QSEHRA vs ICHRA vs HRA: Employer Health Benefit Options
Health Reimbursement Arrangements have been around for decades, but the landscape changed dramatically in 2020 when two new types — QSEHRA and ICHRA — entered the picture. Now employers have three distinct paths for reimbursing employees’ health expenses, each with different rules, limits, and tradeoffs.
Choosing the wrong one can mean unnecessary restrictions, compliance headaches, or missed opportunities to attract talent. This guide walks through all three types, compares them head-to-head, and helps you pick the right fit based on your company size and goals.
What Is an HRA?
A Health Reimbursement Arrangement (HRA) is an employer-funded plan that reimburses employees for qualified medical expenses and, in some cases, health insurance premiums. The employer decides how much to contribute, and employees submit claims for eligible expenses.
Key characteristics of all HRAs:
- Employer-funded only — employees cannot contribute their own money
- Tax-advantaged — employer contributions are tax-deductible, and reimbursements are tax-free to employees
- Employer-designed — the employer sets the contribution amount, eligible expenses, and plan rules
From there, the three types diverge significantly.
Traditional HRA (Group Coverage HRA)
The traditional HRA — sometimes called a “group coverage HRA” since 2020 — is the original model. It’s been available since 2002 and is typically offered alongside a group health insurance plan.
How It Works
The employer offers group health insurance and pairs it with an HRA to help cover out-of-pocket costs like deductibles, copays, and coinsurance. Employees must be enrolled in the employer’s group plan to participate.
Key Features
- Must be paired with group health insurance — employees can’t use it standalone
- No contribution limits — the employer can set any reimbursement amount
- Employer controls eligible expenses — can be limited to specific categories
- Unused funds can roll over — at the employer’s discretion
- Available to any size employer — no headcount restrictions
Best For
Employers who already offer group health insurance and want to help employees with out-of-pocket costs. Common with high-deductible health plans where the HRA offsets the higher deductible.
QSEHRA (Qualified Small Employer HRA)
The Qualified Small Employer Health Reimbursement Arrangement was created by the 21st Century Cures Act in 2016 and became available in 2017. It was designed specifically for small employers who don’t offer group health insurance.
How It Works
Instead of providing group coverage, the employer gives employees a monthly allowance to reimburse individual health insurance premiums and qualified medical expenses. Employees purchase their own insurance — typically through the ACA marketplace or directly from an insurer — and get reimbursed up to the employer’s set amount.
Key Features
- Small employers only — must have fewer than 50 full-time equivalent employees
- Cannot offer group health insurance — if you have a group plan, you can’t offer a QSEHRA
- Annual contribution limits apply — for 2026, the limits are $6,350 for self-only coverage and $12,800 for family coverage
- Must be offered to all eligible employees on the same terms (with variation allowed only by age and family size)
- Employees must have minimum essential coverage to receive tax-free reimbursements
- No plan document required under ERISA — but a written notice to employees is required
Contribution Limits (2026)
| Coverage Type | Annual Maximum |
|---|---|
| Self-only | $6,350 |
| Family | $12,800 |
These limits are adjusted annually for inflation.
Best For
Small businesses (under 50 employees) that don’t want the cost and complexity of group health insurance but still want to help employees with health coverage. Especially useful for businesses with employees in multiple states where group coverage is impractical.
ICHRA (Individual Coverage HRA)
The Individual Coverage Health Reimbursement Arrangement became available January 1, 2020. It’s the most flexible of the three and is available to employers of any size.
How It Works
Like QSEHRA, the employer provides a monthly allowance for employees to purchase their own individual health insurance and get reimbursed. But unlike QSEHRA, there are no contribution limits and no employer size restrictions. Employers can also vary contribution amounts by employee class.
Key Features
- Any employer size — from 1 employee to 100,000+
- No contribution limits — the employer can set any reimbursement amount
- Employee classes allowed — employers can offer different amounts to different classes of employees (full-time, part-time, salaried, hourly, geographic location, etc.)
- Can coexist with group coverage — employers can offer ICHRA to some classes and group insurance to others (but not both to the same class)
- Employees must have individual coverage — they need to be enrolled in individual health insurance to participate
- No minimum participation requirements
Employee Classes
One of ICHRA’s biggest advantages is the ability to create employee classes with different contribution levels. The IRS recognizes these classes:
- Full-time employees
- Part-time employees
- Seasonal employees
- Salaried vs. hourly employees
- Employees in different geographic rating areas
- Temporary employees of staffing firms
- Employees covered under a collective bargaining agreement
- Employees who haven’t satisfied a waiting period
- Non-resident aliens with no US-source income
Within each class, all employees must receive the same offer, but different classes can receive different amounts.
Best For
Employers of any size who want maximum flexibility. Particularly attractive for companies with employees across multiple states, multi-location businesses, or organizations transitioning away from group coverage.
Side-by-Side Comparison
| Feature | Traditional HRA | QSEHRA | ICHRA |
|---|---|---|---|
| Employer size | Any | Under 50 FTEs | Any |
| Group insurance required? | Yes | No (can’t have one) | No (but can coexist by class) |
| Contribution limits | None | $6,350 / $12,800 (2026) | None |
| Employee classes | Limited | Same terms for all | 11 defined classes |
| Employee must have coverage? | Group plan enrollment | Minimum essential coverage | Individual health insurance |
| ERISA applies? | Yes | No | Yes |
| Available since | 2002 | 2017 | 2020 |
| Employer tax deduction? | Yes | Yes | Yes |
| Tax-free to employees? | Yes | Yes | Yes |
| Rollover allowed? | Employer’s choice | Employer’s choice | Employer’s choice |
| ACA employer mandate satisfied? | With group plan | No | Yes (if affordable) |
Which HRA Is Right for Your Business?
Small Employers (Under 50 Employees)
If you don’t offer group insurance: QSEHRA is the simplest path. It’s specifically designed for you, has minimal administrative burden, and gives employees the freedom to choose their own coverage. The contribution limits are high enough for most small businesses.
If you want more flexibility: ICHRA removes the contribution caps and lets you create employee classes. This is useful if you want to offer more to managers than entry-level employees, or if you have workers across different states.
If you already offer group insurance: A traditional HRA can supplement your group plan by covering deductibles and copays. You could also transition some employee classes to ICHRA while keeping others on the group plan.
Mid-Size Employers (50–250 Employees)
QSEHRA is off the table — you’re over the 50-employee threshold. Your main choices are traditional HRA (paired with group coverage) or ICHRA.
ICHRA is worth serious consideration if:
- Your group renewal premiums are climbing
- You have employees in multiple states
- You want to give employees more choice in their health coverage
- You want to set defined contribution amounts and control costs
Traditional HRA makes sense if:
- You’re happy with your group plan
- You want to help with out-of-pocket costs specifically
- Your employees prefer having coverage chosen for them
Large Employers (250+)
Large employers typically use traditional HRAs alongside their group health plans. However, ICHRA is gaining traction as a way to offer benefits to hard-to-cover populations — part-time workers, employees in remote locations, or temporary staff — without extending the group plan.
Some large employers are also using ICHRA for retiree populations, giving retirees an allowance to purchase individual Medicare supplement coverage.
For a detailed look at ICHRA as a standalone option, read our ICHRA vs. traditional group health insurance guide.
Compliance Considerations
QSEHRA Compliance
- Provide written notice to eligible employees at least 90 days before the plan year (or when they become eligible)
- Report QSEHRA amounts on employees’ W-2 forms (Box 12, Code FF)
- Verify employees have minimum essential coverage before reimbursing
- Employees may see a reduced premium tax credit on the ACA marketplace
ICHRA Compliance
- Provide a written notice to participants at least 90 days before the plan year
- Employees must be enrolled in individual health insurance (or Medicare) to participate
- Verify coverage monthly or use an attestation system
- Must satisfy affordability requirements to count toward ACA employer mandate (for applicable large employers)
- ERISA plan document and SPD required
Traditional HRA Compliance
- ERISA plan document and SPD required
- Must be integrated with group health insurance
- Subject to ACA market reform rules (when integrated with group coverage)
- COBRA continuation applies
Cost Comparison for Employers
The cost of each HRA type depends on two factors: the reimbursement amounts you set and the administration costs.
Administration Costs
| HRA Type | Typical Admin Cost |
|---|---|
| Traditional HRA | $3–$8 per employee per month |
| QSEHRA | $15–$25 per employee per month |
| ICHRA | $15–$30 per employee per month |
QSEHRA and ICHRA tend to cost more to administer because they involve individual coverage verification and potentially marketplace coordination. However, the total cost to the employer is often lower than group insurance because you set a fixed contribution amount and there are no annual premium surprises.
Total Cost Control
One of the biggest advantages of QSEHRA and ICHRA over traditional group insurance is defined contribution. You decide exactly how much to spend per employee. There are no renewal increases to negotiate, no surprise rate hikes, and no risk of costs spiraling beyond your budget.
Making the Transition
If you’re currently on group insurance and considering a switch to ICHRA:
- Analyze your current costs — What are you spending per employee on group premiums?
- Research individual market options — What’s available to your employees on the ACA marketplace and private market in their areas?
- Model the contribution — Set ICHRA amounts that give employees comparable coverage at a cost you can control
- Communicate early — Give employees at least 90 days’ notice and help them understand how to shop for individual coverage
- Consider a phased approach — Move one employee class to ICHRA first (e.g., part-time employees) before transitioning the entire workforce
The Bottom Line
All three HRA types offer tax-advantaged health benefits, but they serve different situations:
- Traditional HRA = supplement to group insurance for out-of-pocket costs
- QSEHRA = simple, capped health benefit for small employers without group coverage
- ICHRA = flexible, uncapped health benefit for any employer, with employee class customization
The trend is clearly moving toward ICHRA and defined-contribution health benefits. As individual insurance markets stabilize and grow, more employers are finding that letting employees choose their own coverage — with employer funding — creates better outcomes for everyone.
Want to understand how ICHRA stacks up against traditional group coverage? See our ICHRA vs. traditional group health insurance comparison.
Ready to compare your options? Use our HRA Comparison Tool to see which arrangement fits your business.
This guide is for informational purposes and does not constitute tax or legal advice. Consult with a qualified tax professional or benefits advisor for guidance specific to your situation.
