HRAs Explained: What Is a QSEHRA, What Is an ICHRA, and How Do They Differ?

A health reimbursement arrangement (HRA) lets an employer reimburse employees for individual health insurance premiums and qualifying medical expenses on a tax-free basis under IRC Section 105. Two designs dominate for small businesses and pass-through entity owners: the qualified small employer HRA (QSEHRA), which is statutory and capped, and the individual coverage HRA (ICHRA), which is regulatory and uncapped. The right choice depends on employer size, workforce composition, and how much design flexibility matters. Neither arrangement requires the employer to sponsor a group health plan, which is the central appeal of both. Readers should confirm current contribution limits and ACA interaction rules on IRS.gov, as figures adjust annually and ICHRA rules in particular carry regulatory rather than statutory footing.

Before 2017, an employer that wanted to help employees pay for individual health insurance premiums faced a serious problem: the IRS treated that reimbursement as a group health plan that failed ACA market reform requirements, triggering an excise tax of $100 per employee per day under IRC Section 4980D. Congress fixed this for small employers with the 21st Century Cures Act, which created the QSEHRA. Treasury later created the ICHRA through regulation, extending the concept to employers of any size.

Both arrangements share the same core mechanic: the employer sets a monthly allowance, employees submit substantiated expenses, and reimbursements flow out tax-free to the employee and deductible to the employer. Neither requires a group health plan. That is where the similarity largely ends.

QSEHRA: The Statutory Option for Small Employers

The QSEHRA lives in IRC Section 9831(d). It is available only to employers with fewer than 50 full-time equivalent employees - the same threshold that defines an applicable large employer (ALE) under the ACA employer mandate. If an employer crosses that line, QSEHRA eligibility is lost entirely.

Key structural rules:

Annual contribution limits are set by statute and adjusted for inflation each year. Confirm current figures at IRS.gov before plan design - the self-only and family limits differ and are not the same as HSA limits.
Uniform benefit rule: The employer must offer the same terms to all eligible employees. Variation by class is not permitted the way it is under ICHRA.
ACA premium tax credit interaction: If an employee is otherwise eligible for a premium tax credit on the exchange, the QSEHRA benefit reduces that credit dollar for dollar. The employer must provide written notice to employees annually so they can account for this on Form 8962.
No group health plan permitted: An employer offering a QSEHRA cannot simultaneously offer a traditional group health plan. The two are mutually exclusive.

The QSEHRA is simple to administer and the statutory basis gives it more durability than a purely regulatory arrangement. The tradeoff is rigidity - contribution limits cap the benefit, and class-based design is not available.

ICHRA: The Regulatory Option With No Size Limit and No Cap

The ICHRA was created by Treasury and IRS final regulations effective January 1, 2020 (84 Fed. Reg. 28888). It is not codified in the IRC the way the QSEHRA is - a distinction that matters for long-term planning because regulatory arrangements can be modified or rescinded without an act of Congress.

Key structural rules:

No contribution cap. An employer can reimburse any dollar amount. This makes the ICHRA workable for larger employers and for employers who want to provide a genuinely robust benefit.
No employer size limit. ALEs can use an ICHRA. This is the primary reason a 50-plus employee company would choose ICHRA over QSEHRA.
Employee class design. The ICHRA permits different allowance amounts for different classes of employees - full-time vs. part-time, salaried vs. hourly, employees in different geographic rating areas, and others defined in the regulations. This is the most powerful design feature QSEHRA lacks.
ACA employer mandate interaction: For ALEs, an ICHRA can satisfy the employer mandate if it meets affordability standards. The affordability calculation uses a different safe harbor than traditional group plan affordability - confirm current percentages with IRS guidance before relying on this.
ACA premium tax credit interaction: An employee offered an affordable ICHRA cannot claim a premium tax credit. If the ICHRA is unaffordable, the employee can opt out and claim the credit instead. This opt-out right is a required feature of ICHRA design.
Individual coverage requirement: Employees must be enrolled in individual health insurance (including Medicare) to receive ICHRA reimbursements. Reimbursement of expenses without underlying individual coverage is not permitted.

Side-by-Side Comparison

Feature	QSEHRA	ICHRA
Legal basis	Statutory - IRC Section 9831(d)	Regulatory - Treasury/IRS final rule (2019)
Employer size limit	Fewer than 50 FTEs	None
Annual contribution cap	Yes - inflation-adjusted annually	None
Class-based benefit design	No - uniform benefit required	Yes - defined employee classes permitted
Group health plan permitted alongside	No	No (for same class of employees)
ACA employer mandate satisfaction	Not applicable (small employer)	Yes, if affordability standards met
Employee opt-out right	No formal opt-out mechanism	Required if ICHRA is unaffordable

Which One Fits Which Situation

The QSEHRA is typically the right starting point for a small employer - under 50 FTEs - that wants a simple, uniform benefit and is not concerned about hitting the contribution cap. The statutory footing is a real advantage for employers who want predictability.

The ICHRA becomes the better fit when any of the following apply:

The employer has 50 or more FTEs and needs to satisfy the ACA employer mandate without sponsoring a group plan.
The employer wants to offer different benefit levels to different classes of workers - for example, a higher allowance for full-time employees and a lower one for part-time.
The employer wants to provide reimbursements above the QSEHRA statutory cap.
The employer operates in multiple geographic markets where individual insurance costs vary significantly, and class-based design by rating area makes the benefit more equitable.

One planning note relevant to pass-through entity owners: more-than-2-percent S corporation shareholders and partners are not treated as employees for fringe benefit purposes under IRC Sections 1372 and 707(c). HRA reimbursements to these individuals do not receive the same tax-free treatment available to rank-and-file employees. This is a common design error worth addressing before an arrangement is put in place.

Can an S corporation owner participate in a QSEHRA or ICHRA on the same tax-free basis as employees?

No. A more-than-2-percent shareholder of an S corporation is treated as a partner, not an employee, for fringe benefit purposes under IRC Section 1372. HRA reimbursements paid to a more-than-2-percent shareholder are includible in their gross income and reported on Form W-2. The shareholder may then be eligible to deduct the premiums as self-employed health insurance under IRC Section 162(l), but the tax-free exclusion available to common-law employees does not apply. Plan design for S corporations with owner-employees requires careful attention to this distinction.

Does an employee need to be enrolled in an ACA-compliant plan to use an ICHRA?

The employee must be enrolled in individual health insurance coverage or Medicare. The coverage does not need to be purchased through an ACA exchange - off-exchange individual plans qualify. Short-term limited-duration insurance does not qualify for ICHRA purposes. The employer is responsible for substantiating that employees have qualifying coverage before processing reimbursements.

What happens to unused ICHRA or QSEHRA funds at year end?

Both arrangements can be designed to allow or disallow carryover of unused balances - this is an employer plan design choice. Unlike an HSA, neither an ICHRA nor a QSEHRA is an account owned by the employee. There is no portability right when employment ends. The employer controls whether unused amounts carry forward, and that decision should be documented in the written plan document required for both arrangements.