ICHRA vs. QSEHRA: A Business Owner’s Guide to Health Reimbursement Arrangements

Providing health benefits does not always mean choosing one group insurance plan for your entire team. An Individual Coverage Health Reimbursement Arrangement (ICHRA) or Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) gives eligible employers another way to contribute toward employees’ health care.

Both can offer budget control and employee choice. But the rules differ substantially, especially when it comes to employee eligibility, contribution amounts and Marketplace subsidies. A useful comparison looks at both the employer’s budget and what employees will actually pay.

How these arrangements work

The employer establishes a formal reimbursement benefit, sets an allowance and reimburses eligible expenses after required documentation is provided. Depending on the plan, eligible expenses can include insurance premiums and other medical costs. Properly structured reimbursements generally receive favorable federal tax treatment. The HRA itself is employer funded; employees do not contribute to it through salary reductions. ^{[1] [2]}

For example, an employer might establish a $400 monthly premium allowance. If an employee has a $550 eligible premium, the arrangement could reimburse $400 and the employee pays the remaining $150. The allowance is a reimbursement limit, not an automatic cash payment.

An HRA is different from a Health Savings Account (HSA). Employees do not automatically own the unused allowance or receive it as cash when they leave.

Terminology note: Some current federal resources refer to ICHRAs as “CHOICE Arrangements.” This article uses ICHRA, the familiar name many employers and benefits professionals still use. ^[14]

ICHRA and QSEHRA at a glance

Question	ICHRA	QSEHRA
Who can offer it?	Employers of any size.	Eligible small employers that are not applicable large employers under the ACA.
Annual federal allowance cap?	No federal dollar cap; the employer sets its contribution.	An IRS maximum applies and is adjusted annually.
Can employees receive different allowances?	Yes, across permitted classes; same-terms rules apply within each class.	Generally the same terms for all eligible employees, with limited permitted variations.
Can the business also offer group medical coverage?	Yes, to separate permitted classes; employees generally cannot choose between both.	The employer cannot offer a group health plan to any current employees.
What coverage must employees maintain?	Qualifying individual health insurance or Medicare Parts A and B, or Part C.	Minimum essential coverage, which can include individual insurance, Medicare or coverage through a spouse’s job.
How do federal premium tax credits interact?	An affordable offer generally blocks credits. An unaffordable offer requires opting out to pursue credits.	An affordable benefit blocks credits. An unaffordable benefit reduces otherwise available credits.

The practical distinction: ICHRA provides more design flexibility; QSEHRA provides a more uniform benefit for eligible small employers. ^{[1] [2] [4] [7]}

What qualifies an employer to offer a QSEHRA?

The employer must not be an ACA applicable large employer (ALE). Generally, that means averaging fewer than 50 full-time employees, including full-time equivalents, in the preceding calendar year. Related businesses may have to be counted together; a simple headcount of full-time staff can be misleading. ^{[2] [3]}

The employer also cannot offer a group health plan to any current employees. This restriction extends beyond group medical insurance: an employer-sponsored group dental or vision plan, health FSA or another HRA can also disqualify the employer. Review the entire benefits package before choosing QSEHRA. ^[3]

The arrangement must be funded only by the employer, stay within IRS limits and generally provide the same terms to every eligible employee. For 2026, the annual maximum is $6,450 for self-only coverage or $13,100 for family coverage. Employers can choose lower allowances. Limits are prorated for employees eligible for only part of the year; verify the applicable year’s limit before implementation. ^[6]

Which employees can be excluded from a QSEHRA?

A QSEHRA can exclude the following categories when its written terms and the applicable definitions support the exclusion:

Employees who have not completed 90 days of service.
Employees who have not reached age 25 before the beginning of the plan year.
Part-time or seasonal employees under the applicable rules.
Employees covered by a collective bargaining agreement when health benefits were the subject of good-faith bargaining.
Nonresident aliens with no U.S.-source earned income.

These are permitted exclusions, not ICHRA-style benefit classes. An employer generally cannot give managers $500 and other eligible employees $200 simply because of their titles. Limited allowance variations based on age and family size must follow the same-terms rules; they are not permission to negotiate individual deals. ^{[2] [6]}

What qualifies an employer to offer an ICHRA?

Employers of any size can offer an ICHRA, and there is no federal annual contribution cap. A small business can offer it even if it does not offer traditional group medical coverage. ^[1]

Employees and any dependents covered by the ICHRA must maintain qualifying individual health insurance or Medicare Parts A and B, or Part C. Coverage only through a spouse’s group plan does not satisfy ICHRA’s integration requirement. Short-term insurance and health care sharing arrangements do not substitute for qualifying individual coverage. ^{[4] [5]}

An employer can offer traditional group medical coverage to one permitted class and an ICHRA to another. It generally cannot let employees within the same class choose between the two. The plan also must provide an annual opportunity to opt out. ^{[1] [5]}

Which employee classes can an ICHRA use?

Federal rules permit the following classes. Definitions must be documented and applied consistently. ^[4]

Permitted class	What it means
Full-time employees	Employees meeting the plan’s permitted full-time definition.
Part-time employees	Employees meeting the corresponding part-time definition.
Salaried employees	Employees paid on a salary basis.
Non-salaried employees	Employees paid on another basis, such as hourly.
Seasonal employees	Employees meeting a permitted seasonal definition.
Collectively bargained employees	Employees covered by a particular qualifying collective bargaining agreement.
Employees in a geographic area	Based on primary work location and insurance rating areas; permitted areas can be combined.
Employees in a waiting period	Employees who have not satisfied a lawful coverage waiting period.
Certain nonresident aliens	Nonresident aliens with no U.S.-based income.
Temporary staffing-firm employees	Employees hired by a staffing entity for temporary placement with another business.
Combinations of permitted classes	For example, salaried employees working in a defined geographic area.

Job title, performance, health status or an owner’s preference are not stand-alone permitted classes. A special prospective new-hire rule can allow a transition from group coverage to ICHRA; it does not create a general right to split existing employees by tenure. ^[5]

When minimum class sizes apply

When group coverage and ICHRA are offered to different classes, certain splits trigger a minimum size for the ICHRA class—for example, salaried versus hourly, full-time versus part-time, or geography smaller than a state. Where applicable:

Employer’s total employee count	Minimum ICHRA class size
Fewer than 100	10 employees
100–200	10% of employees, rounded down
More than 200	20 employees

The test counts employees offered the ICHRA, not just those enrolling. These minimums do not apply to every ICHRA design: a business offering only an ICHRA does not need 10 employees. Whole-state geographic classes and other exceptions have specific rules. ^{[1] [5]}

Within a class, ICHRA must be offered on the same terms, with permitted adjustments for age and covered dependents. Age-based increases cannot give the oldest participants more than three times the youngest participants’ allowance on that basis. ^[5]

Affordability: why an allowance can change an employee’s subsidy

“Affordable” has a technical meaning under federal law. It does not mean the employee personally feels the coverage fits their budget. The test compares a benchmark premium, after the relevant HRA allowance, with a percentage of household income.

The federal affordability percentage is 9.96% for 2026 and 10.22% for 2027. Use the percentage and rules applicable to the coverage period. ^{[9] [10]}

The benchmark differs: ICHRA generally uses the employee’s lowest-cost self-only Silver plan; QSEHRA uses the second-lowest-cost self-only Silver plan. The plan an employee actually chooses can cost more. ^[4]

QSEHRA: a reduced tax credit may remain

If QSEHRA is affordable, the employee generally cannot claim a federal Marketplace premium tax credit. If it is unaffordable and the employee otherwise qualifies, the credit is reduced by the applicable QSEHRA permitted benefit. The reduction is based on the available benefit, not just reimbursements used. Ignoring the allowance does not preserve the full credit. ^{[7] [8]}

Illustrative 2026 example: A single employee has $40,000 in annual household income, a $600 monthly second-lowest-cost self-only Silver premium and a $200 monthly QSEHRA allowance.

Calculation	Monthly amount
Affordability threshold: $40,000 × 9.96% ÷ 12	$332
Benchmark premium after allowance: $600 − $200	$400

Because $400 exceeds $332, the QSEHRA is unaffordable in this example. If the employee otherwise qualified for a $300 monthly tax credit, the $200 allowance would reduce that credit to $100. The employee does not receive the full $300 credit plus the $200 reimbursement. These are assumed numbers, not a subsidy quote. ^[7]

ICHRA: the employee must choose

An affordable ICHRA offer generally prevents premium tax credits even if the employee declines it. If the offer is unaffordable, the employee must opt out of ICHRA reimbursements to pursue a Marketplace tax credit and must otherwise qualify. The employee cannot use both for the same coverage month. ^[7]

Dependent eligibility also needs review. An HRA offer can affect family members’ subsidy eligibility; do not assume the family-affordability rules for traditional group insurance apply in the same way. ^{[3] [4]}

The advantages for employers and employees

A defined employer budget. The business chooses the allowance and can model its maximum reimbursement commitment, plus administration costs.
Individual plan choice. Employees shopping for individual coverage can compare plans for their own doctors, medications and family needs.
Potential tax advantages. Compliant reimbursements can provide more value than an equivalent taxable wage increase.
Flexibility for a dispersed workforce. Employees can evaluate individual plans where they live, while ICHRA classes can support different workforce needs.

QSEHRA may fit a small employer seeking a uniform allowance within federal limits. ICHRA may fit an employer needing larger allowances, permitted employee classes or a path that can continue as the business grows. Neither guarantees lower total costs.

The risks and tradeoffs to evaluate

Employees may lose subsidies. Compare each household’s likely net cost, not just the employer’s contribution. Household details should be handled confidentially.
Plan access can vary. Check actual provider networks, prescriptions and out-of-area coverage. A familiar carrier name does not guarantee the same network as a group plan.
A fixed allowance does not freeze premiums. If premiums rise faster than the allowance, employees pay more.
Employees take on enrollment decisions. Provide help with plan selection, premium payments and reimbursement timing.
Administration still matters. Eligibility errors, missing notices and unsupported reimbursements can undermine the intended tax treatment.
HSA contributions need compatible design. An HRA that reimburses general medical expenses can interfere with HSA eligibility; review its reimbursement scope before pairing the benefits. ^[15]

Business owners do not automatically qualify personally

A business can qualify to provide an HRA for employees while its owner cannot participate on the same tax-free basis. Sole proprietors, partners and more-than-2% S-corporation shareholders generally cannot participate as tax-free employee HRA recipients. An LLC’s tax treatment matters, and family ownership attribution can affect the result. Confirm owner eligibility separately with the business’s tax adviser. ^[15] ^{[2] [3] [6]}

What does it take to set one up?

Use written plan terms, required employee notices, coverage verification and a process for substantiating eligible expenses. Annual notices generally follow a 90-day advance timetable, with special timing rules for newly eligible employees and newly established arrangements. Coordinate individual policy enrollment and effective dates before ending existing coverage. ^{[11] [12]}

QSEHRA permitted benefits must be reported on Form W-2 using Box 12, Code FF. ICHRA is a group health plan and can carry ERISA, COBRA and other obligations when applicable. An ALE must also evaluate ACA affordability, offers to full-time employees and dependents, and reporting; adopting an ICHRA alone does not eliminate employer-mandate exposure. ^{[1] [11] [13]}

For Washington employers, individual Marketplace coverage is accessed through Washington Healthplanfinder. Review local individual options alongside traditional group benefits before deciding. ^[16]

How to decide for your business

Start with four questions: Does the business qualify? Which employees must be included? What will employees pay after any subsidy changes? Do available individual plans meet their needs?

A side-by-side review should compare employer cost, employee net premiums, networks, prescriptions and administrative support. Sometimes an HRA is a strong fit. Sometimes traditional group coverage produces a better result.

Sapper Insurance can help business owners compare these paths and understand the tradeoffs before making a change. Call 425-363-4300 or email the Sapper team.

Reviewed November 4, 2026. This article provides general education, not individualized legal or tax advice. Contribution limits, affordability percentages and plan availability can change. Examples use 2026 figures unless stated otherwise.