Comparing the ICHRA and the QSEHRA

Offering health benefits to your employees is one of the most important things you can do as a business owner. But between the different options available, the IRS rules, and the ever-changing regulations, navigating the world of health insurance can feel overwhelming.

If you've been looking for an alternative to traditional group health insurance, you've probably come across two options: the ICHRA and the QSEHRA. Both are types of Health Reimbursement Arrangements that allow employers to reimburse employees for health insurance costs on a tax-free basis. They are worth understanding, so in this article, we'll break down what each of these plans is, who qualifies for them, how they compare to one another, and how to get started. By the time you finish reading, you'll have a clear picture of which option might be the right fit for your business and your team.

Key Takeaways from this Article

• Both the ICHRA and QSEHRA allow employers to reimburse employees for health insurance premiums and qualified medical expenses on a tax-free basis.
• The QSEHRA is designed exclusively for small businesses with fewer than 50 full-time employees, while the ICHRA is available to employers of any size.
• The QSEHRA has IRS-set annual contribution limits, whereas the ICHRA has no contribution cap, giving employers more flexibility in how much they reimburse.
• With an ICHRA, employers can offer different reimbursement amounts to different classes of employees, while a QSEHRA must be offered on the same terms to all eligible employees.
• Neither plan requires an employer to offer a traditional group health plan, making both a potentially cost-effective alternative for businesses looking to provide meaningful health benefits.

What is an HRA?

An HRA, or Health Reimbursement Arrangement, is an employer-funded account that reimburses employees for qualified health insurance premiums and medical expenses. Unlike Health Savings Accounts (HSAs) or Flexible Spending Accounts (FSAs), HRAs are entirely funded by the employer, and there’s no option for employee contributions. The employer sets the rules, determines the budget, and funds the account. Employees then use that money to pay for their own health coverage and eligible out-of-pocket medical costs.

HRAs have been around for a long time, but the rules surrounding them have changed significantly over the years, particularly after the Affordable Care Act came into play. Two of the most relevant HRA options for small and mid-sized businesses today are the ICHRA and the QSEHRA. Let's look at each one individually.

What is an ICHRA?

The Individual Coverage Health Reimbursement Arrangement, or ICHRA, was introduced in 2020 and quickly became one of the most flexible health benefit options available to employers. The idea of the ICHRA is that instead of offering a traditional group health plan, an employer reimburses employees for the cost of their own individual health insurance and other qualified medical expenses.

What makes the ICHRA stand out is its flexibility. There are no contribution limits, meaning employers can decide exactly how much they want to reimburse each month. Employers can also set different reimbursement amounts for different classes of employees, such as full-time employees, part-time employees, seasonal workers, or employees in different geographic locations. This level of customization simply doesn't exist with most traditional health plans.

Another important feature is that the ICHRA can work alongside a traditional group health plan, as long as the two are not offered to the same class of employees. So if a business wants to offer a group plan to full-time employees and an ICHRA to part-time employees, that is allowed.

It is also worth noting that employees who participate in an ICHRA must have their own individual health insurance that meets ACA requirements. Employees cannot use ICHRA funds without having qualifying individual coverage in place.

Who is Eligible for the ICHRA?

One of the biggest advantages of the ICHRA is that it is available to employers of any size. Whether you have five employees or five hundred, you can offer an ICHRA. There is no minimum or maximum employee count.

On the employee side, workers must be enrolled in an individual health insurance plan that meets ACA standards in order to participate. Employers have the ability to define which classes of employees are eligible and what reimbursement amounts apply to each class. This gives businesses a lot of control over how the benefit is designed and distributed.

It is important to know that employees who receive an affordable ICHRA offer are generally not eligible for a premium tax credit on the ACA Marketplace. However, if the ICHRA offer is deemed unaffordable under ACA guidelines, employees may have the option to opt out of the ICHRA and claim a premium tax credit instead.

What is a QSEHRA?

The Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, was created in 2016 and was the first HRA of its kind designed specifically for small businesses. Like the ICHRA, it allows employers to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-free basis.

The QSEHRA is simple and straightforward to set up and administer, and it gives small business owners a legitimate way to help employees with health care costs without the price tag of a traditional group plan. One thing to keep in mind is that the QSEHRA does come with IRS-set annual contribution limits. For 2026, the maximum reimbursement is $6,450 per year for employees with self-only coverage and $13,100 per year for employees with family coverage. These limits are adjusted by the IRS each year.

Unlike the ICHRA, a QSEHRA cannot be offered alongside a group health plan. If a business offers any form of group health coverage, the QSEHRA is off the table.

Who is Eligible for the QSEHRA?

The QSEHRA is exclusively for small employers, specifically for businesses with fewer than 50 full-time equivalent employees that do not offer a group health plan.

On the employee side, workers must have qualifying health coverage, known as Minimum Essential Coverage, in order to receive tax-free reimbursements. This can include individual plans purchased on or off the ACA Marketplace, Medicare, a spouse's employer-sponsored plan, COBRA, or TRICARE.

One important distinction from the ICHRA is that a QSEHRA must be offered to all eligible full-time employees on the same terms. You cannot offer different reimbursement amounts to different employees based on their role or classification. There are limited exceptions — for example, you can offer different amounts based on whether an employee has individual or family coverage — but the QSEHRA is largely a uniform benefit across your workforce.

Employers offering a QSEHRA are also required to report the benefit amount on employees' W-2 forms each year using code FF in Box 12.

ICHRA vs QSEHRA: How Do They Compare?

FAQs on the ICHRA and the QSEHRA

Can I offer an ICHRA or QSEHRA if I already have a group health plan?

If you currently offer a group health plan, you can still offer an ICHRA — but there are rules around it. You cannot offer an ICHRA to the same class of employees already covered under your group plan. However, you could offer a group plan to one class of employees, like full-time workers, and an ICHRA to another class, like part-time employees. The QSEHRA is less flexible in this regard. If any group health plan is in place, the QSEHRA cannot be offered at all. It is an either/or situation for small employers considering the QSEHRA.

What happens if an employee does not have health insurance?

For both the ICHRA and the QSEHRA, employees must have qualifying health coverage in order to receive tax-free reimbursements. Without it, any reimbursements made on their behalf would be considered taxable income, which defeats the purpose of the arrangement for both parties. This is why it is so important to communicate clearly with employees from the start. They need to understand that obtaining and maintaining their own individual health coverage is a requirement for participating in either plan. Employees who are unsure where to start can explore options through the ACA Marketplace at healthcare.gov.

Can business owners participate in these plans?

This is a common question, and the answer depends largely on how your business is structured. Sole proprietors, partners in a partnership, and S-corporation shareholders who own more than 2% of the company generally cannot participate in these plans as employees. However, if you are a business owner who is also a W-2 employee of your company, such as a shareholder in a C-corporation, you may be eligible to participate. Because the rules here can get complicated quickly, we always recommend consulting with a tax professional or your benefits broker to understand exactly how your specific situation applies before setting anything up.

Are these plans available year round?

Yes, and this is one of the features that makes both plans appealing. Neither the ICHRA nor the QSEHRA is tied to traditional open enrollment periods, so you are not locked into a January start date. You can implement either plan at any point during the year that makes sense for your business. When you do launch a new plan mid-year, it automatically triggers a special enrollment period for your employees, giving them the opportunity to shop for and enroll in individual health coverage outside of the standard enrollment window. This is especially helpful for businesses that are just getting started with offering health benefits.

Do employees keep their coverage if they leave the company?

Yes, and this is actually one of the most employee-friendly aspects of both arrangements. Because employees purchase and own their individual health insurance plans directly — rather than being covered under an employer-sponsored group plan — they can take that coverage with them when they change jobs or leave the company. They simply take over paying the premiums on their own. There is no steep COBRA premium increase or scramble to find new coverage during a job transition. For employees, this kind of portability can be a meaningful and often overlooked benefit.

How do I setup an ICHRA or a QSEHRA?

The good news is that setting up either plan is more straightforward than you might expect. Both arrangements require a formal written plan document — this is an IRS requirement and not something you want to skip. Employees must also receive written notice of the benefit at least 90 days before the plan year begins, outlining the amount available and how the plan works. From there, employees need to provide proof of qualifying health coverage before reimbursements can begin.

The details do matter here, and getting things set up correctly from the start will save you headaches down the road. One resource worth knowing about is PeopleKeep, a software platform that specializes in HRA administration. They handle the plan documentation, employee notifications, reimbursement tracking, and compliance requirements on your behalf, making the day-to-day management of an ICHRA or QSEHRA much more hands-off for business owners. It is a solid option for employers who want a dedicated tool built specifically for this purpose.

Conclusion

Providing health benefits does not have to mean signing up for an expensive group health plan that stretches your budget. The ICHRA and the QSEHRA both offer legitimate, tax-advantaged ways to help your employees access health coverage while giving you control over your costs.

The right choice really comes down to the size of your business, whether you already offer a group plan, and how much flexibility you need. If you are a small employer with fewer than 50 employees and want a simple, uniform benefit, the QSEHRA may be a great fit. If you need more customization, have a larger workforce, or want to offer different benefit levels to different employee groups, the ICHRA is worth a closer look.

Written: February 2026

Written by: Chris Cluff