ICHRA vs. QSEHRA: How do they compare?

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.

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.

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 insurance status doesn’t affect their eligibility for a QSEHRA. Employees can participate whether they have an individual health insurance policy, a traditional group health plan from their spouse’s employer, an alternative healthcare solution like Medi-Share, or no insurance at all.

However, only employees with MEC can receive QSEHRA reimbursements free of income tax. Employees without MEC must report all QSEHRA 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.

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.