ICHRA vs. QSEHRA: How do they compare?

Two popular HRAs that are cost-effective and flexible for benefits administrators are the qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA).

The QSEHRA is uniquely suited for small employers, while the ICHRA can be offered by employers of all sizes. Both allow organizations to give money to their employees to purchase individual health coverage and other out-of-pocket medical expenses. 

While both HRAs operate in similar ways, they vary in how they can be customized, who they can be offered to, and more. 

This page outlines similarities and differences between the two health benefits so you can determine which is the best choice for your employees.

Learn more about the different types of HRAs in our blog

What is an ICHRA?

An ICHRA is an employer-funded health benefit used to reimburse an organization’s employees for their individual health insurance premiums and other qualifying medical expenses tax-free. 

Rather than being covered by an employer-chosen group health insurance policy, employees will covered by an ICHRA can choose and  purchase their own  individual coverage policy. 

Employers of any size can offer an ICHRA to their employees either as a stand-alone health benefit or to specific employee classes that don’t qualify for your group health insurance plan.  

ICHRAs are particularly beneficial for applicable large employers (ALEs) looking to satisfy the Affordable Care Act’s employer mandate but don’t want to pay for costly group health insurance or be subject to annual premium rate increases.

What is a QSEHRA?

Like the ICHRA, a QSEHRA allows eligible employers to reimburse employees, tax-free, for their health insurance coverage and a wide range of healthcare expenses. However, in order to offer a QSEHRA, an employer must have fewer than 50 full-time equivalent employees (FTEs). 

The benefit can’t be offered with a group insurance health plan or a flexible spending account (FSA). Unlike an ICHRA, employees don't need a qualifying form of individual health insurance in order to participate. However, in order for reimbursements to be tax-free, they'll need minimum essential coverage (MEC).

The IRS sets annual maximum contribution limits for QSEHRAs, so the amount an employer can give is capped. If the employer allows yearly rollover capabilities, the rollover amount is restricted so they don’t exceed the following year’s annual limit. 

All in all, QSEHRAs are an excellent way for small employers to provide healthcare benefits to attract and retain talent without breaking the bank.

How are the ICHRA and QSEHRA the same?

QSEHRAs and ICHRAs are most notably the same in their reimbursement method. Employers set an allowance amount, employees make a qualified purchase, and they are reimbursed when the expense is reviewed and approved. But there are other ways these two employee benefits interact that are similar in structure.

Employer contributions

Both QSEHRAs and ICHRAs are employer-owned and employer-funded health benefits. But they’re not pre-funded accounts. This is good for employers because HRA funds are only paid out to the employee when they incur a qualified expense ready for reimbursement.

Additionally, unlike the FSA or health savings account (HSA), all HRA contributions made by the employer belong to the company. This means that when an employee leaves the organization, they don’t take any HRA funds with them. 

Check out the difference between an HRA, HSA, and FSA in our comparison chart.

Eligible expenses

With ICHRA and QSEHRA coverage, employees are allowed to get reimbursed for qualified medical expenses dictated by IRS Publication 502. There are over 200 eligible expenses ranging from health insurance premiums, prescription drugs, doctor visits, and more. 

Some expenses are only reimbursable with a doctor’s note explaining why the medication or treatment is necessary. Still, several other over-the-counter items are reimbursable with a receipt indicating the purchase was made.

Tax advantages

HRAs have substantial tax advantages for both employers and employees alike. All employer HRA contributions are tax-deductible and payroll tax-free. Employees don’t have to pay income taxes on the reimbursements they receive either, as long as their individual health insurance policy meets MEC.

What are the differences between an ICHRA and a QSEHRA?

It’s clear that ICHRAs and QSEHRAs have a good amount in common. But they do have pretty significant differences in their structure and flexibility that we’ll go over in the sections below.

Employee classes

With the ICHRA, employers can set different allowance amounts based on 11 specific employee classes. These classes categorize employees into groups for better health benefit customization. 

The classes must be determined by legitimate job-based criteria, like salaried or hourly, part-time or full-time employees. Additionally, all employees in the same class must receive the same allowance amount. 

While an ICHRA allows for varying allowance amounts based on many employee classes, QSEHRAs only allow employers to vary reimbursement amounts based on age and family size. However, if you're offering a QSEHRA with PeopleKeep, only varied allowance amounts by family status are permitted. All full-time W-2 employees must be offered QSEHRA coverage.

Contribution limits

ICHRAs offer quite a bit of flexibility in terms of employer contribution. They have no minimum or maximum contribution limits, so employers can choose an allowance amount that best fits their budget and their employees’ needs. 

However, QSEHRAs have maximum contribution limits for single and family statuses determined by the IRS each year. However, there’s no minimum contribution limit for the QSEHRA.

Premium tax credits

Employees offered an ICHRA who also qualify for a premium tax credit can pick if they want to participate in the ICHRA or collect their tax credit. However, this decision depends on if their ICHRA is deemed affordable.

If an employee has an affordable ICHRA allowance, they will be unable to receive their tax credits even if they don’t participate in the ICHRA coverage. If an allowance is considered unaffordable, employees can opt-in or out of the ICHRA based on who’s offering the larger amount.  

With a QSEHRA, employees can keep their premium tax credit and participate in the QSEHRA. But employees have to reduce their tax credit offering by the amount of their QSEHRA allowance, and they don’t have the option to opt-in or out.

Learn more about how premium tax credits work with HRAs in our blog.

QSEHRA vs. ICHRA comparison chart

The chart below compares key differences between the two HRAs and highlights which option is best for certain company goals.

How can you choose between an ICHRA and a QSEHRA?

The best way to choose between an ICHRA and a QSEHRA for your organization is to consider your company’s needs. If you’re looking for a more flexible health benefit, such as greater customization with employee classes, unlimited annual contribution limits, or satisfying the employer mandate, an ICHRA is likely your best option.

However, if your goal is a health benefit that’s more cost-effective than group health insurance, easily implemented and administered, and works for qualified small employers with less than 50 employees, a QSEHRA is the right way to go.

Whichever HRA you choose, you’ll be selecting a customizable health benefit that will empower your employees to take more control over their own healthcare decisions while saving your company money.

And with PeopleKeep, we’ll help you administer your QSEHRA or ICHRA so you can rest assured knowing that documentation review and compliance regulations are being handled for you.

Frequently asked questions