Employee benefits play a major role in recruiting and retaining top-notch staff, but not every business has the means to offer one of the most prized: group health insurance coverage.
Fortunately, these employers have other options to help employees cover their medical expenses, including Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs) and Individual Coverage Health Reimbursement Arrangements (ICHRAs). Both of these are exempt from the sometimes cost-prohibitive coverage requirements of the Affordable Care Act.
While the two arrangements share some similarities, they have some important differences you need to understand before choosing one over the other.
QSEHRAs in a nutshell
A QSEHRA lets small employers reimburse their employees’ qualified medical expenses, including insurance premiums, copayments, and coinsurance, tax free.
To offer a QSEHRA, you generally must:
- Have fewer than 50 full-time employees,
- Not offer a group health insurance plan, including coverage through the Small Business Health Options Program (SHOP) or a flexible spending account, and
- Provide the arrangement on the same terms to all full-time employees; reimbursement amounts can vary based only on the age and the number of individuals covered.
You can decide how much you want to contribute to your employees’ accounts, up to the annual maximum. In 2021, the maximum is $5,300 for individual employees and $10,700 for employees with families.
How does it work? Employees first pay their provider or insurance company for their covered expenses and then submit proof of payment for reimbursement by the QSEHRA. Reimbursements are typically made monthly.
To qualify for QSEHRA reimbursement, employees must have minimum essential coverage (MEC), also known as qualifying health coverage. MEC can include an insurance plan purchased through a health insurance exchange (aka marketplaces) or Medicare. If employees don’t have MEC, any reimbursements they receive will be taxable.
Before a QSEHRA can reimburse an expense in any plan year, the employee must provide proof that the individual who incurred the expense has MEC for the month the expense was incurred. This proof must be either:
- A document from a third party (for example, the insurer) showing the coverage, such as an insurance card or explanation of benefits form, and an attestation that the coverage is MEC, or
- An attestation from the employee stating that: a) the covered person has MEC, b) the date coverage began, and c) the name of the provider of the coverage. The IRS has a model attestation in Appendix B of this notice .
If an employee doesn’t use all of your contributions in a plan year, you can keep the balance or roll it over from year to year while the employee still works for your business — it’s your call. But the sum of the amount rolled over and the amount typically contributed the next year can’t exceed the annual limit for the following year.
For example, if you normally contribute $2,000 each year, an employee could roll over $2,000 from 2020 to 2021 and remain under the $5,300 limit for 2021. If you regularly contribute the maximum amount allowed, though, no amount could be carried over from previous years.
You can establish a QSEHRA at any time in the year as long as you give written notice to your employees as soon as they’re eligible to participate. You also must provide notice 90 days before the beginning of each plan year, and is required to contain certain information for employees.
Take into account how most of your employees obtain their qualifying health coverage when you’re picking your start date. Launching on January 1 generally allows them to choose coverage during the open enrollment period for HealthCare.gov, the federally facilitated marketplace, and the state-run marketplaces.
Note: If you’re terminating a group health plan to provide a QSEHRA, your employees may qualify for a Special Enrollment Period.
If you don’t qualify to provide a QSEHRA or don’t find it appealing, you instead can offer an ICHRA. Any employer with at least one employee (other than a self-employed owner or a spouse) can offer an ICHRA and make contributions of any size — no minimum or maximum requirements apply.
To use the funds, employees must be enrolled in individual health insurance coverage (like a plan they bought through the Marketplace) or Medicare. This enrollment also means that reimbursements are nontaxable. You’ll need some reasonable procedures to confirm that employees and their households have individual health insurance coverage.
With an ICHRA, employers can structure their eligibility requirements based on a given set of employee classes. So you can offer it to any eligible employee or only certain types of employees depending on job-based criteria, including:
- Full-time, part-time, or seasonal status
- Unionized employees
- Salaried or hourly
- New employees in a waiting period
- Employee work locations
You can also vary the amount of reimbursement you offer within each class based on differences in age, family size, and the price of an insurance policy in the relevant market. Outside of these exceptions, you must offer the plan on the same terms to all employees in the same class.
Note: While it is not necessary under federal law to provide equal benefits to all employees, you should take care to ensure that the job-based criteria you create for benefits is as non-discriminatory as possible.
Establishing an ICHRA doesn’t limit your options; you can offer some employees a traditional group health plan and others an ICHRA – for example, traditional group coverage for full-time employees and an ICHRA for part-time. You must not, however, offer both types of coverage to a single class. In other words, you cannot offer full-time employees traditional group coverage and an ICHRA.
If you opt to have both, you have to satisfy minimum class size requirements, based on the number of employees:
|# of Employees||Minimum Class Size|
|Fewer than 100||10 employees|
|100-200||10 percent of the total number of employees|
|More than 200||20 employees|
The class size minimums only apply if you offer a traditional group plan to any of your employees.
Note: If you have a cafeteria plan, you can use payroll deductions to let your employees pay, on a pre-tax basis, their share of individual health insurance premiums not covered by the ICHRA – but not for coverage acquired on the federal marketplace.
As with a QSEHRA, you can set up an ICHRA at any time, with written notice to employees as soon as they’re eligible and 90 days before the beginning of each plan year. The same considerations regarding timing around open enrollment come into play, too.
Unlike with a QSEHRA, though, employees must have the opportunity to decline the ICHRA before the plan year.
The Impact on Premium Tax Credits
Employees who obtain their own health insurance may receive premium tax credits (PTCs) that help subsidize their costs. Participation in a QSEHRA or ICHRA can affect the availability of these credits.
If QSEHRA coverage is considered “affordable,” as defined by the Affordable Care Act, no PTCs are permitted. If it’s not affordable, employees can get PTCs, if otherwise eligible, less the amount of the QSEHRA.
PTCs aren’t available to employees covered by or offered an affordable ICHRA. If the ICHRA isn’t affordable, employees must opt out of the coverage to claim the PTCs, if otherwise eligible.
How to choose between offering a QSEHRA and an ICHRA
When trying to choose whether to go with a QSEHRA or ICHRA, you have several considerations. For example, an ICHRA is likely preferable if most of your employees pay for their own coverage. But, if a good number of employees are otherwise covered (for example, by a spouse’s group coverage), a QSEHRA may work better because it will benefit all employees regardless of their coverage circumstances.
PTCs are also relevant. An ICHRA lets your employees choose whether they want their credits or the arrangement. With a QSEHRA, employees don’t have that option, and you could end up covering costs the PTCs would have covered.
You will want to think about your company’s future, as well. If you expect to grow beyond 50 employees, for example, you’ll grow out of eligibility for a QSEHRA and have to go through the hassle of switching. Plus, an ICHRA can help you tailor your benefits package to attract high potential employees because you can offer bigger contributions to certain classes.
QSEHRA vs ICHRA at a glance
|Contribution amount||Employer’s choice, up to the annual limit.||Employer’s choice, with no limit.|
|Eligible businesses||Employers with fewer than 50 employees (other than certain owners or their spouses) that don’t offer other group health plan coverage.||Employers of any size with at least one employee (other than certain owners or their spouses).|
|Permissible expenses||Qualifying health care expenses, as long as the employee has qualifying health coverage.||Qualifying health care expenses, as long as the employee has individual health insurance coverage.|
|Tax effects||Reimbursements aren’t taxable to the employee. If the QSEHRA is affordable, employees aren’t allowed PTCs. If unaffordable, the employee must reduce monthly PTCs by the monthly amount of the QSEHRA.||Reimbursements aren’t taxable to the employee. If the ICHRA is affordable, employees aren’t allowed PTCs. Employees who decline an unaffordable ICHRA may qualify for PTCs if otherwise eligible.|