What Is the Difference Between ICHRA and QSEHRA?

Health Reimbursement Arrangements (HRAs) are employer-sponsored health benefits designed to assist employees with medical expenses. These plans enable employers to set aside money to reimburse employees for qualified healthcare costs. HRAs offer a flexible approach to providing health benefits, allowing employers to manage costs. The Individual Coverage Health Reimbursement Arrangement (ICHRA) and the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) are two distinct types of HRAs.

Individual Coverage Health Reimbursement Arrangement (ICHRA)

The Individual Coverage Health Reimbursement Arrangement (ICHRA) allows employers of any size to reimburse employees for individual health insurance premiums and other qualified medical expenses, as defined by IRS Publication 502. This arrangement provides flexibility for employers to offer health benefits without the complexities of traditional group health plans.

To participate in an ICHRA, employees must be enrolled in individual health insurance coverage that meets minimum essential coverage requirements, or be enrolled in Medicare Parts A and B, or Part C. Employers can customize contribution amounts and eligibility based on various employee classes, such as full-time versus part-time, salaried versus non-salaried, or by geographic location. This allows for tailored benefit offerings.

Contributions made by employers to an ICHRA are generally tax-deductible for the business, and reimbursements received by employees for qualified expenses are typically tax-free. There are no statutory maximum contribution limits imposed on ICHRA by the IRS. This absence of limits provides employers with significant control over their benefits budget.

Qualified Small Employer Health Reimbursement Arrangement (QSEHRA)

The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is designed for small employers that have fewer than 50 full-time equivalent employees and do not offer a traditional group health plan. QSEHRA enables these employers to reimburse employees for individual health insurance premiums and other qualified medical expenses.

Employers offering a QSEHRA must provide the benefit on the same terms to all eligible employees. While a general uniformity rule applies, some variations are permitted based on family status or age. The IRS sets annual maximum contribution limits for QSEHRAs, which are adjusted each year. For 2025, the maximum reimbursement limits are $6,350 for self-only employees and $12,800 for employees with family coverage.

QSEHRA contributions made by employers are generally tax-deductible for the business. Reimbursements received by employees for qualified medical expenses and individual health insurance premiums are typically tax-free, provided the employee maintains minimum essential coverage. Employers must notify employees at least 90 days before the plan begins, detailing the annual benefit amount and the impact on premium tax credits.

Direct Comparison of ICHRA and QSEHRA

The distinctions between ICHRA and QSEHRA significantly influence which option an employer might select to provide health benefits. A primary difference lies in the employer size and eligibility requirements. ICHRA is accessible to businesses of any size, from small startups to large corporations, making it a versatile choice for a broad range of employers. Conversely, QSEHRA is exclusively available to small employers with fewer than 50 full-time equivalent employees.

A significant divergence also exists in contribution limits. ICHRA plans have no statutory maximum contribution limits, allowing employers to offer any amount for reimbursement, providing substantial flexibility in benefit design. In contrast, QSEHRA is subject to annual maximum contribution limits set by the IRS, which for 2025 are $6,350 for self-only coverage and $12,800 for employees with family coverage. These fixed limits mean less flexibility for employers using QSEHRA compared to ICHRA.

The integration with group health plans also differs notably. An employer offering a QSEHRA cannot offer a traditional group health plan alongside it; the QSEHRA must be the sole health benefit offering. However, ICHRA offers more flexibility, allowing employers to offer a group health plan to certain classes of employees while providing an ICHRA to other distinct classes. An employer cannot offer the same employee a choice between an ICHRA and a traditional group health plan.

Regarding employee eligibility and uniformity, QSEHRA mandates that the benefit generally be offered on the same terms to all eligible employees, though minor variations based on age or family size are permitted. ICHRA provides greater flexibility, enabling employers to establish different reimbursement amounts and eligibility rules for various employee classes, such as full-time, part-time, or employees in different geographic locations. This allows for more customized benefit structures under ICHRA.

The impact on premium tax credits is another key differentiator. For employees offered a QSEHRA, their eligibility for premium tax credits from the Marketplace may be reduced by the QSEHRA allowance, depending on the affordability of the QSEHRA offer. With an ICHRA, if the employer’s offer is deemed affordable based on specific IRS criteria (e.g., costing less than 9.02% of household income for self-only coverage in 2025), the employee may not be eligible for premium tax credits. If the ICHRA is not affordable, employees can reject it and claim tax credits if otherwise eligible.

However, there can be differences in reporting requirements. For instance, ICHRA, as a group health plan, typically requires annual Affordable Care Act (ACA) reporting via Forms 1094-C and 1095-C, while QSEHRA generally does not have these specific reporting obligations.