ICHRA vs. QSEHRA: How do they compare?
This guide compares two popular stand-alone health reimbursement arrangements (HRAs) to help you pick the right one for your organization.
Are you wondering if a QSEHRA or ICHRA is best for your employees? Book a call with an HRA specialist to get answers to your questions.
Need help determining which HRA is best for your organization?
If you’re a business owner wanting to offer a health benefit for the first time or searching for an alternative to traditional group health insurance, a health reimbursement arrangement (HRA) is an easy-to-manage employee benefit.
The qualified small employer HRA (QSEHRA) and the individual coverage HRA (ICHRA) are two health benefits plans uniquely suited for employers looking for an affordable and personalized benefits option.
The QSEHRA is designed for small business owners, while employers of all sizes can offer the ICHRA. Both allow organizations to set allowances for their employees to purchase individual health coverage and other out-of-pocket medical expenses.
While both HRAs operate similarly, they vary in customization, who can offer them, contribution limits, 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.
See whether an ICHRA or a QSEHRA is right for your business.
What is an ICHRA?
An ICHRA is an employer-funded health benefit that organizations use to reimburse employees for their individual health insurance premiums and other qualifying medical expenses tax-free.
Rather than having an employer-chosen group health insurance policy, employees with an ICHRA can choose and purchase their own qualifying individual coverage policy from their preferred health insurance company.
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 without paying for costly group health insurance or becoming subject to annual premium rate increases.
Intro to the ICHRA
Learn about how the ICHRA works in our complete guide.
ICHRA employee classes
Learn more about the 11 ICHRA employee classes.
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 costs. However, to offer a QSEHRA, an employer must have fewer than 50 full-time equivalent employees (FTEs).
Employers can’t offer a group insurance health plan or a flexible spending account (FSA) alongside a QSEHRA. Unlike an ICHRA, employees don't need a qualifying form of individual health insurance coverage to participate.
However, they'll need minimum essential coverage (MEC) for healthcare reimbursements to be tax-free.
The IRS sets annual maximum contribution limits for QSEHRAs that employers must consider when determining their allowance amount. Even if the employer allows yearly rollover capabilities, the rollover amount can’t exceed the following year’s annual limit.
Overall, QSEHRAs are an excellent way for small employers to provide healthcare benefits to attract and retain talented employees without breaking the bank.
Intro to the QSEHRA
Learn about how the QSEHRA works in our complete guide.
QSEHRA contribution limits
Learn about the 2025 QSEHRA contribution limits.
QSEHRA pros and cons
See the pros and cons of the QSEHRA in our blog post.
How are the ICHRA and QSEHRA the same?
QSEHRAs and ICHRAs are most notably the same in how they work. Employers set an allowance amount, employees make a qualified purchase, and they receive reimbursements when the employer reviews and approves the expense.
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 they only pay out HRA funds to employees when they incur a qualified expense ready for reimbursement.
The employer sets an allowance for both HRAs. The monthly allowance represents the maximum amount the organization will pay out through the HRA.
Additionally, unlike the FSA or health savings account (HSA), all HRA contributions made by the employer belong to the company. This means employees don’t take any HRA funds with them when they leave the organization.
Check out the difference between an HRA, HSA, and FSA in our comparison chart.
Eligible expenses
With ICHRA and QSEHRA coverage, employers can reimburse employees for qualified medical expenses listed in IRS Publication 502. There are more than 200 eligible expenses including individual health coverage 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 or other eligible documentation.
The documentation must show they incurred an eligible expense, including the amount, date, and product or service description for the employee to receive reimbursements.
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 plan 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, there are significant differences in their structure and flexibility, which we’ll review in the sections below.
Employer eligibility
Employer eligibility is stricter with a QSEHRA. To offer a QSEHRA, an organization must have fewer than 50 FTEs and 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, and there are certain situations when employers can offer group health plan coverage and an ICHRA simultaneously, just not to the same employees.
Employee eligibility
To participate in an ICHRA, all employees must have individual health insurance coverage 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 must have coverage under qualifying individual health insurance, all ICHRA reimbursements are free of payroll and income tax.
With the ICHRA, employers can set different allowance amounts and define eligibility based on 11 specific employee classes. These classes categorize employees into groups for better health benefit customization.
Employers must use legitimate job-based criteria, like salaried or hourly, part-time or full-time employees, to determine classes. Additionally, all employees in the same class must receive the same allowance amount.
If you’re offering an ICHRA with PeopleKeep’s HRA administration software, only the full-time, part-time, seasonal, salaried, non-salaried, and state-based classes are available.
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. All full-time W-2 employees and their families are automatically eligible for the QSEHRA.
The employer can also extend eligibility to part-time employees, provided they offer the same allowance amounts to both full- and part-time employees.
The employee’s individual insurance status doesn’t affect their eligibility for a QSEHRA. Instead, employees need MEC. This means employees can participate whether they have an individual health insurance policy, or a traditional group health plan from their spouse’s employer.
Only employees with MEC can receive QSEHRA reimbursements. If an employer accidentally reimburses any employees without MEC, the employees must report those reimbursements as taxable income when they file their taxes.
Contribution limits
A QSEHRA has greater restrictions on allowance amounts and benefits budgets than an ICHRA. 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.
ICHRAs offer more flexibility in terms of employer contribution. They have no minimum or maximum contribution limits, so employers can offer different allowance amounts to different employees based on class, age, and family size.
QSEHRA allowances can rollover month-to-month and year-to-year, but the total amount of reimbursements made to employees in a year can’t exceed the annual cap. ICHRA allowance amounts can rollover month-to-month and year-to-year without restriction.
If you’re offering an HRA through PeopleKeep, you can only rollover allowances monthly, not yearly.
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 if they don’t offer both options 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.
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 (only if the rating area is smaller than the state level), their employee classes must meet a minimum size.
Minimum employee class sizes vary by business size, such as:
- Ten employees for employers with fewer than 100 employees
- 10% 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 size rules don’t apply to state-based or multi-state ICHRA classes.
Premium tax credits
QSEHRAs and ICHRAs are subject to special rules regarding premium tax credits. That means that eligible employees who qualify for premium tax credits deal with additional requirements before they can access their benefits.
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 whether their ICHRA is affordable.
If an employee has an affordable ICHRA allowance, they can’t collect their tax credits even if they don’t participate in the ICHRA coverage. If an allowance is unaffordable, employees can opt in or out of the ICHRA based on who’s offering the larger amount.
With a QSEHRA, the situation is slightly different. Your employees with a QSEHRA who also qualify for a premium tax credit can only claim their credits if your allowance is unaffordable. If an employee has an affordable QSEHRA allowance, they can't collect their tax credits, and employees can't opt out of a QSEHRA. If the allowance is unaffordable, 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.
For example, an employee eligible for a $500 premium tax credit with a $200 QSEHRA allowance could only collect $300 of their premium tax credit.
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.
| ICHRA | QSEHRA | |
|
Employer eligibility requirements |
Available to organizations of any size with or without group health insurance, as long as the employer doesn’t offer a group health plan and an ICHRA to the same classes of employees. |
Available to organizations with fewer than 50 full-time equivalent employees that don’t offer group health insurance. |
|
ACA employer mandate |
It may satisfy the employer mandate for ALEs if coverage is affordable and the employer offers coverage to more than 95% of full-time employees. |
Not available for applicable large employers (ALEs) with more than 50 full-time-equivalent employees. Only ALEs are subject to the employer mandate. |
|
Employee eligibility |
The business can structure eligibility guidelines based on 11 predefined employee classes, such as full-time, part-time, salaried, hourly, and seasonal. Employees must have qualified individual health insurance to participate. |
All full-time W-2 employees are eligible for the benefit. Employers can choose to offer it to part-time employees as well. |
|
Annual allowance caps |
None. |
The following annual caps exist for 2025:
|
|
Rollover guidelines |
Organizations can roll over allowances month-to-month or annually. With PeopleKeep, businesses can only roll over from month-to-month, but not annually. |
Businesses can rollover allowances month-to-month. But, monthly allowances have caps to prevent total contributions from exceeding the annual maximum. |
|
Budgetary guidelines |
Businesses can offer different allowance amounts to employees based on class, age, and family status. |
Businesses can offer different allowance amounts to employees based on family status. |
|
Premium tax credit guidelines |
Employees can’t have both a 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 IRS considers the HRA allowance amount unaffordable. |
Employees with premium tax credits can participate in the QSEHRA depending on affordability. If their allowance is affordable, they can't collect any tax credits. But if the allowance is unaffordable they can claim their tax credits. However, the amount of their QSEHRA allowance will reduce their premium tax credit. Employees can’t opt out of the QSEHRA. |
|
Best suited for |
Organizations that:
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Organizations that:
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How can you choose between an ICHRA and a QSEHRA?
If you’re deciding whether an ICHRA or QSEHRA is the best fit for your organization, consider two key things.
First, think about your employee’s needs. Most employers offer benefits to attract and retain top talent, so you should tailor your HRA to the people on your team.
If your organization has many employees with individual health insurance policies, 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 circumstances.
Additionally, make sure to think about how many of your employees qualify for premium tax credits. If you have many 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; employers foot the bill for money the federal government would have otherwise supplied.
Next, 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, satisfying the employer mandate, or anticipate employing more than 50 full-time employees soon, 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 have a customizable health benefit that will empower your employees to take more control over their own healthcare decisions while saving your company money.
With PeopleKeep, we’ll help you administer your QSEHRA or ICHRA, so you can rest assured knowing that we’ll take care of documentation review and compliance regulations for you.
Frequently asked questions
HRAs can reimburse many healthcare products and services, including insurance premiums, provided employees didn’t purchase them with pre-tax dollars. Use our IRS expense tool to see which expenses can be eligible for reimbursement.
An HRA is an arrangement between an employer and an employee, allowing employees to get reimbursed for their medical expenses. In contrast, an HSA is a portable account the employee owns and keeps with them even after leaving the organization.
With an HRA, the employee only gets paid when they incur an eligible expense, while an HSA is pre-funded each month regardless of whether or not they spend the money.
Only eligible employers can implement a QSEHRA, which means they must have had fewer than 50 full-time employees or FTEs in the prior calendar year. Under the ACA, regulations only apply to employers with 50 or more employees, so the QSEHRA wouldn’t be subject to the employer mandate.
On the other hand, an ICHRA can satisfy the employer mandate if the IRS considers the benefit allowance affordable. Learn more about how affordability and other rules apply in our article: ICHRA and the employer mandate.
Depending on how they file, some business owners can participate in an HRA.
C-corporation owners: C-corporations are legal entities separate from the owner. This means owners are considered common-law employees of the corporation and are eligible to participate in this benefit. As with all employees, this eligibility also extends to the C-corp owner’s family. All reimbursements paid to the C-corp owner and the owner’s family are tax-free to the company and the owner.
Sole proprietors: A sole proprietorship is an unincorporated business owned and run by one person. There’s no distinction between the business and the owner, so the owner isn't an employee. This means sole proprietors can’t participate.
But, if the owner’s spouse is a W-2 employee of the business, the owner could gain access through their spouse’s allowance as a dependent. All reimbursements would be tax-free to the sole proprietorship and the owner’s spouse.
Partners: A partnership is a pass-through entity, which means the company isn't subject to income tax. Instead, the partners are directly taxed individually. Partners in a partnership are considered self-employed rather than company employees, so they’re not eligible to participate in a reimbursement benefit.
Similar to sole proprietors, married partners can participate in the benefit if their spouse is a W-2 employee of the business, as long as the partner’s spouse isn’t also a business partner.
S-corporation owners: An S-corporation is a pass-through entity, meaning the company isn’t subject to income tax. Instead, shareholders (i.e., owners who own 2 percent or more of the company’s shares) are directly taxed individually. This means shareholders aren’t considered employees and aren’t eligible to participate in a reimbursement benefit.
Interested in offering an HRA through PeopleKeep?
Speak with a PeopleKeep HRA specialist who can help you answer questions, set up your account, and guide you through the beginning stages of your new benefit.
Contributors:
Chase Charaba
Content Marketing Manager
Elizabeth Walker
Content Marketing Specialist