By: HUB’s EB Compliance Team
Health Reimbursement Arrangements (“HRA”) are employer funded arrangements that can reimburse employees, on a tax-free basis, for certain out-of-pocket medical expenses and/or premiums. They also come in several different varieties. Recently, HUB wrote about one such type, Excepted Benefit HRAs (“EBHRA”). This article will focus on the similarities and differences between two other HRA types; Individual Coverage HRAs (“ICHRA”) and Qualified Small Employer HRAs (“QSEHRA”).
Introduction
ICHRAs and QSEHRAs both allow employers to reimburse employees tax-free for individual health insurance premiums and qualifying medical expenses. Both are employer-funded (as HRAs are required to be), neither requires a traditional group health plan, and both share a common lineage in the broader HRA regulatory framework. But the similarities largely end there. The two arrangements differ materially in employer eligibility, contribution flexibility, employee coverage requirements, ACA interactions, and reporting obligations. These distinctions are important for employers to consider in evaluating either of these options.
Employer Eligibility
The threshold question is employer size. A QSEHRA is available only to "eligible employers" — those with fewer than 50 full-time equivalent employees (“FTE”) that do not offer a group health plan to any employee. Effectively only non-applicable large employers (“ALE”) under the Affordable Care Act (“ACA”) are eligible to offer a QSEHRA.
An ICHRA, by contrast, is available to employers of any size. All employers, including those eligible to offer a QSEHRA may offer an ICHRA. An employer may offer an ICHRA alongside a group health plan, provided the two are offered to different classes of employees — subject to the allowable classification and minimum class size rules.
Contribution Limits
QSEHRAs are subject to annual IRS contribution caps. For plan years beginning in 2026, the maximum permitted benefit is $6,450 ($537.50 per month) for self-only coverage and $13,100 ($1,091.66 per month) for family coverage. Amounts must be prorated for employees who become eligible mid-year. Even with rollover provisions, accumulated amounts cannot exceed the following year's statutory maximum.
ICHRAs have no statutory contribution ceiling. Employers set the allowance amount at their discretion, subject to the requirement that all employees within the same class receive the same terms (with permitted variation by age and family size using an age-based ratio that cannot exceed 3:1). ALEs offering an ICHRA must also ensure the employer’s contribution results in an offer of affordable coverage based on the lowest cost silver plan available to the employee in order to avoid potential ACA penalties.
Employee Classes and Uniformity
QSEHRAs operate on a single-class model. All eligible employees must be offered the benefit on the same terms, with variation permitted only by age and number of covered family members. There is no ability to differentiate by job category, geography, or employment classification.
ICHRAs permit employers to establish distinct employee classes based on IRS-defined criteria, including full-time vs. part-time status, salaried vs. hourly, geographic rating area, seasonal employee status, employees covered under a collective bargaining agreement, and employees who have not yet met a waiting period. Each class may receive different employer contributions, giving employers significantly more design flexibility.
Coverage Requirements for Employees – Flexibility for QSEHRAs
Under a QSEHRA, employees must have minimum essential coverage (“MEC”) as defined in 26 U.S.C. § 5000A(f). The type of MEC is broadly defined — it includes individual market coverage, a spouse's group plan, Medicare, Medicaid, and TRICARE, among others. Importantly, the QSEHRA must condition reimbursement on the employee's proof of MEC; an arrangement that reimburses employees who have not provided proof of MEC risks failing to qualify as a QSEHRA altogether, potentially subjecting the employer to excise taxes.
Under an ICHRA, employees must be enrolled in individual health insurance coverage — meaning an individual market plan or Medicare — to participate at all. Coverage under a spouse's employer-sponsored group plan does not qualify. This is a narrower requirement that reduces the eligible participant pool in practice, particularly where employees have access to a spouse's group coverage.
The broad definition of MEC applicable to QSEHRAs allows employees to potentially enroll in coverage under a spouse’s employer and still use QSEHRA funds towards out-of-pocket medical expenses. This is an important advantage for QSEHRAs as compared to ICHRAs, which specifically require enrollment in only individual coverage or Medicare. Employers eligible to offer either an ICHRA or QSEHRA should consider this flexibility as part of their decision making process.
QSEHRAs – An Important Limitation
While the broad definition of MEC is favorable for QSEHRAs, the rules also contain an important limitation for QSEHRAs that may limit their usefulness. Employers offering a QSEHRA may not offer any group health plan to any employee. For these purposes "group health plan" is defined broadly to include other HRAs, health care FSAs, and even standalone excepted benefit plans such as employer-sponsored vision, dental, life insurance, disability, accident, critical illness, or indemnity coverage
The one carve-out is HSAs: an employer may contribute to an employee's HSA alongside a QSEHRA, but only if the QSEHRA is designed to reimburse premiums only — not out-of-pocket medical expenses.
ICHRA v. QSEHRA Comparison
| ICHRA | QSEHRA | |
|---|---|---|
| Employer Eligibility | No size restrictions | Only non-ALEs who averaged less than 50 full-time equivalent employees in the prior calendar year |
| Contribution Limits | No limits on employer contributions | Limits on employer contributions adjusted annually - $6,450 for individuals / $13,100 for families in 2026 |
| Coverage Requirements | Individual coverage or Medicare | Minimum Essential Coverage – includes individual coverage, Medicare, Medicaid, TRICARE, and coverage under a spouse’s employer group plan |
| Ability to Vary Contributions | By age, family size and between allowable classes | By age and family size only |
| Impact to Other Benefits | No restrictions on employers offering other, non-medical benefits | Employers offering a QSEHRA cannot offer other “group health plans” including excepted benefits such as dental, vision, life, or disability coverage |
Conclusion
While ICHRAs and QSEHRAs have similarities, there are also many key differences – starting with employer eligibility. Employers who are eligible to offer either option need to consider these differences in determining which is a better fit.
If you have any questions, please contact your HUB Advisor. View more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
Neither Hub International Limited nor any of its affiliated companies is a law or accounting firm, and therefore they cannot provide legal or tax advice. The information herein is provided for general information only and is not intended to constitute legal or tax advice as to an organization’s or individual's specific circumstances. It is based on Hub International's understanding of the law as it exists on the date of this publication. Subsequent developments may result in this information becoming outdated or incorrect and Hub International does not have an obligation to update this information. You should consult an attorney, accountant, or other legal or tax professional regarding the application of the general information provided here to your organization’s specific situation in light of your or your organization’s particular needs.