QSEHRA and ICHRA: The Health Reimbursement Arrangements Most Small Business Owners Have Never Heard Of

Small business owners who want to help employees pay for health insurance but cannot afford, or do not want to manage, a traditional group health plan may have two alternatives to consider: the Qualified Small Employer Health Reimbursement Arrangement, or QSEHRA, and the Individual Coverage Health Reimbursement Arrangement, or ICHRA.

Both arrangements can allow employers to reimburse eligible employees for individual health insurance premiums and qualified medical expenses on a tax-favored basis when the rules are followed. But these are formal benefit arrangements, not informal reimbursement agreements. They require proper plan documents, employee notices, substantiation procedures, and coordination with payroll and benefits compliance.

The Problem Both Solve

Before 2017, employers who tried to reimburse employees for individual insurance premiums

ran into a specific problem: the IRS and Department of Labor issued guidance that those informal arrangements violated ACA market reform requirements and exposed employers to $100-per-day per-employee penalties. The QSEHRA and ICHRA were both created through legislation and regulation specifically to provide a compliant mechanism for employer reimbursement of individual health insurance costs. They're not workarounds—they're explicitly authorized.

QSEHRA: The Small Employer Option

The Qualified Small Employer Health Reimbursement Arrangement is available to employers with fewer than 50 full-time equivalent employees who do not offer a group health plan to any employees. Under a QSEHRA, the employer sets an annual reimbursement limit (capped by the IRS—check current-year limits, as they're adjusted annually; for 2025 the limits are $6,350 for self-only coverage and $12,800 for family coverage). Employees submit qualified expenses—individual health insurance premiums, copays, deductibles, prescriptions—and receive tax-free reimbursements up to that limit.

QSEHRA reimbursements are tax-free to the employee and deductible by the employer. Employees must maintain Minimum Essential Coverage (MEC) to receive QSEHRA reimbursements—if they're uninsured, the reimbursements become taxable income to them. Participation is mandatory for all eligible employees (subject to limited exclusions for part-time and seasonal workers), which means the employer can't selectively offer the QSEHRA to some employees and not others. The QSEHRA must be set up with a written plan document, and employees must be notified at least 90 days before the plan year begins.

ICHRA: More Flexible, No Size Limit

The Individual Coverage Health Reimbursement Arrangement, available since 2020, is generally more flexible than a QSEHRA. Employers of any size may offer an ICHRA, and there is no annual federal dollar cap on reimbursements. The employer sets the reimbursement amount for the plan year.

An ICHRA may also be used alongside a traditional group health plan, but not for the same class of employees. For example, an employer may offer a group health plan to full-time employees and an ICHRA to part-time employees, if the arrangement satisfies the applicable class rules. The employer cannot offer the same class of employees a choice between the group plan and the ICHRA.

ICHRA classes can include categories such as full-time employees, part-time employees, seasonal employees, salaried employees, hourly employees, employees in different locations, and certain other permitted classes. The flexibility is real, but the classes must come from the rules. Employers cannot simply create any class they want.

How It Works in Practice

Setting up a QSEHRA or ICHRA requires a written plan document that specifies the reimbursement limit, eligible expenses, and plan year. Employees purchase their own individual or family health insurance—through the ACA marketplace, directly from an insurer, or through an association plan—and submit receipts to the HRA administrator for reimbursement. Reimbursements are made tax-free (no FICA, no federal income tax withholding) up to the plan limit. The employer deducts the reimbursements as a business expense. The administrative burden is significantly less than a group plan: no network negotiations, no minimum participation requirements, and employees choose the coverage that best fits their family's needs.

S-Corp Owner Considerations

S-corporation owners who own more than 2% of the company have special health insurance rules. For many employee benefit purposes, they are treated more like partners than regular employees.

A more-than-2% S-corp shareholder-employee generally should not be treated as an ordinary employee participant in a QSEHRA. Instead, shareholder health insurance is usually handled through the S-corp owner health insurance rules: the premiums are included in the shareholder’s Form W-2 as taxable wages for federal income tax purposes, and the shareholder may be able to claim the self-employed health insurance deduction if the requirements are met.

This is an area where the plan document, payroll reporting, and shareholder tax return need to line up. S-corp owners should not set up a QSEHRA or ICHRA assuming they can receive the same tax-free reimbursement treatment as non-owner employees.

Choosing Between QSEHRA and ICHRA

If you have fewer than 50 employees and no group plan: either QSEHRA or ICHRA may work, but the QSEHRA's mandatory uniform coverage requirement can be a limitation if you want flexibility in benefit levels by employee class. If you have 50 or more employees, or want maximum flexibility in design: the ICHRA is your only option. If your primary goal is simplicity: the QSEHRA is more straightforward to administer because the caps are set by statute rather than employer choice. Either way, both tools fill a meaningful gap for small business owners who want to provide health benefits without the cost and complexity of traditional group coverage.

Because QSEHRAs and ICHRAs are formal employee benefit arrangements, they should be set up through a qualified benefits administrator or employee benefits professional. Tax reporting, payroll treatment, ACA affordability, and plan document compliance should be coordinated before reimbursements begin.

This article is general federal tax and small business education. QSEHRA and ICHRA rules are fact-specific and involve tax, payroll, ACA, and employee benefit compliance. Business owners should coordinate with a qualified benefits administrator, payroll provider, and tax professional before implementing a plan.