ICHRA vs. QSEHRA: Understand Health Reimbursement Accounts

Health Reimbursement Arrangements including the Individual Coverage Health Reimbursement Arrangement (ICHRA) and Qualified Small Employer Health Reimbursement Arrangements (QSEHRA) provide healthcare reimbursement options for businesses. ICHRAs are flexible, scalable, easy to administer, and available to businesses of any size but may lead to higher costs for some employees. QSEHRAs are less flexible, have caps on reimbursement amounts and only available to small businesses with less than 50 employees but are more predictable in cost management for both employers and employees.

If you find health insurance premiums cost-prohibitive, Mira is a good option to provide non-hospital care to your team members at only $55/month/person. 

I. Main differences between ICHRA and QSEHRA 

ICHRA Overview

The Individual Coverage Health Reimbursement Arrangement (ICHRA) is a relatively new health insurance option. It's a health benefit solution that businesses can offer to their employees, no matter the company's size. Employers provide a certain amount of money each month, which employees can then use to buy individual insurance or Medicare policies.

One of the ICHRA’s distinguishing features is that it does not have a maximum contribution limit, which is crucial in giving employers flexibility to design their benefits package. The ICHRA's adjustable character allows businesses to offer different reimbursements depending on factors such as job classification, geographic location, and the number of dependents. Moreover, the reimbursements are tax-free, meaning you don’t have to hold back the funds for taxes each month. 

However, a key drawback to the ICHRA is that employers have the discretion on reimbursements. Some critics argue that it may lessen the employers’ responsibility towards their employees' health care as companies could potentially shift costs to workers. 

QSEHRA Overview

Unlike the ICHRA, the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) is only available for small businesses with fewer than 50 employees. It allows employers to reimburse employees tax-free for their individual health insurance premiums and other qualified medical expenses. The advantage of a QSEHRA is that all employees receive the same reimbursement amount, which upholds the principle of equality among the workforce.

Key features of the QSEHRA include annual contribution limits. As of 2020, the cap is $5,250 for self-only employees and $10,600 for employees with a family. These figures are prorated based on when the employee became eligible. The plans are also versatile as they work with any type of health insurance, including coverage from an employee's spouse, short-term health insurance, and more.

A potential drawback of the QSEHRA is the contribution limits, which may not suffice for employees in high-cost areas or with severe health issues. Another drawback is that QSEHRAs must be offered on the same terms to all eligible employees, so employers cannot adjust benefits based on variables like job classification or number of dependents.  

Advantages and Challenges of ICHRA compared to QSEHRA

Individual Coverage Health Reimbursement Arrangements (ICHRA)

Advantages

ICHRA offers enhanced flexibility to accommodate varied employee groups, according to information from the Internal Revenue Service (IRS). Unlike a traditional health plan, employers can design their ICHRA to have different allowances for different types of employees, categorizing them by factors such as job description, geographic location, or part-time versus full-time status. This degree of flexibility optimally meets the divergent needs of the workforce and contributes to employee satisfaction.

Moreover, the scalability of ICHRAs is another marked advantage, especially for businesses at different growth stages, as detailed by the Business Health Care Association. Companies can readily adjust their ICHRA plans as they scale, which ensures a consistent health benefit offering for employees regardless of company size.

Challenges

Despite the advantages, ICHRAs are not without challenges. A prominent concern is the potential for higher costs for employees as highlighted by the Center for Health and Economy. ICHRA-supported plans could be more expensive for some employees than group plans due to personalized coverage, leading to potential financial strain.

Additionally, managing an ICHRA can be administratively complex. The Society for Human Resource Management stresses that the ability to tailor plans across different employee groups can lead to administrative difficulties, especially for larger organizations. Ensuring the correct allowance disbursement, as well as plan compliance with varied state laws, can be a significant challenge.

Qualified Small Employer Health Reimbursement Arrangements (QSEHRA)

Advantages

The predictability and simplicity in cost management for employers stand as a primary advantage of QSEHRAs, according to data from the National Association of Professional Benefit Administrators. The ability to set a fixed monthly allowance provides employers with an exact annual cost for employee health coverage, simplifying financial planning, and budgeting.

QSEHRAs also place less burden on small businesses, as detailed by the National Small Business Association. Given their design primarily for businesses with fewer than 50 employees, the administrative and financial burden of setting up and managing a QSEHRA is considerably less than more traditional or larger-scale health plans.

Challenges

Despite the host of advantages, QSEHRA has some inherent challenges. Its usability is limited only to small businesses, as clearly defined by the U.S Department of Labor. Therefore, it does not serve the needs of larger employers or accommodate the growth of a company beyond 50 employees.

QSEHRAs also place caps on annual reimbursement amounts, as outlined by IRS. This might not fully cover the cost of individual insurance premiums or out-of-pocket medical expenses for some employees, potentially leaving them with significant healthcare costs despite the availability of the stipend.

Determining the Most Advantaged Health Reimbursement Arrangement: ICHRA vs QSEHRA

Assessing Your Business's Healthcare Needs

Choosing between the Individual Coverage Health Reimbursement Arrangement (ICHRA) and the Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) starts with an assessment of your business's healthcare needs. According to the National Business Group on Health, understanding the level of coverage your employees require, their preference for flexibility, and the different health situations of your employees are essential considerations (source). Recognize your demographic factors, such as age and health challenges, as these play a crucial role in the level of financial risks both plans pose. By conducting a thorough needs assessment, a business can identify which plan best supports their employees' health demands.

Confronting the Financial Implications

When it comes to financial implications, ICHRA and QSEHRA present distinctive considerations. America's Health Insurance Plans points out that while both plans are tax-advantaged and can offer businesses a cost-effective alternative to traditional health care, their financial implications differ markedly (source). With ICHRA, businesses can offer differing reimbursements based on employees' health statuses, while QSEHRA has a defined annual allowance cap. Thus, a business that requires more cost flexibility and variability would benefit from the ICHRA, while a business on a tighter budget or smaller size might find QSEHRA more suitable.

Considering Administrative Feasibility

The administrative feasibility of either an ICHRA or QSEHRA is a further determinant in the decision-making process. HR Professionals Magazine emphasizes that while both plans require administrative oversight, the requirements and flexibility of each plan differ (source). ICHRAs, in particular, tend to have more administrative requirements due to their complex design and maneuverability. QSEHRAs, in contrast, are more straightforward, requiring less administrative management. Therefore, a business with a less complicated structure and limited administrative capacity would be more suited to a QSEHRA, while a larger and more complex business may fare better with the flexibility an ICHRA offers.

FAQs

A. What is the difference between ICHRA and QSEHRA?

Individual Coverage Health Reimbursement Arrangement (ICHRA) and Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) are both employer-funded health plans that reimburse employees for their medical expenses. The fundamental difference lies primarily in terms of eligibility, contribution limits, and participation with other plans.

ICHRA, for starters, is available to corporations of all sizes even those with more than 50 employees. It does not have a maximum contribution limit and can be integrated with a traditional group health plan (Health Affairs, 2020). Moreover, employers can provide different reimbursement to different groups of employees based on employee classes (e.g., full-time, part-time, seasonal).

On the flip side, QSEHRA is only geared towards smaller companies with fewer than 50 employees. It has a maximum yearly contribution limit ($5,300 for individuals and $10,700 for families in 2022) (26 U.S. Code § 9831, 2021) and cannot be coupled with a traditional group health plan. Unlike ICHRA, QSEHRA does not allow employers to vary contributions for different types of employees.

B. Who is eligible for ICHRA and QSEHRA?

For ICHRA, employers can establish eligibility requirements based on clearly defined employee classes. Examples of these classes include full-time employees, part-time employees, workers based on geographic location, or employees who have not yet satisfied a waiting period for coverage. Employees must also have individual health insurance or Medicare to participate (Internal Revenue Service, 2021).

In the case of QSEHRA, companies with fewer than 50 full-time employees are eligible, provided they do not offer a group health plan to any of their workers. Employees must provide proof of minimum essential coverage to receive reimbursements (Internal Revenue Service, 2021).

C. How does ICHRA work?

ICHRA is a health benefit where employers reimburse employees tax-free for health care costs, including individual health insurance premiums. The employer sets the monthly allowance amounts based on employee classes. When employees incur medical expenses, they submit proof of these costs, and if approved, they get reimbursed up to their allowance amount (Health Affairs, 2020).

D. How does QSEHRA work?

Like ICHRA, QSEHRA is a company-funded health benefit that reimburses employees for personal health care expenses. However, it operates on an annual basis. The employer sets annual allowance amounts, and if employees incur eligible expenses, they can submit these for reimbursement. The company then reviews these claims and, if approved, reimburses the employee up to their annual limit (26 U.S. Code § 9831, 2021).

E. How can a business choose between ICHRA and QSEHRA?

The decision between ICHRA and QSEHRA ultimately depends on the employer's specific needs. ICHRA might be a better option for more substantial businesses or those that want to offer different benefits amounts to different employees. QSEHRA, alternatively, could be a more attractive choice for smaller companies due to its simplicity and ease of adoption. Employers should consider factors like the size of their workforce, the budget for health benefits, and the need for flexibility in offering benefits when making this decision (Health Affairs, 2020).