A QSEHRA and an ICHRA both let an employer reimburse workers tax-free for individual health insurance premiums and qualifying medical expenses, but the two arrangements differ on who can offer them, how much can be contributed, and how they interact with marketplace premium tax credits. The Qualified Small Employer Health Reimbursement Arrangement is limited to businesses with fewer than 50 full-time equivalent workers that offer no group health plan. The Individual Coverage Health Reimbursement Arrangement has no size limit and no contribution cap, but comes with tighter coverage verification and a different effect on employee subsidies. Which one fits depends on your headcount, how much you want to spend per employee, and whether your workers rely on marketplace credits.
Who Can Offer Each Arrangement
The QSEHRA has two hard gates under 26 U.S.C. § 9831(d)(3)(B). The employer must have averaged fewer than 50 full-time equivalent employees the prior calendar year, and it cannot offer any group health plan to any employee.1Office of the Law Revision Counsel. 26 USC 9831 – General Exceptions That includes group dental and vision. If you currently sponsor group coverage of any kind, you have to drop it before setting up a QSEHRA.
The ICHRA has no size restriction. A one-employee business and a company with thousands of workers can each offer one. The constraint is different: an employer cannot offer an ICHRA and a traditional group plan to the same class of employees.2Centers for Medicare & Medicaid Services. Individual Coverage Health Reimbursement Arrangements: Policy and Application Overview Splitting the workforce so some classes get group coverage and others get an ICHRA is permitted, but that triggers minimum class size rules.
Contribution Limits
This is the sharpest practical difference. The QSEHRA has a statutory annual cap that adjusts each year. For 2026, the maximum permitted benefit is $6,450 for self-only coverage and $13,100 for family coverage.3Internal Revenue Service. Rev. Proc. 2025-32 Going over disqualifies the arrangement from tax-preferred treatment. For anyone who becomes eligible partway through the year, the limit prorates by month.
The ICHRA has no federal cap. You can set the allowance at $200 a month or $2,000 a month. The only financial rule is that everyone in the same employee class gets the same terms, with limited room to vary by age (within a 3-to-1 ratio) and dependent count. For a growing company that wants to offer a competitive benefit, or one that expects to adjust spending significantly year to year, the ICHRA’s open ceiling is often the deciding factor.
How Each Affects Premium Tax Credits
The interaction with marketplace subsidies is where the two arrangements diverge most and where employees are most likely to be caught off guard.
QSEHRA: Dollar-for-Dollar Offset
A QSEHRA reduces the employee’s premium tax credit by the full monthly permitted benefit. The IRS subtracts the monthly QSEHRA benefit from the tentative credit and floors the result at zero.4Internal Revenue Service. Premium Tax Credit (PTC) The reduction is tied to the benefit the employee is entitled to receive, not the amount actually claimed. Submit no reimbursements at all, and the full permitted benefit still cuts the credit.5HealthCare.gov. Qualified Small Employer HRAs Employees cannot opt out to preserve their subsidy. If they’re taking advance credits, they need to lower the advance amount by the QSEHRA benefit, or they’ll owe money back at tax time.
ICHRA: Affordability Test and Opt-Out
The ICHRA uses an affordability test rather than an automatic offset. For 2026, an ICHRA offer is affordable if the employee’s remaining cost for the lowest-cost silver plan in their area, after the ICHRA allowance is applied, is less than 9.96% of household income.6Internal Revenue Service. Rev. Proc. 2025-25 If the offer is affordable, the employee gets no premium tax credit at all, even if they decline the ICHRA.7HealthCare.gov. Individual Coverage Health Reimbursement Arrangements If the offer is unaffordable, the employee can opt out and claim credits through the marketplace instead. It’s a genuine either/or: the ICHRA or the subsidy, not both. A newly offered employee gets a 60-day special enrollment period to switch to marketplace coverage if they opt out.
What Employees Must Have for Coverage
Both arrangements require employees to carry their own health insurance, but the specifics differ.
A QSEHRA participant must maintain minimum essential coverage for themselves and any family members the arrangement covers. Marketplace plans, coverage through a spouse’s employer, and Medicare all qualify.5HealthCare.gov. Qualified Small Employer HRAs If the employee lacks that coverage for any month, the reimbursements for that month become taxable income.
An ICHRA participant faces a stricter rule. They must be enrolled in individual health insurance or in Medicare Parts A and B (or Part C) for the entire time they’re being reimbursed.8HealthCare.gov. Individual Coverage HRAs Short-term limited-duration insurance, health care sharing ministries, fixed indemnity plans, and association health plans do not qualify. The employer must verify qualifying coverage before issuing any reimbursement.
Employee Classes and Benefit Variation
The QSEHRA has to be offered on the same terms to all eligible employees. No segmentation by job title, no varying amounts by compensation.
The ICHRA can be segmented across 11 permitted employee classes defined in federal regulation, including full-time, part-time, salaried, hourly, seasonal, employees under a collective bargaining agreement, employees in a waiting period, non-resident aliens with no U.S.-based income, temporary workers, employees grouped by geographic rating area, and combinations of these.9eCFR. 26 CFR 54.9802-4 – Special Rule Allowing Integration of Health Reimbursement Arrangements Within any single class, everyone gets the same terms.
Minimum class sizes only apply when the employer offers a group plan to one class and an ICHRA to another. The thresholds are at least 10 employees for companies with fewer than 100 eligible workers, at least 10 percent for companies with 100 to 200 employees, and at least 20 employees for larger organizations.9eCFR. 26 CFR 54.9802-4 – Special Rule Allowing Integration of Health Reimbursement Arrangements Offer an ICHRA to everyone with no group plan alongside it, and minimum class sizes don’t apply at all.
What Each Reimburses
Both arrangements can reimburse qualified medical expenses under Internal Revenue Code Section 213(d): individual insurance premiums, dental and vision, prescriptions, copays, deductibles, lab work, mental health care, and medical equipment. An employer can narrow the list of eligible expenses in the plan documents but cannot expand it beyond what 213(d) allows.
On premiums, the QSEHRA reimburses any individual coverage that qualifies as minimum essential coverage. The ICHRA reimburses individual insurance premiums and Medicare, and the employer decides whether the ICHRA also covers out-of-pocket medical expenses or is limited to premiums alone. An ICHRA that only reimburses premiums is treated as an insured plan and is exempt from Section 105(h) nondiscrimination testing. One that reimburses out-of-pocket costs too is treated as self-insured and must pass those tests, with safe harbors for variations that follow the class and age rules.
Tax Treatment and Rollovers
The core tax result is the same for both. Employer contributions are deductible and not subject to FICA or FUTA. Reimbursements are excluded from the employee’s gross income and not subject to income tax or withholding, as long as the coverage requirements are met. Both arrangements are more tax-efficient than simply raising wages to help employees buy insurance.
Unused funds belong to the employer in both cases. Either plan can be designed to let unused balances roll forward while the employee stays with the company, or to reset at year-end.10HealthCare.gov. Health Reimbursement Arrangements (HRAs) for Small Employers Neither is portable. When an employee leaves, the balance stays with the employer.
Compliance and Reporting
Both arrangements carry administrative duties that are easy to miss.
A QSEHRA employer must give each eligible employee a written notice at least 90 days before the plan year starts. For mid-year hires, the notice is due on or before their eligibility date. The notice has to state the permitted benefit amount, tell the employee to report that amount when applying for premium tax credits, and warn that lacking minimum essential coverage will make reimbursements taxable.11Internal Revenue Service. Affordable Care Act Tax Provisions for Employers The permitted benefit also gets reported on the W-2 using Code FF in Box 12. The reported figure is what the employee was entitled to receive, not what was claimed. A $6,000 permitted benefit with only $3,500 in claims still shows $6,000 on the W-2.12Internal Revenue Service. 2026 General Instructions for Forms W-2 and W-3
An ICHRA employer must verify each participant’s qualifying coverage at the start of the plan year and before every reimbursement.2Centers for Medicare & Medicaid Services. Individual Coverage Health Reimbursement Arrangements: Policy and Application Overview Because ICHRAs are treated as self-insured plans, employers with 20 or more workers must offer COBRA continuation to participants who lose eligibility. Calculating the COBRA premium usually means either a past-cost method based on prior-year average usage or an actuarial estimate. ICHRAs also owe the Patient-Centered Outcomes Research Institute fee, reported on Form 720 for the second quarter, due July 31 of the year following the plan year.13Internal Revenue Service. Patient-Centered Outcomes Research Institute Fee
Failing the requirements of either arrangement triggers an excise tax of $100 per day per affected employee under 26 U.S.C. § 4980D. For a 10-person company, a violation left uncorrected for a year would produce a $365,000 penalty. The clock runs from when the failure first occurs until it’s fixed.14Office of the Law Revision Counsel. 26 USC 4980D – Failure to Meet Certain Group Health Plan Requirements Common triggers are reimbursing someone without qualifying coverage, exceeding the QSEHRA cap, and skipping the required QSEHRA notice.
Choosing Between Them
If your business has fewer than 50 full-time equivalent employees, the QSEHRA and the ICHRA are both on the table. The QSEHRA is simpler to administer, has no COBRA obligation, and delivers a predictable statutory benefit ceiling. It’s a poor fit if you want to contribute more than the annual cap allows, if you want to vary benefits across employee groups, or if you want to keep any group coverage in place.
The ICHRA opens up higher contributions, class-based design, and the ability to run alongside a group plan for a different class. It costs you more compliance work, coverage verification before each reimbursement, and, for larger employers, COBRA and PCORI obligations. On the employee side, the affordability test creates a cleaner opt-out path for workers who would do better with a marketplace subsidy than the older-style dollar-for-dollar QSEHRA offset allows.
If any employee is likely to qualify for a significant premium tax credit, model the numbers both ways before committing. The subsidy math is often what tips the decision.