Small businesses that want to offer health benefits without the cost and complexity of a group plan have two IRS-approved options: ICHRA and QSEHRA. Both let the employer fund tax-free health reimbursements; the differences come down to employer size, annual limits, and flexibility. (Self-employed owners who pay their own premiums use a different mechanism covered in self-employed health insurance deduction.)
What Is a Health Reimbursement Arrangement?
An HRA is an employer-funded account that reimburses employees for qualified health expenses. The employer sets an annual allowance, employees submit receipts for eligible expenses, and the employer reimburses them. Employees cannot contribute to an HRA.
For tax purposes, employer contributions are deductible as a business expense and employee reimbursements are excluded from gross income. They are also exempt from FICA and FUTA, provided the employee has qualifying coverage.
QSEHRA: For Small Employers Under 50 FTEs
The Qualified Small Employer HRA is designed for businesses with fewer than 50 full-time equivalent employees that do not offer any group health plan.
2026 limits (Rev. Proc. 2025-32):
- Self-only coverage: $6,450 per year ($537.50 per month)
- Family coverage: $13,100 per year ($1,091.67 per month)
An arrangement that exceeds these limits does not qualify as a QSEHRA. It becomes a non-compliant group health plan, potentially triggering an excise tax under IRC Section 4980D of up to $100 per day per affected employee.
Key rules:
- Must be offered on the same terms to all eligible employees; benefit amounts may vary by number of family members covered and by age-driven premium differences, but no other variation is permitted
- Employees must have qualifying minimum essential coverage (MEC) to receive tax-free reimbursements
- Written notice must be provided at least 90 days before the plan year begins (October 3 for a January 1 start); new hires receive notice no later than the date they become eligible
- Permitted benefit (the maximum reimbursement available for the year; distinct from actual amounts paid) reported on Form W-2, Box 12, Code FF
- Cannot coexist with any group health plan offered by the same employer
ICHRA: For Employers of Any Size
The Individual Coverage HRA has no federal dollar cap and is available to businesses of any size.
Key rules:
- Employees must have qualified individual coverage (ACA-compliant plan or Medicare)
- Employer can set different allowances for different classes of employees (full-time, part-time, seasonal, geographic location, etc.)
- Allowances must be offered on the same terms to all employees within a class; variation within a class is permitted only for age (up to a 3:1 ratio between oldest and youngest) and number of dependents
- For applicable large employers (50+ FTEs), the ICHRA offer is treated as employer-sponsored coverage under ACA rules and must pass an affordability test
- ICHRA is an ERISA-covered group health plan and requires a written plan document and summary plan description; employers with 100+ participants file Form 5500
ICHRA and the ACA Marketplace
CautionAn employee who accepts an ICHRA offer loses eligibility for ACA premium tax credits, regardless of whether the ICHRA is affordable. An employee who is offered an unaffordable ICHRA may opt out and claim the premium tax credit instead. For 2026, affordability is measured by whether the employee's net cost (the premium for the lowest-cost silver self-only plan on the exchange, minus the ICHRA monthly amount) exceeds 9.96% of household income (Rev. Proc. 2025-25). Before setting ICHRA amounts for employees who currently receive marketplace subsidies, model the interaction carefully.
Comparing QSEHRA and ICHRA
| QSEHRA | ICHRA | |
|---|---|---|
| Employer size | Under 50 FTEs | Any size |
| 2026 annual cap | $6,450 / $13,100 | No cap |
| Employee classes | No (uniform offer) | Yes (by class) |
| Group plan combo | Not permitted | Permitted for different employee classes |
Reporting Requirements
Both plans carry specific compliance obligations:
- QSEHRA: Box 12, Code FF on Form W-2 reports the permitted benefit (the maximum available for the year), even if the employee received no actual reimbursements. The arrangement must also include proper plan documentation and employee notices.
- ICHRA: Reported under ACA Section 6056 employer reporting for applicable large employers. ICHRA is not reported on Form W-2. All employers must provide employees a written notice at least 90 days before the plan year (Treas. Reg. §54.9802-4(c)(6) and parallel DOL/HHS regulations).
Which Option Fits Your Business?
A QSEHRA works well for small businesses with straightforward benefits goals and a workforce that largely carries individual marketplace plans. The annual cap keeps employer cost predictable.
ICHRA makes more sense when you want to offer different allowances to different categories of employees, or when your workforce is large enough that the QSEHRA employee limit applies.
Both plans let you offer health benefits without designing or administering a traditional group plan.
Questions about setting up an HRA for your business? Contact TS CPA for a free consultation. We respond within the same day.