.