Health Reimbursement Arrangements — HRAs — represent one of the most significant recent developments in small business benefits, yet they remain poorly understood by most employers and their advisors. HRAs allow small businesses to reimburse employees for health insurance premiums and medical expenses on a tax-free basis without the administrative complexity of a traditional group health plan. The two most relevant HRA types for small businesses — the Qualified Small Employer HRA (QSEHRA) and the Individual Coverage HRA (ICHRA) — were either created or dramatically expanded in 2020, making them among the newest significant tools in the small business benefits toolkit. This guide explains how each works, who they’re right for, and what you need to know before implementing one.
What Is a Health Reimbursement Arrangement?
A Health Reimbursement Arrangement is an employer-funded account that allows employers to reimburse employees tax-free for qualifying health care expenses. Unlike a Flexible Spending Account (FSA), which employees fund through pre-tax salary reductions, an HRA is funded entirely by the employer — employees make no contributions. Like an FSA, HRA reimbursements are tax-free to employees when used for qualifying expenses (IRS Publication 502 defines these, and the list is extensive — virtually all medical expenses qualify).
HRAs have existed since the early 2000s, but their use was severely restricted by ACA regulations that took effect in 2014. Many small employers who had been reimbursing employees for individual health insurance premiums on an informal basis were suddenly exposed to IRS penalties of $100/day/employee for non-compliance. The regulatory landscape changed dramatically with the 21st Century Cures Act in 2016 (which created QSEHRA) and IRS Notice 2019-45 and subsequent final regulations (which created ICHRA in 2020). These regulatory developments reopened HRAs as a legitimate, compliant tool for small business benefits.
QSEHRA: The Qualified Small Employer HRA
The QSEHRA — pronounced “cue-sarah” in industry shorthand — was created specifically for small businesses that want to offer health benefits without the complexity of a group health plan. To use a QSEHRA, the employer must have fewer than 50 full-time equivalent employees (not an Applicable Large Employer under the ACA), must not offer any group health plan to employees, and must provide the same terms to all full-time employees (though part-time employees can be excluded).
The QSEHRA allows the employer to set a defined annual dollar amount for reimbursement, up to federally established limits. For 2026, the QSEHRA limits are approximately $6,350 for self-only coverage and $12,800 for family coverage. Employers are not required to contribute the maximum — they can set any amount up to the limit. Importantly, the QSEHRA limit must be consistent for all eligible employees: you can’t give some employees $400/month and others $200/month based on salary or any other individual factor (you can, however, vary by coverage tier — a higher amount for employees with family coverage than for employees with self-only coverage).
Employees use their QSEHRA by enrolling in their own individual health insurance coverage — whether through the ACA marketplace, a spouse’s employer plan, Medicare, or directly from a carrier — and then submitting proof of coverage and qualifying expense receipts for reimbursement. Reimbursements come from the employer’s QSEHRA account, are tax-free to the employee (as wages are not increased), and are deductible as a business expense for the employer.
A critical interaction with ACA subsidies: if an employee would otherwise qualify for a premium tax credit through the marketplace, having access to a QSEHRA reduces their premium tax credit dollar-for-dollar, up to the QSEHRA amount. This means the government subsidy effectively transfers from the ACA marketplace to the employer-funded QSEHRA — the employee’s net outcome may be similar, but the funding source shifts. Employees must report their QSEHRA amount to the marketplace when applying for coverage.
ICHRA: The Individual Coverage HRA
The Individual Coverage HRA was introduced in 2020 and represents a more flexible, broader tool than QSEHRA. Unlike QSEHRA, ICHRA has no employer size limit — businesses of any size can use ICHRA, including those with more than 50 employees. ICHRA also has no maximum contribution limit — the employer can set any reimbursement amount that fits their budget. And unlike QSEHRA, ICHRA can be offered alongside a group health plan to different classes of employees.
The “classes” aspect of ICHRA is one of its most powerful features. Employers can offer ICHRA to some classes of employees while offering a traditional group health plan to others. Permitted classes include: full-time employees, part-time employees, seasonal employees, employees in a specific geographic area (such as a different state or city), salaried vs. hourly employees, and new employees in a waiting period. This flexibility allows a business to, for example, offer a traditional group plan to full-time employees at headquarters while offering ICHRA to part-time employees or remote workers in states where the group plan’s network is inadequate.
To use ICHRA benefits, employees must be enrolled in qualifying individual health coverage — ACA marketplace plans, certain employer-sponsored plans from a spouse, or Medicare Part A+B or Part C. Unlike QSEHRA, employees covered by ICHRA are not eligible for ACA premium tax credits during any month they’re covered by the ICHRA (the ICHRA is treated as affordable employer coverage, regardless of its amount, which disqualifies marketplace subsidy eligibility). This is an important consideration: if an employee would qualify for significant marketplace subsidies, the ICHRA may provide less total value than those subsidies.
QSEHRA vs. ICHRA: Which Is Right for Your Business?
The choice between QSEHRA and ICHRA depends on several factors specific to your business. For employers with fewer than 50 employees who don’t want to offer a group plan, QSEHRA is a straightforward, compliant option with simple, consistent contribution rules. Its main limitation is the annual contribution cap — for employers who want to provide more than approximately $528/month for family coverage, QSEHRA’s maximum may not be sufficient.
ICHRA is the right choice when: you have more than 50 employees, you want to offer HRA to some employees and a group plan to others, you want to contribute more than the QSEHRA maximums, or you want the flexibility to vary contributions by employee class. The absence of maximum limits and the class flexibility make ICHRA a more sophisticated tool — but it also comes with more complexity in administration, particularly around ACA affordability determinations for ALE employers.
For very small businesses (under 10-15 employees), the administrative overhead of either HRA type may outweigh the benefits compared to simply offering a small group plan through a carrier. HRAs work best when employees are capable of navigating the individual insurance market to find and enroll in their own coverage — which varies considerably across employee populations. Employees who are comfortable with technology, familiar with the ACA marketplace, and able to evaluate their own coverage options independently will have a better experience with HRA-based benefits than employees who are unfamiliar with individual insurance markets and may feel lost without the employer selecting a specific plan on their behalf.
Administrative Requirements and Compliance
Both QSEHRA and ICHRA have specific compliance requirements that employers must follow. For QSEHRA, employers must provide a written notice to eligible employees at least 90 days before the beginning of each plan year, or when an employee becomes eligible. The notice must include the maximum annual QSEHRA amount, a description of the requirement for employees to have minimum essential coverage, and information about potential marketplace subsidy implications.
ICHRA requires a similar annual notice, plus additional documentation for affordability calculations if you’re an ALE subject to the employer mandate. ICHRA also requires that employees confirm they have qualifying individual coverage before reimbursements are made — employees must attest to their coverage and often submit documentation on a monthly or quarterly basis.
Both HRA types require substantiation — employees must submit receipts or other documentation of qualifying expenses before reimbursement is made. Employers cannot simply deposit money into an account without documentation of a qualifying expense. This substantiation requirement is what distinguishes compliant HRAs from taxable compensation, and it requires either a manual expense review process or administration software that manages submissions and approvals.
HRA Administration Software and Third-Party Administrators
Administering an HRA manually — tracking employee submissions, verifying coverage documentation, processing reimbursements, maintaining required records — is feasible for a handful of employees but becomes cumbersome for larger groups. Third-party administrators (TPAs) and HRA administration software platforms handle these functions at a monthly fee per employee, typically $10-20/month. Well-known platforms include Take Command Health, PeopleKeep, Remodel Health, and others that specialize in QSEHRA and ICHRA administration.
These platforms provide: employee portals for submitting expense documentation, automated verification workflows, reimbursement processing, required notice generation, and reporting for compliance purposes. For employers implementing an ICHRA or QSEHRA without dedicated HR staff, these platforms dramatically reduce the administrative burden and reduce the risk of compliance errors.
Frequently Asked Questions
Can I offer a QSEHRA if I currently have a group health plan?
No. QSEHRA is only available to employers that do not offer any group health plan to the employees receiving the QSEHRA. If you currently have a group plan, you’d need to terminate it before implementing a QSEHRA. ICHRA, by contrast, can be offered to separate employee classes while maintaining a group plan for other classes.
What happens to unused QSEHRA or ICHRA funds at year-end?
Unlike HSAs, which carry over indefinitely, HRA funds either carry over to the next plan year (at the employer’s discretion) or are forfeited at year-end. The employer sets the carryover policy when designing the HRA. Many employers allow a limited carryover — say, up to $500 — as an employee retention feature while maintaining control over the maximum accumulation.
Are QSEHRA and ICHRA compatible with HSAs?
QSEHRA is compatible with employee HSA contributions, though it restricts what the QSEHRA can reimburse. If an employee has an HSA and wants to maintain HSA eligibility, the QSEHRA can only reimburse expenses that wouldn’t disqualify HSA eligibility (primarily the premium for an HDHP). ICHRA can be designed as “HDHP-only” to preserve employee HSA eligibility.
HRAs represent a meaningful alternative to traditional group health insurance for many small businesses — but the right choice depends on your specific workforce, budget, and administrative capacity. Garden State Benefits helps small business owners throughout our 26-state service area evaluate whether an HRA or traditional group coverage is the right fit. Call Paul Z Olah at 856-880-6340 for a free consultation.