QSEHRA vs. ICHRA: Understanding the differences between these health reimbursement arrangements

QSEHRA vs. ICHRA: Getting to know the differences

What is QSEHRA?

Simply put, a QSEHRA is a Health Reimbursement Arrangement (HRA) tailored for small businesses with fewer than 50 full-time employees. A key point to remember is the word reimbursement. That’s because QSEHRA is not itself health insurance but a means for employers to reimburse employees for specific healthcare expenses. To find out more, we caught up with Paul Foery, OnPay’s Vice President of Insurance and benefits expert with over 30 years of experience helping business owners navigate the complexities of health coverage.

“Employers and employees should keep in mind that QSEHRA is an option that allows employees to shop for insurance on their own. Its not a healthcare plan. This sometimes can get lost in the shuffle,” he explains. “Instead, certain employers choose to reimburse a portion of costs associated with healthcare expenses and these reimbursements are tax-exempt for employees.” The employee does the legwork with QSEHRA. “Employees shop for coverage that fits their needs,” says Foery. “And employers avoid the heavy lifting of trying to find health care that pleases everyone.”

Next, let’s take a few minutes to find out what an ICHRA is.

What is proof of minimum essential coverage?

Employees can obtain this coverage from sources such as the Health Insurance Marketplace, their spouse’s employment-based health insurance, or government-backed coverages like Medicaid and Medicare.

Employers can extend QSEHRA reimbursements to qualifying employee dependents, who also need to show proof of minimum essential coverage.

Employees must present

• An insurance card or similar evidence, plus the employee’s signed acknowledgment confirming minimum essential coverage.
• A signed statement (by the employee) with details of the coverage, including the insurance provider’s name and the coverage start date.

To receive QSEHRA reimbursements, the employee must submit proof of their eligible out-of-pocket medical expenses.

QSEHRA: Pros and Cons

Like many voluntary benefits, QSEHRAs have their pros and cons employers may want to consider before offering this as an option.

Potential pros for employers

• Cost Effective: For small employers on a budget that are unable to afford group health insurance, a QSEHRA can be a feasible option.
• Enhanced Talent Attraction and Retention: Offering a QSEHRA, instead of no health benefits at all, can boost the employer’s appeal in the talent market.
• Greater Financial Control: Employers can set their QSEHRA contribution, provided it’s within the IRS’ annual limit.
• Tax Exemptions: Typically, neither the employer nor the employee incurs taxes on QSEHRA reimbursements.
• Business Tax Deductions: QSEHRA reimbursements are tax-deductible for businesses.
• Compatibility with HSAs: Because HSAs are savings plans and not health plans, employees can maintain their existing HSA along with their QSEHRA.
• Integration with Other Health Plans: QSEHRAs can be integrated with spousal job-based health insurance and Tricare, which is a healthcare program for active-duty military personnel and their families.

Cons that could affect an employer’s decisions

• Group Health Plan Restrictions: The inability to offer a company-sponsored group health plan could compromise the quality of the employer’s healthcare offerings.
• Size-Based Limitations: Employers with 50 or more employees are ineligible for QSEHRAs. Instead, they’re considered applicable large employers under the Affordable Care Act.
• Potential Talent Attraction and Retention Issues: This can arise if health insurance isn’t provided.
• Fluctuating Health Insurance Market: The varying market conditions might affect the  employee’s ability to secure affordable individual health coverage.

It can also be a good idea to do your homework when incorporating QSEHRA so you know what to expect.

Setting Up a QSEHRA

The process, while straightforward, requires precision. Here’s a step-by-step overview on how to get the ball rolling.

• Confirm your eligibility as an employer.
• Determine employee eligibility. You can exclude certain employees, such as part-time and seasonal workers.
• Decide on the inclusion of dependents. Be sure to examine what constitutes a dependent for QSEHRA purposes.
• Establish your monthly contribution amount. For 2024, employers can contribute up to $6,150 for individual employees and up to $12,450 for family coverage.
• Choose the medical expenses to reimburse, as shown in IRS Publication 502.
• Prepare necessary documents, including a plan document and a written notice to your employees.
• Select a commencement date. While you can generally start a QSEHRA at any time, the best time is generally at the start of the month.
• Inform employees about the QSEHRA benefit.
• Direct employees to relevant resources like the Health Insurance Marketplace.

It’s also worth considering whether to manage the QSEHRA in-house or through a third party. Some employers work with a third-party administrator, or TPA, to spell out what the QSEHRA consists of and administer the plan.

If you opt to manage one or the other in-house, just be sure that your staff understands the intricacies that a QSEHRA brings to the table.

So, now that we have an understanding of what QSEHRA brings to the table, let’s find out how it compares to the new kid on the block, the ICHRA.

QSEHRA and ICHRA: Are these HRA options the same thing?

In a nutshell, a QSEHRA and an ICHRA are both health reimbursement arrangements; however, they operate differently.

ICHRA gets introduced

In 2019, the federal government issued regulations that introduced a new type of HRA called the “Individual Coverage Health Reimbursement Arrangement,” or ICHRA for short. These regulations became effective on January 1, 2020.

ICHRA allows employers of all sizes to reimburse employees for certain health-related expenses, as long as the employee has individual health coverage. Before the introduction of HRAs became available, employers were restricted from reimbursing employees for individual health coverage premiums. ICHRA eliminates this restriction. For a separate primer, read our in-depth guide on how ICHRA can help employees shop around for health care options.

Now let’s talk more about how these two HRAs shape up side by side.

QSEHRA vs ICHRA: Charting the differences

Understanding the distinctions between the various HRAs can be complex. For a clearer picture, here’s a chart detailing the similarities and differences between QSEHRA and ICHRA.