How to Set Up an HRA for Small Business: QSEHRA and ICHRA Steps

To set up an HRA for a small business, choose between the two federally authorized formats — a Qualified Small Employer HRA (QSEHRA) or an Individual Coverage HRA (ICHRA) — then draft an ERISA plan document and Summary Plan Description, deliver a written notice to every eligible employee at least 90 days before the plan year begins, and put a system in place to verify coverage, review claims, and handle the annual tax reporting. The rest of the work is filling in the details each of those steps requires.

Step 1: Pick QSEHRA or ICHRA

The plan type you choose drives every later decision, so start here.

A QSEHRA is available only to employers that are not applicable large employers (generally fewer than 50 full-time equivalent employees) and that do not offer a group health plan to any employee. The benefit has to be offered on the same terms to all eligible employees, although amounts can vary by employee age or family size. The IRS caps annual reimbursements: for 2026, $6,450 for self-only coverage and $13,100 for family coverage. Going over the cap costs the arrangement its tax-exempt status.¹²

An ICHRA is open to employers of any size and gives you more room to design the benefit. You can split your workforce into any of eleven permissible classes — full-time, part-time, salaried, hourly, seasonal, employees in a particular geographic rating area, employees under a collective bargaining agreement, and others — and offer different amounts to each class.³ There is no federal cap on ICHRA contributions. The tradeoffs: every participating employee must be enrolled in individual health insurance that meets federal standards, and you cannot offer a traditional group plan to the same class receiving the ICHRA.⁴

Step 2: Confirm You Have Eligible Employees and Check the Owner Rules

HRAs are for employees, and several common owner situations are excluded. Sole proprietors, partners in a partnership, and LLC members treated as self-employed cannot receive tax-free HRA reimbursements from their own company’s plan.⁵ You generally need at least one common-law employee who is not the owner or the owner’s spouse to have an HRA at all.

S-corporation shareholders who own more than 2% of the company’s stock can receive HRA benefits, but the value has to be included in their wages for federal income tax; the employer can still exclude those amounts from Social Security, Medicare, and federal unemployment taxes.⁶ Owners shut out of their own HRA may still be able to claim the self-employed health insurance deduction on their personal return.

Step 3: Design the Plan

Start Date and Who’s Eligible

Any start date works as long as it leaves you time to complete the 90-day employee notice; the beginning of a calendar year or a quarter is typical. Under a QSEHRA, every eligible employee has to receive the same benefit, but you can exclude employees who have worked fewer than 90 days, are under age 25, or are part-time or seasonal workers as defined by federal rules.¹

Under an ICHRA, you lock in your class definitions before the plan year starts and cannot change them mid-year.

Contribution Amounts

QSEHRA contributions cannot exceed the annual IRS cap ($6,450 self-only and $13,100 family for 2026); you can offer less.² The caps are adjusted annually for inflation.

An ICHRA has no federal maximum, so you set the number. If you have fewer than 50 full-time equivalent employees, the ICHRA affordability rule that applies to larger employers doesn’t reach you, but your contribution level still affects whether your employees can access marketplace subsidies (see the last section).

Eligible Expenses

Both plan types can reimburse anything that qualifies as medical care under federal tax law — doctor visits, prescriptions, hospital services, mental health treatment, dental and vision, certain medical equipment. Cosmetic procedures generally do not qualify unless they address a deformity from a congenital condition, injury, or disease.⁷ You can limit reimbursements to insurance premiums, to out-of-pocket costs, or cover both. Nail this down before employees start submitting claims.

Carryover

Decide whether unused funds roll into the next plan year or expire. For a QSEHRA, carryover is allowed, but the rolled amount plus the new year’s allowance cannot exceed that year’s IRS cap. An ICHRA has no statutory cap, so you simply write your carryover rule into the plan. A use-it-or-lose-it design keeps the annual budget predictable.

Step 4: Draft the Plan Document and Summary Plan Description

Both QSEHRAs and ICHRAs are ERISA plans, so you need a written plan document and a Summary Plan Description in place before the plan takes effect. Most small employers hire a third-party administrator or an employment attorney rather than drafting from scratch.

The plan document is the legal blueprint: eligibility requirements, contribution amounts, plan year dates, covered expenses, claims and appeals procedures, and the carryover or forfeiture rule. It governs plan operation and is what you point to if a dispute comes up.

The Summary Plan Description goes to every eligible employee and has to explain the plan in plain language, not legalese. It must cover how to submit a claim, how reimbursements are calculated, the payment timeline, and how to appeal a denial, along with the legal name of the plan administrator and the address for service of legal documents.⁸ Distribute the SPD within 120 days of the plan’s effective date, or within 90 days of when a new employee becomes eligible.

Step 5: Send the 90-Day Employee Notice

Both plan types require written notice to every eligible employee at least 90 days before the plan year begins. For employees who become eligible mid-year, the notice must go out on or before the date they first become eligible.

A QSEHRA notice must include three items: the employee’s permitted benefit amount for the year, a statement telling the employee to report that amount to any marketplace where they apply for subsidies, and a statement that reimbursements may be taxable if the employee lacks minimum essential coverage in any month.¹ Missing the deadline triggers a $50-per-employee penalty for each failure, capped at $2,500 per calendar year, unless you can show reasonable cause and not willful neglect.⁹

An ICHRA notice must describe the maximum dollar amount available, whether family members are eligible, the plan year dates, and a statement telling employees to give this information to the marketplace if they apply for premium tax credits.¹⁰ The Department of Labor publishes a model notice you can adapt; using it is optional but reduces the chance of missing a required element.

Step 6: Run the Plan — Substantiation and Reimbursements

For an ICHRA, verify each employee’s individual health insurance coverage twice: once at the start of the plan year through an annual attestation, and again with each reimbursement request confirming the employee had qualifying coverage in the month the expense was incurred.¹¹ DOL publishes a model attestation form.

Employees submit documentation of premiums or qualifying medical expenses — receipts, explanation-of-benefits statements, invoices — and the administrator checks each submission against the plan’s covered-expense list and the employee’s available balance. Approved reimbursements go to the employee free of federal income and payroll tax, provided the coverage requirement was met. Keep records for at least six years to satisfy ERISA and IRS audits.

Step 7: Meet the Annual Tax Reporting Obligations

Once the plan is running, three reporting duties come around each year.

QSEHRA W-2 reporting. Report the total permitted QSEHRA benefit on the employee’s W-2 in Box 12 using Code FF. The amount reported is what the employee was entitled to receive, not what they actually used. Any taxable reimbursements (for example, from a month without minimum essential coverage) go in Box 1 as wages.²

ICHRA coverage reporting. Small employers offering an ICHRA that are not subject to the employer shared-responsibility provisions (generally fewer than 50 FTEs) report covered individuals on Forms 1094-B and 1095-B, using code G on line 8 of Form 1095-B to identify the ICHRA.¹²

PCORI fee. Both plan types count as self-insured health plans for the Patient-Centered Outcomes Research Institute fee. For plan years ending after September 30, 2025, and before October 1, 2026, the fee is $3.84 per average covered life. Report and pay on Form 720 by July 31 of the year after your plan year ends.¹³

What to Tell Employees About Marketplace Subsidies

An HRA offer changes what an employee can claim on the health insurance marketplace, and the effect differs by plan type. This is why both notices require language directing employees to report the benefit to the marketplace.

A QSEHRA benefit generally reduces the employee’s premium tax credit by the amount of the permitted benefit, whether or not the employee uses it all. If the QSEHRA makes marketplace coverage affordable under the federal test, the employee loses the credit entirely for those months.¹⁴

An employee offered an ICHRA cannot receive premium tax credits for marketplace coverage unless they opt out of the ICHRA and the offer is considered unaffordable.¹⁵ An employee cannot receive both an ICHRA reimbursement and a premium tax credit for the same month.

1
Office of the Law Revision Counsel. 26 USC 9831 – General Exceptions
2
Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
3
eCFR. 29 CFR 2590.702-2 – Special Rule Allowing Integration of Health Reimbursement Arrangements With Individual Health Insurance Coverage
4
eCFR. 29 CFR 2510.3-1 – Employee Welfare Benefit Plan – Section: Safe Harbor for Health Reimbursement Arrangements
5
HealthCare.gov. Individual Coverage Health Reimbursement Arrangements (HRAs)
6
Internal Revenue Service. Employer’s Tax Guide to Fringe Benefits
7
Office of the Law Revision Counsel. 26 USC 213 – Medical, Dental, Etc., Expenses
8
eCFR. 29 CFR 2520.102-3 – Contents of Summary Plan Description
9
Office of the Law Revision Counsel. 26 USC 6652 – Failure to File Certain Information Returns, Registration Statements, Etc.
10
U.S. Department of Labor. Individual Coverage HRA Model Notice
11
U.S. Department of Labor. Individual Coverage HRA Model Attestations
12
IRS. 2025 Instructions for Forms 1094-B and 1095-B
13
Internal Revenue Service. Patient-Centered Outcomes Research Trust Fund Fee: Questions and Answers
14
Office of the Law Revision Counsel. 26 USC 36B – Refundable Credit for Coverage Under a Qualified Health Plan
15
Internal Revenue Service. Questions and Answers on the Premium Tax Credit