ICHRA vs. QSEHRA: Which is a Better Choice for My Business?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) and a Qualified Small Health Reimbursement Arrangement (QSEHRA) are both health benefit plans that are best suited for employers that want an option that provides personalized benefits. Both allow an employer to set allowances to help their employees pay for health insurance policies and other medical expenses.
While an ICHRA and a QSEHRA are similar in several ways, there are aspects that set them apart, too. This article is designed to help you decide which one, if any, might be best for your situation by spelling out both the main similarities and differences between these two types of HRAs.
How are they the same?
Like other HRAs, a QSEHRA and an ICHRA both involve the employer reimbursing employees for health care expenses. In a nutshell, here is how they work.
- The employer sets an allowance. This monthly allowance is the maximum amount the company will pay out through the HRA.
- Employees purchase health care. Employees buy the health care products and services they want, possibly including individual health insurance. Both a QSEHRA and an ICHRA can reimburse any expense listed in IRS Publication 502.
- Employees submit reimbursement requests. This includes documentation that shows they incurred an expense, including the amount, the date it was incurred and a description of the product or service.
- Employers review and approve the requests, including the documentation, to ensure the expense is eligible for reimbursement.
- The employer reimburses employees tax-free. If approved, the employer reimburses the employee. Qualifying HRA reimbursements are tax deductible for the employer and tax-free for the participant.
How are they different?
Learning what differentiates ICHRAs from QSEHRAs is what can help when deciding which option is right for you. There are several main ways that they differ:
ICHRA: Can be offered by employers of all sizes.
QSEHRA: A business must have fewer than 50 full-time employees (or full-time equivalents), and it cannot also offer group health insurance, including dental or vision.
ICHRA: May be offered to employees based on 11 defined classes. Furthermore, contributions may also be structured differently for each class.
QSEHRA: All full-time employees must be offered a QSEHRA, although employers may exclude other classes of employees, such as part-timers, seasonal workers, or those younger than 26 at the start of the plan year. An easy way to remember this is that anyone who gets a W-2 must or can be included, while contractors or workers who receive a 1099 Form cannot be included.
Group health insurance
ICHRA: Group health insurance may be offered with an ICHRA as long as it is offered to different classes of employees. In other words, employees in the same class cannot be offered a choice between group coverage and an ICHRA.
QSEHRA: Cannot be offered with group health insurance of any kind, even a Flexible Spending Account.
Contributions and allowance caps
ICHRA: No annual contribution caps. Allowance amounts can carry over from one year to the next without restrictions.
QSEHRA: The IRS sets annual contribution and reimbursement limits for a QSEHRA – one amount for a single employee and one for employees with a family. QSEHRAs allow for a carryover provision if the employer permits it.
However, in both cases, employers may vary reimbursement amounts to employees based on age and family size. For example, single employees may be offered one amount, while those with dependents could be offered a higher amount.
Premium tax credits
ICHRA: Employees cannot have both an ICHRA and premium tax credits, so they have a choice: waive their tax credits and participate in the ICHRA or opt out of the ICHRA and use the tax credits.
QSEHRA: Employees with premium tax credits can enroll in a QSEHRA, but the amount of the tax credits must be reduced by the amount of their monthly QSEHRA allowance. So, if an employee is eligible for a $500 premium tax credit and is offered a $200 monthly QSEHRA allowance, she is entitled to $300 of their premium tax credit. Employees may not opt out of the QSEHRA.
So, why would an employer want to pay for the tax credits instead of letting the government foot the bill? Think of it as a benefit you’re offering employees, says John Donovan from KIG partner PrimePay. “We get that question all the time. The bottom line is the employer is offering a benefit that is much needed. And if you’re not offering anything, who is going to come to work for you? How are you going to hire and retain employees?”
But what are premium tax credits?
It’s a tax credit you can use to lower your monthly premium when you enroll in a plan through the Health Insurance Marketplace. The amount is based on the income estimate and household information you report on your Marketplace application.
If your income is between 100% and 400% of the federal poverty level, you qualify for premium tax credits that lower the monthly premium for a Marketplace health insurance plan. If your income is at or below 150% of the federal poverty level, you may qualify to enroll in or change Marketplace coverage through a Special Enrollment Period. If your income is above 400% of the federal poverty level, you do not qualify for premium tax credits. Note: The poverty level is based on the number of people in a household.
You can use all, some, or none of your premium tax credits in advance to lower the monthly premium. If you use more advance payments of the tax credit than you qualify for, you must repay the difference when you file your federal income tax return. If you use less premium tax credit than you qualify for, you’ll get the difference as a refundable credit when you file your taxes.
For more on premium tax credits, click here.
ICHRA: While W-2 reporting is not required for ICHRAs, there are other reporting requirements such as Form 1094/1095, PCORI fees and Form 5500. Click here for more detail about ICHRA reporting requirements.
QSEHRA: W-2 reporting is required (Box 12, code FF). Report the total allowance an employee was entitled to receive during a calendar year, without regard to the amount of payments or reimbursements the employee actually received. This excludes any carryover funds from the previous year.
You may prefer an ICHRA if you want to offer:
- A reimbursement limit that is higher than those allowed by a QSEHRA.
- Different allowance contributions to various classes of employees.
- A group health plan and an HRA together.
A QSEHRA may be more attractive because:
- You’re looking for an affordable alternative to a group health plan. Remember, you are not permitted to have a group health plan with a QSEHRA.
- It has an annual allowance limit.
- You want to reimburse insurance premiums in addition to medical expenses.
What’s best for you?
Here are some basic considerations to take into account to help you decide which, if either, is a good fit for your organization.
Company size. If your company already has 50 or more full-time employees (or full-time equivalents), you are not eligible for a QSEHRA.
Employee needs. If most of your workforce is paying for individual health insurance, an ICHRA may be a good choice. But if several of your employees are on their spouse’s group health policy, for example, a QSEHRA might make more sense because all employees can benefit.
Flexibility. An ICHRA affords more options because it can be offered to employees in different classes, or a combination of classes. Plus, you can offer an FSA with an ICHRA, but not with a QSEHRA.
Premium tax credits. If several employees qualify for premium tax credits, an ICHRA is likely a better option because it allows employees a choice between using their tax credits and using the ICHRA.
The learning curve
A good insurance broker, John says, will take the time to understand what the employer’s needs are and outline their options, weighing both the pros and cons. “When you have an employer who is venturing into this realm for the first time, it’s up to the broker to educate the client. Maybe they need to cut costs or retain employees. Depending on the need, sometimes it’s better to go the HRA route, but sometimes it’s sticking with the current group health plan.”
Likewise, it’s important to educate employees who have never known anything other than a traditional group health plan and are now switching to one of these HRAs, he says.
“The employees must shift from a broker walking them through the health plan to going on a website and choosing from several different options. How do you know what plan is better? You want them to understand the process when it’s foreign to them,” John says.
Both ICHRAs and QSEHRAs come with their own set of advantages and disadvantages, and neither is necessarily a one-size-fits-all approach. So, if you want to talk through which may – or may not -- be a better choice for your unique situation, give us a call and we can help guide you through the decision-making process.