ICHRA and QSEHRA
An Individual Coverage Health Reimbursement Arrangement (ICHRA) and a Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) are both employer-funded, account-based health plans that reimburse employees for individual health insurance premiums and qualified medical expenses. Neither is a traditional group health plan. Both give employees the flexibility to choose their own individual health insurance plan while the employer sets a defined contribution amount.
What Is an ICHRA?
An Individual Coverage Health Reimbursement Arrangement (ICHRA) is an employer-funded plan that reimburses employees tax-free for individual health insurance premiums and other qualified medical expenses. Employers set a monthly allowance and employees purchase their own qualifying individual health insurance plan. There is no government-mandated minimum or maximum allowance amount. Employers can base the allowance on age, family size, geographic location, or a flat amount.
Any employer of any size can offer an ICHRA, as long as the employer has at least one W-2 employee who is not a self-employed owner or their spouse. Business owners can only participate in their own ICHRA if they are classified as W-2 employees. C-Corp owners generally qualify. Sole proprietors, partners, and most S-Corp owners do not.
Key features of an ICHRA:
Employees receive tax-free reimbursement up to the maximum amount the employer sets
Employers may allow unused ICHRA funds to carry over from year to year
Employers can extend ICHRA coverage to the employee and the employee's household members
Reimbursement is tax-free for employees and tax-deductible for employers
There are no participation minimums or underwriting requirements
What Is a QSEHRA?
A Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is an employer-funded reimbursement plan available only to employers with fewer than 50 full-time equivalent employees. Like an ICHRA, a QSEHRA reimburses employees tax-free for individual health insurance premiums and qualified medical expenses. Unlike an ICHRA, a QSEHRA has strict annual contribution limits set by the IRS and is subject to more regulatory requirements. A QSEHRA may be a suitable option for small employers with a straightforward plan design.
ICHRA vs. QSEHRA — Key Differences
Employer size: ICHRA is available to employers of any size. QSEHRA is only available to employers with fewer than 50 full-time equivalent employees.
Contribution limits: ICHRA has no contribution caps. QSEHRA has strict IRS annual contribution limits.
Employee classes: ICHRA allows employers to divide their workforce into up to 11 permitted classes and offer different allowances to each class. QSEHRA does not support employee classes.
Regulation: ICHRA is subject to fewer restrictions than QSEHRA.
What Plans Can Employees Use ICHRA or QSEHRA Funds For?
To use an ICHRA or QSEHRA, the employee and any covered household members must be enrolled in a qualifying individual health insurance plan. Qualifying coverage includes:
ACA-compliant individual major medical plans purchased on the ACA Marketplace or off-exchange
Medicare Part A and Part B, or a Medicare Advantage plan
The following plan types do not meet the qualifying coverage requirement for an ICHRA:
Short-term health plans
Limited benefit plans such as dental-only or vision-only plans
ICHRA Employee Classes
Employers offering an ICHRA can divide their workforce into the following permitted classes and offer different allowance amounts or eligibility rules to each class:
Full-time employees
Part-time employees
Salaried employees
Hourly employees
Seasonal employees
Employees by geographic location (state or rating area)
Collective bargaining employees
Employees in a waiting period
Staffing firm temporary employees
Non-resident aliens
Combinations of the above classes
Minimum class-size rules apply for smaller employers.
How an ICHRA Affects ACA Marketplace Premium Tax Credits
An ICHRA offer from an employer may affect whether a client qualifies for the Advanced Premium Tax Credit (APTC) on the ACA Marketplace. A client cannot use both an ICHRA and the Premium Tax Credit at the same time.
If the ICHRA is considered affordable:
The client is not eligible for the Premium Tax Credit on their Marketplace coverage
If the ICHRA covers household members, those household members are also not eligible for the Premium Tax Credit
The client can use the ICHRA reimbursement to lower the cost of their Marketplace plan
If the ICHRA is not considered affordable:
The client may be eligible for the Premium Tax Credit, but only if the client declines the ICHRA
If the client accepts the ICHRA and also uses the Premium Tax Credit, the client may owe money when filing federal taxes
2026 Affordability Threshold
For 2026 plans, an ICHRA is considered affordable if the monthly premium of the lowest-cost Silver plan for self-only Marketplace coverage, minus the ICHRA contribution, equals or is less than 9.96% of one-twelfth of the client's yearly household income.
Clients can use the decision guide at HealthCare.gov/job-based-help to determine whether their ICHRA meets affordability requirements.
How to Identify a Client With an ICHRA
If a client's employer offers an ICHRA, the employer is required to send the client a written notice that includes:
Whether the ICHRA covers household members
How much the employer will reimburse for each household member
The start and end dates of the ICHRA
Rules for enrolling in other health coverage and how the ICHRA could affect Marketplace coverage
The employer must send this notice at least 90 days before the start of the ICHRA plan year. For new employees who become eligible fewer than 90 days before the plan year starts, the notice must be sent before the ICHRA begins.
ICHRA Enrollment Timing
Clients with an ICHRA that starts on January 1 should enroll in a Marketplace plan by December 15 so that Marketplace coverage also starts January 1. The client must be enrolled in a qualifying health insurance plan no later than the date the ICHRA begins.
If a client is newly offered an ICHRA — such as a new employee — the client may qualify for a Special Enrollment Period (SEP) to enroll in or change individual health coverage. The client generally has 60 days before the ICHRA start date to enroll using the SEP.
Compliance Requirements
Employers offering an ICHRA are required to:
Provide a written ICHRA notice at least 90 days before the plan year begins, or when an employee becomes eligible
Issue a Summary Plan Description (SPD) and Summary of Benefits and Coverage (SBC)
Verify that employees are enrolled in qualifying individual coverage before issuing reimbursements
For applicable large employers (50 or more full-time equivalents): meet the ACA affordability threshold (9.96% of household income for 2026) to avoid penalties
Follow applicable ERISA, COBRA, and HIPAA requirements
An ICHRA is subject to COBRA. The COBRA premium equals the ICHRA allowance plus a 2% administrative fee. Employees can continue receiving reimbursements under COBRA as long as they maintain qualifying individual coverage.
Frequently Asked Questions
Can I have an ICHRA and Medicare at the same time? Yes. If a client is enrolled in an employer's ICHRA, the client must also be enrolled in Medicare for each month they are covered by the ICHRA. If household members are also covered by the ICHRA, those household members must be enrolled in individual health insurance or Medicare, if eligible, for each month they are covered. Clients who go 63 or more consecutive days without creditable prescription drug coverage after first becoming eligible for Medicare may be subject to a Medicare Part D late enrollment penalty.
Can a client use both an ICHRA and the ACA Premium Tax Credit? No. A client cannot use both at the same time. If the ICHRA is considered affordable, the client is not eligible for the Premium Tax Credit. If the ICHRA is not considered affordable and the client declines the ICHRA, the client may be eligible for the Premium Tax Credit.
Can an employer offer group health insurance to some employees and an ICHRA to others? Yes. Employers can offer traditional group health coverage to one employee class and an ICHRA to another class, as long as the employee classes are defined according to the permitted ICHRA class rules.
Can an employer change the ICHRA allowance amount each year? Yes. Employers set and can adjust the allowance amount annually.
What happens if an employee loses qualifying coverage mid-year? The loss of qualifying coverage is a qualifying life event that allows the employee to enroll in a new plan. ICHRA reimbursements stop until the employee regains qualifying individual coverage.
Is ICHRA right for every employer? Not necessarily. ICHRA may be a strong fit for employer groups facing significant premium increases, but the right solution depends on the employer's workforce size, budget, and benefits goals.
What are the 2026 updates to ICHRA? The ACA affordability threshold for 2026 has been updated to 9.96% of household income. There are no other major regulatory changes to ICHRA for 2026.
Additional Resources
For additional questions, contact Producer Support.
Producer Support is available by phone at (888) 568-9649, by email at [email protected], or by chat directly from your account.