Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) and Individual Coverage Health Reimbursement Arrangements (ICHRAs) both allow small business employers to provide tax-free reimbursement of certain healthcare expenses to employees who maintain qualifying coverage, including an individual Marketplace plan.
Here is an overview of each benefit.
An ICHRA is a health benefit that employers can offer. It lets employees pick a health insurance plan they like from their chosen provider. The employer can then use the ICHRA to reimburse employees, tax-free, for the cost of their health insurance premiums and other eligible medical expenses.
ICHRAs work especially well for applicable large employers (ALEs) who need to meet the Affordable Care Act’s requirements. They can help you avoid the high costs of group health insurance and the hassle of dealing with annual price increases.
Rules for who can offer an ICHRA
Businesses of any size can offer an ICHRA. You can provide it as a standalone benefit or offer it to certain groups of employees, like those who are not covered under your group health plan.
A QSEHRA is similar to an ICHRA because it allows employers to reimburse employees, tax-free, for health insurance costs and other medical expenses. However, with a QSEHRA, employees don’t have to buy a qualifying individual health plan. They only need minimum essential coverage (MEC) to make sure reimbursements stay tax-free.
The IRS sets yearly limits on how much employers can contribute to QSEHRAs. Even if the employer allows leftover funds to roll over to the next year, the rollover amount cannot go over the next year’s limit.
Rules for who can offer a QSEHRA
Only smaller employers with fewer than 50 full-time workers can offer a QSEHRA. Unlike an ICHRA, a QSEHRA cannot be paired with a group health insurance plan or a Flexible Spending Account (FSA).
Check out the tables below for some of the key similarities and differences between these benefits.
| QSEHRA and ICHRA | |
|---|---|
| Funding source | The employer alone funds the QSEHRA or ICHRA. |
| Taxation | Reimbursements are generally tax-free for both employees and employers. |
| Premium tax credits | QSEHRA: If their monthly QSEHRA allowance does not qualify as affordable coverage, employees can claim a premium tax credit for individual coverage purchased through the Marketplace. ICHRA: If their ICHRA allowance qualifies as unaffordable coverage (and they decline it), employees may qualify for a premium tax credit. |
| Allowance usage | Employees can use their allowance only for qualifying expenses, as listed in IRS Publication 502. |
| QSEHRA | ICHRA | |
|---|---|---|
| Employer size | Employers with fewer than 50 full-time employees. | Employers of any size. |
| Employee health insurance requirement | Employees must have health insurance from a qualifying source to participate in a QSEHRA. | Employees must have individual health insurance from a qualifying source to participate in an ICHRA. |
| Group health plan compatibility | Employers cannot offer a group health plan alongside a QSEHRA. | Employers can offer an ICHRA alongside a group health plan, but not to the same class of employees. |
| Compatibility with Tricare and spousal employment-based health insurance | Integrates with Tricare and spousal employment-based health insurance. | Does not integrate with Tricare or spousal employment-based health insurance. |
| Reimbursement limits | Subject to IRS annual contribution limits. | Not subject to IRS limits—employers can reimburse as much as they want. |
| Allowance rules | The same QSEHRA terms apply to all employees, including allowance amounts. | Employers can allocate different ICHRA amounts to different classes of employees. |
| Rollover | Month-to-month and year-to-year rollovers are allowed, with restrictions. | Month-to-month and year-to-year rollovers are allowed, without restrictions. |
| W-2 reporting | Subject to W-2 reporting requirements. | Not subject to W-2 reporting requirements. |
If you’re interested in offering either QSEHRA or ICHRA to your team, we recommend Take Command Health because they offer policy flexibility and a focus on HRA administration. To learn more about Take Command Health, follow this referral link to set up a new HRA or speak with an expert.
Gusto no longer administers a QSEHRA.
QSEHRA benefits cannot be offered alongside small-group health insurance, including small-group health insurance offered through Gusto. ICHRA benefits can be offered alongside a group health plan, but not to the same class of employees.
Once you offer QSEHRA or ICHRA through a third party (such as Take Command Health), you can set up tax-free payroll reimbursements in Gusto.
ICHRA and QSEHRA have different reporting requirements.
ICHRA benefits do not need to be reported on employee W-2s. If you have questions about ACA reporting requirements, contact your ICHRA provider.
Employers offering a QSEHRA must include certain details on their employees’ Form W-2s.
Payroll admins should report QSEHRA totals when completing the end-of year special compensation prompt on your Home page in Gusto, then we'll add them to employee tax forms.
How employers must report QSEHRA on the W-2
Employers must report the total amount an employee is allowed to receive from the QSEHRA for the year. This amount goes in box 12 on Form W-2 and is labeled with code FF. It’s important to note that this is the total permitted benefit, not just the amount the employee actually used.
Here are two different examples of permitted benefits and what is reported on the W-2.
Example 1:
Example 2:
What happens if an employee was reimbursed through QSEHRA during a month in which they did not have MEC?
Employees or their family members must have minimum essential coverage (MEC) to get tax-free reimbursements from a QSEHRA. If the employer mistakenly reimburses expenses for someone without MEC during a given month, reimbursements in that month are taxable.
Here’s how to report taxable reimbursements on the Form W-2:
For more help, reach out to your QSEHRA plan administrator or review IRS Notice 2017-67.