HRA, QSEHRA & ICHRA: Small Business Health Benefits

QSEHRA $6,350/$12,800 (2026) • ICHRA No Dollar Cap • Employer Deduction • Employee Exclusion
IRC §105IRC §106IRS Notice 2017-67
← Individual Tax

Small business owners who cannot afford group health insurance have three employer-funded alternatives: the traditional Health Reimbursement Arrangement (HRA), the Qualified Small Employer HRA (QSEHRA), and the Individual Coverage HRA (ICHRA). All three allow employers to reimburse employees for individual health insurance premiums and qualified medical expenses on a tax-free basis. The employer deducts the reimbursements as a business expense. The employee excludes them from gross income. The key differences are who can offer them, how much can be reimbursed, and what employees can purchase with the funds.

2026 Comparison: HRA, QSEHRA, ICHRA

Traditional HRA: Employer with group health plan reimburses out-of-pocket medical expenses. Employees must be covered by the employer's group plan. No standalone use for individual premium reimbursement (unless ICHRA or QSEHRA).

QSEHRA (Qualified Small Employer HRA): For employers with fewer than 50 full-time employees who do not offer a group health plan. 2026 limits: $6,350 per year for self-only coverage; $12,800 per year for family coverage (adjusted annually). Employees must have minimum essential coverage. Reimbursements reduce the employee's premium tax credit dollar-for-dollar.

ICHRA (Individual Coverage HRA): Available to employers of any size. No dollar cap. Employees must be enrolled in individual health insurance or Medicare. Can vary benefit amounts by employee class (full-time, part-time, seasonal, geographic). Cannot be offered alongside a traditional group health plan to the same class of employees.

QSEHRA: The Small Business Tool

The QSEHRA was created by the 21st Century Cures Act (2016) specifically for small employers who cannot afford group insurance. An employer with 30 employees who offers no group health plan can fund a QSEHRA up to $6,350 per year for single employees and $12,800 for those with family coverage. Employees buy individual health insurance on the marketplace or directly from an insurer, submit receipts, and receive tax-free reimbursements up to the annual limit.

The employer deducts QSEHRA reimbursements as compensation expense. The employee excludes them from gross income provided the employee has minimum essential coverage (MEC) for the month of reimbursement. The critical interaction with the premium tax credit: an employee who receives a QSEHRA benefit must reduce their PTC by the monthly QSEHRA amount. For employees who are marketplace-eligible and subsidy-eligible, this reduces the net value of the QSEHRA benefit.

QSEHRA notice requirement: Employers must provide written notice to all eligible employees at least 90 days before the start of each plan year, or within 90 days of the employee becoming eligible. The notice must state the annual QSEHRA amount, that the employee must have MEC to receive tax-free reimbursements, and the amount to report to the marketplace (which reduces the PTC). Failure to provide timely notice results in the reimbursements being included in the employee's income.

ICHRA: Flexible, No Dollar Cap

The ICHRA, available since January 2020 under Treasury regulations, has no annual dollar limit. An employer with 500 employees could fund an ICHRA at any level they choose. The employer can set different benefit amounts for different classes of employees - full-time employees might receive $500/month while part-time employees receive $250/month. Employees must be enrolled in individual health insurance or Medicare to receive tax-free reimbursements.

The most powerful ICHRA feature: geographic flexibility. A multi-state employer can set different ICHRA amounts by geographic class to reflect local insurance market costs. California employees receive higher ICHRA amounts than lower-cost-market employees because their premiums are higher - and this differential is permissible under the class-based design rules.

ICHRA eliminates the administrative burden of a group health plan entirely. Instead of negotiating group rates, managing plan design, and running open enrollment, the employer funds the ICHRA and employees choose their own individual coverage. Employees get the plan they want. Employers get a predictable, capped cost. The IRS treats the employer contribution as a business expense deductible under §106. The employee's reimbursement is excluded from gross income under §105(b).

Premium Tax Credit Interaction

Employees offered an affordable ICHRA are not eligible for the marketplace premium tax credit (PTC). "Affordable" is defined as the ICHRA amount exceeding a specified percentage of the employee's household income (the affordability threshold, which changes annually). If the ICHRA is affordable, the employee must either use the ICHRA or waive it and forgo the PTC. An employee offered an unaffordable ICHRA can waive it and claim the PTC instead. This interaction requires employers to model whether their ICHRA amount clears the affordability threshold before implementation.

Related Tools & Articles
HSA GuideHRA and HSA cannot both be used unless limited-purpose HRA Fringe Benefits Guide§106 employer health coverage exclusion framework SE Health InsuranceSelf-employed deduct premiums above-the-line instead FSA & Dependent CareHealth FSA vs HRA - key structural differences Payroll Tax GuideQSEHRA/ICHRA reimbursements exempt from FICA Individual Tax HubAll individual health benefit topics
Authority: IRC §105(b) (amounts received under employer accident and health plan excluded from gross income when used for medical care; HRA reimbursements qualify); IRC §106 (employer-provided health coverage excluded from employee gross income; contributions to HRA excluded); 21st Century Cures Act §18001 (created QSEHRA for employers with fewer than 50 full-time employees; effective January 1, 2017); IRS Notice 2017-67 (QSEHRA guidance - eligibility, limits, notice requirements, PTC interaction, MEC requirement); Rev. Proc. 2025-32 (2026 QSEHRA limits: $6,350 self-only, $12,800 family; adjusted annually); 26 CFR §54.9802-4 and HHS regulations (ICHRA final rule - effective January 2020; class-based design; no dollar cap; affordability calculation for ACA purposes; employee must be enrolled in individual coverage or Medicare); IRC §162(a) (employer deduction for QSEHRA and ICHRA reimbursements as compensation expense); IRS Publication 969 (Health Savings Accounts and Other Tax-Favored Health Plans - HRA section; coordination with HSA; qualified medical expenses).