ICHRA vs. QSEHRA: What Is the Difference?

Offering health benefits can be challenging for small businesses when the cost or administrative burden of traditional group health insurance doesn’t fit the company’s — or employees’ — needs. Health reimbursement arrangements (HRAs) offer another option: Instead of choosing a group health plan for employees, employers can reimburse eligible workers for individually purchased health insurance premiums and other qualified medical expenses.

This guide covers two primary types of HRAs: individual coverage HRA (ICHRA) and qualified small employer HRA (QSEHRA). Although the arrangements have similarities, they differ in eligibility, contribution limits, plan design, and employees’ tax credits. Read on to determine which is best for your small business.

What is an ICHRA (CHOICE Arrangement)?

An ICHRA, which was recently rebranded as a CHOICE arrangement, is an employee-sponsored arrangement that reimburses employees for individual health premiums and other qualified medical expenses (if the plan design allows). Unlike traditional group health insurance, employees must obtain their own qualified health insurance policy. Employees are then reimbursed, with employer funds, up to a set amount the employer establishes when creating the arrangement.

[Read more: What Is ICHRA? A Plain-English Guide for Small Business Owners]

What is a QSEHRA?

A QSEHRA is an employer-funded benefit program designed for small businesses that want to help employees with health insurance costs without offering a traditional group plan.

“It has federally indexed annual reimbursement limits and generally must be provided on the same terms to eligible employees, although permitted variations include age and family size,” explained Dean Clune, Small Business Solutions Practice Leader at Gallagher.

Like the ICHRA, employees in a QSEHRA choose and pay for their own individual insurance and are reimbursed by their employer up to a set limit, though the latter is subject to an annual federal limit.

ICHRA vs. QSEHRA: Key differences

Although both HRAs let employers reimburse employees for individual health coverage rather than purchasing a traditional group policy, their rules differ in several important ways worth considering before implementation.

Business size and eligibility

“QSEHRA was created with smaller employers in mind,” Kevin Deutsch, Chief Growth Officer at healthcare operations platform Softheon. “Generally, it is available to employers with fewer than 50 full-time employees and full-time equivalents, based on the prior calendar year.”

Employers with an ICHRA don’t have the same employee restrictions. The arrangement's flexibility often makes it appealing to a small but growing employer.

Contribution limits

While both HRAs are employer-funded, QSEHRA reimbursements are subject to an annual federal cap. For 2026, the maximum permitted benefit is $6,450 for self-only coverage and $13,100 for family coverage, according to Healthcare.gov.

ICHRAs have no federal annual reimbursement ceiling, so employers can make as much money available through an ICHRA as they see fit.

Depending on the plan design, unused ICHRA or QSEHRA allowances may carry over from month to month or into the next plan year. Any QSEHRA reimbursements must still comply with the applicable annual federal limit, while ICHRAs are not subject to a federal contribution cap.

Employee eligibility and plan design

Both types of HRAs have specific eligibility and nondiscrimination rules you must follow to stay compliant. However, ICHRAs offer greater flexibility within those eligibility parameters than QSEHRAs.

“ICHRA allows employers to create different contribution levels for different employee classes, while QSEHRA generally must be offered on the same terms to eligible employees, though reimbursement amounts can vary based on age and family size,” said Deutsch.

Premium tax credits

ICHRAs and QSEHRAs also treat subsidies differently. Carson Hornish, an independent health insurance broker and Owner of Carson Health Advising, explained that, with QSEHRAs,  employees who purchase a marketplace plan can still get a premium tax credit, reduced by the employer-designated QSEHRA amount. 

“With an ICHRA, an employee who is offered an allowance that counts as affordable cannot claim a premium tax credit at all,” Hornish added.

[Read more: Employee Benefits Tax Deductions: Guide for Business Owners]

Which HRA is right for your business?

When determining the best HRA for your small business, the decision comes down to eligibility, contribution flexibility, and workforce structure.

“I start with two questions: How many people are on payroll, and do you want a fixed budget or a fixed benefit?” Hornish explained. “A business under 50 with a modest budget and a simple team is usually well served by a QSEHRA. A business that wants a larger allowance, wants to treat groups of employees differently, or expects to grow past 50 should look at an ICHRA.”

Make your HRA decision based on what you know: your workforce. If you have benefits goals you want to achieve for your small business and the people who champion it, choose the arrangement that best suits your vision—and your employees’ needs.

Before you make your final decision, keep in mind that HRAs are not automatically less expensive or easier to manage than group insurance, said Clune.

“The individual market, provider networks, employee subsidies, and administrative experience must all be evaluated before deciding whether an HRA is a better fit,” he added.

[Read more: Small Business Health Insurance Abbreviations and Acronyms]

How to set up an ICHRA or QSEHRA

While the specific requirements differ between ICHRAs and QSEHRAs, employers generally follow these steps when setting up their HRAs:

• Confirm eligibility and choose an HRA. Make sure your business meets the requirements for the arrangement you want to offer.
• Set reimbursement budget and terms. Decide how much your business will make available to employees and which qualified expenses you'll reimburse. 
• Create formal plan documents. Establish written documents detailing the arrangement's eligibility requirements, reimbursement terms, covered expenses, and other applicable rules.
• Notify employees and verify coverage. Provide employees with required notices within applicable deadlines and establish a process for confirming that participating employees have qualifying health coverage. QSEHRA notices generally must be provided to eligible employees at least 90 days before the beginning of each plan year, with different timing applying to employees who become eligible later.
• Establish a reimbursement process. Determine how employees will submit and substantiate eligible expenses and how reimbursements will be processed and documented. Employers should also account for any ongoing reporting and recordkeeping requirements.

Whichever HRA you choose will be subject to federal requirements and can have tax implications for employers and employees. Because of this, consider working with a benefits administrator, broker, tax adviser, or another qualified professional to assist you in implementing an HRA.

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