Health Reimbursement Arrangement Selection (QSEHRA vs ICHRA vs Integrated)

Why this matters

Trade-business owners with 5 to 50 employees face a recurring problem with health benefits: a traditional group plan is expensive, administratively heavy, and forces every employee into the same plan whether the plan fits their family or not. Health Reimbursement Arrangements (HRAs) let the business reimburse employees for individual coverage they buy on their own, pre-tax, with a defined contribution that is predictable to the budget. Two HRA flavors apply to most trades: QSEHRA (for under-50-employee businesses) and ICHRA (for any size). Picking between them and the legacy integrated HRA is the working decision that owners typically defer because the rules look complex. They are not complex once mapped to the business size and structure.

What an HRA is

An HRA is an employer-funded, tax-advantaged account that reimburses employees for qualified medical expenses, premiums, or both. The employer sets the annual contribution; unused balances either roll over or do not, depending on plan design. The employer takes the deduction; the employee receives the reimbursement tax-free (no income tax, no FICA, no state).

Unlike a group health plan, the employer is not the insurer. The employee buys individual coverage (or in some cases, the family is covered by a spouse's plan), and the HRA reimburses the premium and qualifying medical expenses.

Three current HRA flavors matter:

1. Integrated HRA. Paired with a group health plan; reimburses cost-sharing (deductibles, copays) on top of the group plan. Standard since the 1990s.
2. QSEHRA (Qualified Small Employer HRA). Created by the 21st Century Cures Act (2016). Stand-alone HRA (no group plan required) for businesses with fewer than 50 full-time equivalent employees.
3. ICHRA (Individual Coverage HRA). Created by 2019 final rules from Treasury, DOL, and HHS. Stand-alone HRA available to any-size business; reimburses individual coverage premiums and other medical expenses.

QSEHRA

Designed for the under-50-FTE business that does not want to manage a group plan but wants to offer health benefits.

Mechanics:

• Eligibility: business has fewer than 50 full-time-equivalent employees (FTE)
• Business cannot offer a group health plan to anyone
• Employer sets a maximum annual contribution within IRS-set caps
• Employee buys their own individual coverage on the marketplace or off
• Employer reimburses qualified medical expenses and premiums up to the cap
• Reimbursements are tax-free to the employee if the employee has minimum essential coverage (MEC); if no MEC, reimbursements become taxable
• Owner participation: yes for sole proprietors, partners, more-than-2-percent S-corp shareholders if the rules allow; consult plan-document language

IRS contribution caps for 2026 (subject to annual update via Revenue Procedure):

• Self-only: 6,350 per year (2025 value 6,350 per Rev Proc 2024-25; 2026 adjustment pending)
• Family: 12,800 per year (2025 value 12,800 per Rev Proc 2024-25; 2026 adjustment pending)

QSEHRA must be offered on the same terms to all eligible employees, with limited variation by family status. Reporting on Form W-2 Box 12 Code FF is required.

ICHRA

Designed for any-size business, including those that want different contribution amounts for different employee classes.

Mechanics:

• Any size business (no FTE cap)
• Business cannot offer a group plan to the same employee class but can offer different classes different benefits (group plan for one class, ICHRA for another, no benefit for a third)
• Employer sets the annual contribution per employee class; no IRS cap
• Employee must have individual coverage to participate (no MEC fallback)
• Employer reimburses individual coverage premiums and other qualified medical expenses
• ICHRA satisfies the Affordable Care Act employer mandate for ALEs (applicable large employers) if the contribution is affordable for at least one Silver-plan benchmark employee
• Owner participation: depends on entity structure; more flexible than QSEHRA for some structures

ICHRA classes available: full-time vs part-time, salaried vs hourly, geographic area, seasonal, collective bargaining, new hires, combinations. Each class can receive a different contribution; a full-time technician class can be offered higher contribution than a part-time helper class.

The integrated HRA is the traditional HRA paired with a group health plan. Less relevant today because QSEHRA and ICHRA solve most of the same problems without the group plan cost; use case is a business with a group plan it intends to keep that wants to add cost-sharing reimbursement on top.

Selection by business profile

Owner participation, ACA, and administration

Owner participation is the most-misunderstood HRA rule. Sole proprietors (Schedule C) and partners cannot participate as employees in their own QSEHRA or ICHRA, but a bona-fide W-2 spouse-employee CAN participate (opens family-coverage reimbursement). S-corp 2-percent shareholder-employees cannot participate; other W-2 employees do. C-corp shareholders and employees all participate normally. C-corp is sometimes chosen for full HRA participation; weigh the double-taxation downside.

ICHRA satisfies the ACA employer mandate for ALEs (50+ FTE) if the contribution is "affordable" (the lowest-cost Silver plan in the rating area costs no more than 9.02 percent of household income after ICHRA, 2024 threshold). QSEHRA does NOT satisfy the ACA employer mandate; a 50+ FTE business offering only QSEHRA is exposed to employer-shared-responsibility payments.

QSEHRA and ICHRA require a written plan document, annual employee notice (90 days before plan year for QSEHRA), substantiation, and reporting. Most administration is outsourced to a TPA (monthly per-participant fee) that handles substantiation, reimbursement, plan document, and ICHRA ACA affordability. TPA fees are worthwhile; mistakes trigger plan disqualification and back tax.

What an HRA is not

Not insurance (employee still buys individual coverage); not a cafeteria plan (Section 125 POP and FSAs are different vehicles); not stackable with FSA on the same employee in most cases; not retroactive (plan must be in effect before expenses are incurred).

References

• 26 USC 105 and 106 - Internal Revenue Code provisions on employer-provided health coverage
• 21st Century Cures Act (Public Law 114-255, 2016) - QSEHRA enabling statute
• 26 CFR 54.9802-4 and related sections - Treasury final rules on ICHRA (2019)
• IRS Notice 2017-67 - QSEHRA guidance
• IRS Revenue Procedure (annual) - QSEHRA inflation adjustments
• ACA employer shared responsibility provisions, IRC Section 4980H